Cynthia CarrollCynthia Carroll, CEO, Anglo American

Anglo's Carroll on the brink

David McKay | Sun, 19 Jul 2009 21:11

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[] -- LOSING Anglo American would be as tectonic a shift for Jo’burgers as the loss of Ford Motor Company to Americans, such is the psychological importance of the South African resources firm. However, that’s a possibility following a not entirely surprising merger proposal from Xstrata in mid-June.

But if Anglo American CEO Cynthia Carroll knew of Xstrata’s merger intentions at the time of our interview – a week before the bid was lodged on 21 June – she wasn’t giving anything away. “You can’t tell the future,” she said of the possibility of a takeover approach. “But this merger talk is the longest serving question,” she said – almost amused by its posing. Anglo has the longest life reserves of its peer group, its own unique pipeline of projects, the best opportunities, so on and so forth, she said.

Carroll’s ability to make a case for Anglo’s independence is now even more pressing. She’s facing an onslaught, with some hostile shareholders on one side, no doubt giving Xstrata every encouragement, and a board on the other that will have to decide how far it plans to go to defend the group.

That’s because Anglo has rejected Xstrata’s merger proposal – to the horror of some analysts in London – which will inevitably turn Xstrata into hostile action and possibly a bidding war were Vale, the Brazilian firm, to revive its own well-known takeover ambitions. Carroll stands on the brink.

Ironically, the question of Anglo’s future has been the dominant feature of Carroll’s two-and-a-half year stint at the group. The question was there in 2006 when she took the reins of power and it’s now certainly part of her life as her counterpart – the imposing Mick Davis, CEO of Xstrata plc – looms large.

Every shareholder I subsequently spoke to told me I’d made the right decision

In October 2006 the shock of Carroll’s appointment triggered the market to soul-search on behalf of Anglo. At that time Carroll represented a number of firsts that appeared as if Anglo was to change forever and would be weakened by the fact. She was the first woman to head the group, the first foreigner (non-South African) and the first non-Anglo appointee to the top spot.

In Xstrata Carroll is staring down a firm that views a successful combination with Anglo as important as independence is to Carroll. Quite simply, the astronomically ascendant Xstrata – a company shaped in a record seven-year stretch – is running out of rope if its growth by acquisition strategy is to be a prevailing one. At $159bn, BHP Billiton is too big a quarry for Xstrata. Rio Tinto’s $65.6bn market cap is also too expensive. But Anglo’s $29.6bn market cap is, as with the Little Bear’s porridge, just right. If Mick can’t take Cynthia down it’s hard to see where he’d turn next. Anglo is his Alamo.

"Cynthia, Cynthia, Cynthia..."

Carroll’s situation is severely weakened by shareholder discontent. According to TimesOnline, shareholders have long been mounting a challenge against Carroll, saying she isn’t running the company as well as they’d hoped. They want Anglo to be merged with Xstrata and concerned more funds are required to help distressed assets, such as De Beers, which needs assistance refinancing $1.5bn in debt.

“There are three reasons we sold,” one shareholder told the newspaper's online site about dumping Anglo shares. “Cynthia, Cynthia and Cynthia. It’s nothing personal. We just don’t think she’s done a good job.”

Investec mining analyst Rebecca O’Dwyer told TimesOnline recently: “Anglo would make a lot of shareholders happy if it did a deal with Xstrata. It’s such a big job running Anglo that some shareholders think the only person who could do it would be Mick Davis.”

Passing the dividend in February – the first time in 70 years – left South Africans in particular gasping and perhaps entrenched a view in Johannesburg that the lady from the West was too different to understand “how things work around here”. The first time that was mentioned it had been after shutting Anglo Platinum’s Rustenburg section following underground fatalities.

“We knew that was going to be tough,” said Carroll of passing the dividend. “But we had to preserve our cash and the rating was very much in our minds.”

Rio Tinto subsequently also passed its dividend. But at the time Anglo was announcing it, mining houses across the board were scuttling like mice. Some were considering selling equity to – in the case of Rio Tinto – Chinese public corporations; or they were lining up enormous, silver bullet-type rights issues, such as those subsequently completed by Xstrata and Lonmin.

Anglo’s response, starting with the dividend, was slightly different in that that was the beginning of a modular response to the economic crisis. Around the same time Anglo finally quit its remaining shares in AngloGold Ashanti for $1.8bn; it then added $4.7bn in new debt through a $2bn bond, quickly followed by a $1.7bn convertible bond. A Brazilian development agency also added a $1bn loan.

René Medori, Anglo’s chief financial officer, declared recently Anglo had funds enough for 18 months. However, with a debt to capital gearing of 30% there are still fears the balance sheet is relatively constrained.

But Carroll dismisses talk of additional funding, such as a general rights offer. “I don’t think a rights issue is necessary,” she said. And reflecting again on the dividend cut commented: “The share price didn’t respond well – but now it’s outperformed our rivals over three, two or one month. Every shareholder I subsequently spoke to told me I’d made the right decision.”

What will Xstrata do next?

