Hand of Cutifani in early Anglo conservatism

[miningmx.com] – APRIL 2 may have been Mark Cutifani’s first day as the
CEO of Anglo American, but it’s likely he was exercising his management judgement
over the UK-listed group some weeks before.

The extension of the consultation period between Anglo American Platinum (Amplats),
unions, and the South African government regarding restructuring of the platinum unit
sounds like something Cutifani would sanction given his penchant for “conversations’
with stakeholders, especially the combustible South African government.

And the March 28 withdrawal of Anglo Metallurgical Coal from Mozambique’s Revuboe
coking coal project where it had last year announced investment plans worth $555m,
prefigures comments he gave in an interview to a UK PR company – his first as Anglo
CEO – in which he spoke about “. look[ing] at the portfolio, the commodities we’re in
– do they make sense?’

In that interview, he also spoke about a three to four month period in which he’d seek
“to draw the pieces’ of Anglo together.

Cutifani may have 36 years of working experience under his belt, and he may have
operated in the diversified mining space before at the Canadian firm, Inco, but Anglo
American and its pieces is his largest remit yet, especially after six years where the
dynamics of mining gold was his main concern.

Since it was the work of PR, the interview takes a wide-angle perspective of Cutifani’s
approach to Anglo. Yet there were some signal takeaways.

He observed, for instance, that Anglo’s peer group was not as diversified as they once
were, suggesting that Anglo’s competitive advantage is its exposure to late cycle
mining assets in Amplats and De Beers.

Unfortunately, Amplats is also the biggest drag on Anglo’s valuation given the labour
and government opposition to plans to restructure some 400,000 ounces a year of
productive capacity from the subsidiary, possibly affecting 14,000 jobs.

“While the market has welcomed a new hand at the helm of Anglo, we believe that
there are still significant uncertainties facing the company which will take time to
resolve; the major ones are right-sizing Amplats in the face of labour and political
hostility, and bringing Minas Rio into production on time and within the higher revised
capex budget,’ said Des Kilalea, an analyst for RBC Capital Markets in a note dated
March 26.

Minas Rio is the Brazilian iron ore mine the purchase of which Cutifani’s predecessor,
Cynthia Carroll, sanctioned. Unfortunately, her team ran over budget on the project,
resulting in a $4bn write-down earlier this year.

As Cutifani seems to suggest that Anglo’s competitors are not as diversified as they
once were – largely owing to the preponderance of iron ore projects in which Rio Tinto
and BHP Billiton are progressing – there is the likelihood he will seek to recoup some
of the investment by selling part of Rio Minas’ second phase expansion.

Anglo recently spent $5bn buying a further 40% in De Beers, taking its overall
investment to 85%. Although the long-term fundamentals for the diamond industry
are good, there are short-term concerns. Building the Jwaneng, Venetia and Gahcho
Kue mines will pressure the group’s balance sheet while the relationship with another
southern Africa government – Botswana – will have to be navigated as the sales
agreement with Debswana expires in 2021.

Standard & Poors’ credit rating agency earlier this month downgraded Anglo to BBB
from BBB+, citing negative discretionary cash outflow as capital expenditure and
dividends to shareholders. Fortunately, the outlook remained stable because of the
diversified nature of its asset base and liquidity.

It’s coincidental that on arriving at AngloGold Ashanti six years ago, Cutifani found
himself faced with similar balance sheet pressure, a condition he solved by removing
the hedge book and thus improving the cash generating ability of the company.

Balance sheet issues explain the reticence to approve the $555m investment in
Mozambique with perhaps other project suspensions or abandonments to follow.
(Quite what Anglo plans with the New Largo coal project, so crucial for coal supply to
Eskom’s Kusile power station is a matter for serious conjecture).

Perhaps divestments may follow. Carroll presided over most of the non-core
divestments at Anglo, a process her predecessor, Tony Trahar, initiated.

Analysts expect Cutifani may seek to cut away Anglo’s nickel assets – Codemin and
Barro Alto – which comprise only 3% or $1.3bn of Anglo’s net asset value, according
to Kilalea.