[miningmx.com] – A ROBUST, and sometimes brutal, question-and-answer session following Anglo American’s investor update on December 8 left analysts sceptical that CEO Mark Cutifani had done enough to sustain the group’s vital signs.
Cutifani cut the dividend and future capital expenditure; he also announced the sale of the group’s niobium and phosphates division. Other measures included a slew of redundancies, UK office sharing with De Beers, while new cash-saving steps at the group’s listed subsidiaries in South Africa – Anglo American Platinum (Amplats) and Kumba Iron Ore – were also unveiled.
However, analysts think that at current spot prices cash leakage will continue which will, in turn, take net debt higher, hence the concerns that Anglo ought to have issued shares for cash in order to protect its balance sheet.
“Adjusting for latest capex guidance and with zero dividend we estimate Anglo will still burn $1.7bn on spot commodities,” said HSBC analyst Ash Lazenby. He also thought that boosting disposals to $4bn from $2bn was laudable, but that it might be difficult to achieve in the current market environment.
“Management has officially put the phosphate and niobium assets for sale, but who has cash to buy them right now?,” said CIBC Capital Markets in a note.
He did his best to sound definitive, but even Cutifani can’t be sure how the disposals process will proceed. He said the group would not conduct a fire-sale, nor would he squeeze the last dollar out. He knows shareholders want him to act quicker, but he doesn’t want to look like a price-taker.
“We are looking to make substantial progress through 2016 so that the conversation will be clear in 2017. If we are not getting [the right] price, we will wait, but the back [of the disposals job] will be broken in 2016,” he said.
He more than once alluded to February, the month in which Anglo announces its year-end figures, as a point in time when more clarity on Anglo’s plans would be provided. But it also sounds like Cutifani is playing for time, and praying for relief, owing to the current speed of the mining market deterioration.
“These measures are a step in the right direction for Anglo, but more is still needed,” said CIBC, adding that despite the cut to the dividend, at spot commodity prices, the balance sheet “… will likely still deteriorate”.
“While on the face of it Anglo has liquidity, it has a bigger solvency issue, and expected to be free cash flow negative to the tune of $1bn in 2016 before debt repayments.
Cutifani pointed to the fact that Anglo remained highly liquid with some $15bn in debt available thus offsetting any short-term financial squeeze.
CIBC said, however, that net debt would continue to rise which may require Anglo to make “… further divestments beyond the current plans and crucially must hope for a materially improved commodity pricing environment,” it said.
KUMBA IRON ORE
One of the more salient points during Anglo’s investor day was Cutifani’s insistence that cash negative assets would not be tolerated in the group’s portfolio.
This raises urgent questions about Kumba Iron Ore, the Johannesburg-listed company in which Anglo has approximately a 70% stake.
Already, Cutifani announced that Kumba had cut its life-of-mine by some 133 million tonnes to 400 tonnes in order to minimise dilution and help it make money at an iron ore price of about $40 per tonne.
Again, there’s scepticism that in the current market trough in iron ore, Kumba’s flagship asset, Sishen Iron Ore mine, will be able to markedly improve its prospects of generating positive cash flow.
“We believe Sishen will be hard-pressed to show sustainable cash flow generation should spot prices persist over the medium term and have hence reduced our mine life forecast,” said HSBC analyst Derryn Maade.
He expected Kumba to remain cash negative at spot iron ore prices given the 2016 estimated break-even price at Sishen of $46/t (compared to $50/t previously).
There are also questions about Kumba’s balance sheet given that it may fall foul of debt covenants during 2016. It could also unveil significant write-downs if Sishen’s life of mine is severely cut, estimated by some analysts at between 10 and 15 years.
