[miningmx.com] – SELLING the jet, a fancy Gulfstream G550 estimated to be worth $50m, may not drastically change the look of Anglo American’s financials, but it’s the sort of striking symbolism for which the group’s new Australian CEO, Mark Cutifani, has become well known.
At his former company, AngloGold Ashanti, Cutifani took the door off his office soon after joining in 2007; he also ditched the executive company parking bays in a demonstration of a no-frills cost and flat management structure.
Anglo’s Gulfstream had been bought some two years ago by his predecessor, Cynthia Carroll, who was also known to travel with an entourage of assistants and helpers. In contrast, Cutifani is known to travel light.
Nonetheless, he has his work cut out. Macquarie Research has taken a dim view of Anglo’s prospects in the short-term believing that of all the “diversifieds’ in its peer group, Anglo will fare the worse.
Based on price weakness for nearly all minerals, the stockbroker is between 20% to 30% below earnings consensus on Anglo American. “The various price changes result in our earnings for the diversified miners falling on average 5% to 10% over the next three years,’ it said in a recent note.
For Anglo, however, Macquarie thinks a 20% to 30% decline in earnings is possible owing to lower copper, metallurgical coal and platinum group metal prices whereas BHP Billiton may fall a relatively minor 10% to 15% owing to its exposure to copper.
Exposure to certain minerals and not others is an important differentiator for the so-called diversifieds at the moment, and the question of portfolio structure is currently occupying the mind of Cutifani.
Speaking in an internal company interview during April, shortly after starting at Anglo American, Cutifani observed that Anglo’s peer group was not as diversified as they once were with the focus of Rio Tinto and BHP Billiton firmly on commodities such as iron ore, petroleum and copper.
Although Anglo has some of these commodities in its portfolio, it also has diamonds and platinum, the so-called late stage of the cycle minerals that would operate as a differentiator. But the question is whether a diversified mining business is best suited to the current depressed times?
According to one UK analyst, the thinking is that maintaining a diversified status is perhaps not ideal as capital allocation for growth projects is too broadly based to be effective; better, he says, to be focused on minerals that were wisely and strategically chosen for their long-term prospects.
Though not all agree, naturally.
“If you’ve got the right assets, it makes sense to be diversified,’ said Henk Groenewald of Coronation Asset Management. “Anglo’s capital allocation in the past has been horrendous but that was largely due to new acquisitions rather than putting capital into the existing portfolio,’ he said.
Under Carroll, Anglo bought Minas Rio, an iron ore project in Brazil that ran into regulatory delays. Carroll said in her last months at the company that investors continued to under-estimate the difficulty of bringing large capital projects into being, but analysts thought it was Anglo’s desire to remain a diversified, a company with a mix of many different minerals that led it to invest there, and pay over the odds.
It now seems that Cutifani intends to deal swiftly with the asset. According to a report by Bloomberg News this week, the group is looking to sell as much as 49.9% of the project and has hired a fleet of bankers, including Goldman Sachs, to conclude the deal.
Another headwind for Cutifani is undoubtedly the expectation Anglo will declare a flat dividend in its 2013 financial year whilst its peer group focus on real returns to shareholders.
Peter Davey, an analyst for Standard Bank Group Securities believes cash flow generation from Anglo, owing to the decline in mineral prices, will be hard pushed to cover its cash requirements in the absence of further cuts to capital projects, or increasing debt.
“Accordingly, given our outlook for the group cash flow, we have concluded our previous dividend expectations need paring back,’ he said. “We assume the board is likely to adopt a very cautious outlook and could possibly declare a flat dividend for the 2013 financial year.’
Working against Cutifani in the short-term, is the group’s exposure to South Africa.
According to a report by JP Morgan, the under performance of the South African resources sector against the financial index since 2008, and now at a trailing discount of nearly 20%, should imply a rotation into resources.
Unfortunately, the decline in resources prices notwithstanding the weakness of the rand against the dollar forbids such a move. “While the SA Resources were the clear winners of rand weakness in the last decade during the commodity super cycle, this has not been the case since 2009, with the weaker rand not offsetting sluggish global commodity demand,’ it said.
The profitability of miners operating in South Africa could also stay under pressure owing to wage rates exceeding productivity gains and significant increases in capital expenditure, while returns on capital have fallen, it said.