Currently, cash Anglo may have to raise next year has been completely superseded by the fact of Xstrata’s approach and what it will do next. The view is it will almost certainly work hard to win over South African shareholders, which represent around 25% of Anglo’s share register, and also strive to win the political vote.

Sandile Nogxina, director-general of South Africa's Minerals Resources department, says a combined Xstrata/Anglo American would create uncomfortable dominance in the country’s platinum sector. (But it would mean Xstrata would have to relinquish its stake in Lonmin and perhaps relieve the pressure on its CEO, Ian Farmer.)

“Nobody can make any big decisions involving Anglo without trying to work out how it will affect South Africa’s economy, the South African Government and the South African people,” says Peter Major, an asset manager at Cadiz Corporate Solutions. Peter Attard Montalto, of Nomura International, says: “Following the Government’s new draft mining Bill – which proposes a greater use of black economic empowerment money in mining – the Government and regulators may well push for parts of subsidiary stakes to be given up for that purpose.” Trade unions would also be worried about wage negotiations and possible job losses.

But while Xstrata sets about its strategy of winning the South African vote it falls on Carroll to entrench her own home support. Cadiz’s Major believes now’s the time for Anglo’s board to show its colours. “It [the Anglo board] has unbundled the gold – but what does it really want her to do? Where does the board see this company in five or 10 years?”

In rejecting the friendly overture from Xstrata – according to the, a decision that took less than two hours – it seems Carroll has board support. She will lose her staunchest supporter in Mark Moody-Stuart, outgoing chairman, but his replacement, Sir John Parker, appears to support the notion of Anglo independence particularly in the absence of a nil-premium offer that Xstrata says it will continue to offer.

But with Anglo Platinum continuing to struggle, and with the loss of Anglo's South African head in Kuseni Dlamini (leaving for Old Mutual SA), Carroll has the momentous task quelling a disparate group of unsupportive (or at best, jittery) shareholders, including the likes of Barclays’ Legal & General (58 million shares), M&G Investments (17 million shares) and JPMorgan and Standard Life (which hold five million and 10 million shares respectively).

Says Major of Anglo’s shareholders: “Who does this deal make sense for: Xstrata or Anglo shareholders? My worry is that weak [Anglo] shareholders will make a quick 10% to 15% on the deal.” Major laments the growing flightiness of the group’s shareholder base. “They’re a bunch of anonymous shareholders that are here today and gone tomorrow. And that goes all the way from pension funds and hedge funds to unit trusts.”

One of Carroll’s defences will certainly be that it will be better positioned than Xstrata when the commodities market turns. Xstrata was forced to issue £4.1bn in shares, whereas Anglo’s balance sheet is becalmed in a more modular fashion, as mentioned.

Role of Glencore

However, there will also be concerns about the Glencore’s role in the greater group. Glencore, which owns 34% of Xstrata and which helped form the company, has sometimes raised shareholders’ concern, most recently when it vended in a coalmine instead of paying cash to follow its rights. Some Xstrata shareholders wondered why Glencore should receive that kind of preferential treatment.

One asset manager believes Glencore is driving the bid for Anglo purely for its own interests and not those of other shareholders. By acquiring new assets through Xstrata, Glencore neatly secures itself another source of metals with which it can trade. "This is Glencore's strategy with Xstrata and always has been," an asset manager says.

There’s a way to work with the Chamber of Mines and the DME, which is step-by-step. We’ll put our cards on the table

And then there’s the question of whether Xstrata has the same level of assets as Anglo. Following the BHP Billiton model founded by Davis’s role model, Brian Gilbertson, Davis has assembled second or third tier assets and then slowly hived them off for better quality assets as the company has gained scale.

But do Xstrata’s coal, copper, nickel and platinum prospects match those of Anglo? Carroll’s detractors will say Anglo’s assets, though fundamentally sound, have been mismanaged and that in Davis the enlarged group will have a manager able to extract appropriate value.

MMX was pricey

Carroll’s critics also say she overpaid for assets, including the Minas-Rio iron ore mine the group now controls. Carroll acknowledged the deal, which analysts say was at the top of the market, stands at the heart of Anglo’s current financial struggles. Says Carroll: “There’s no doubt the transaction has put pressure on us. But that’s a short-term concern. We’re here for the long term – for 20 years from now.”

That sounds particularly Anglo-like: defending investments and decisions that affect shareholders in the here-and-now with a perspective from which only our children might benefit.

“The quality of the asset is fantastic,” she said. “When we bought it [MMX] it was about one billion tonnes of iron ore. Now it’s closer to 1.9 billion tonnes. And it could get higher.”

Combining bank facilities and cash, Anglo has $9bn in its kitty and looks positively on the commodity markets. Although the recovery won’t be until next year, Carroll said the group “…tends to think positively” about market prospects.

“The fundamentals of the industry haven’t changed,” she said in our interview. “When the upswing comes it will be positive and we’ll be better positioned to take advantage.”

And China remains fundamental, said Carroll. However, there are economists who think the depth of the US recession – on which China depends as a buyer of its export goods – will suppress global recovery. Carroll disagreed: “China’s stimulus package launched by its government (which involved loosening credit growth restrictions and improving money supply) is having an impact on commodity demand in a positive way.”

Gross domestic product growth in China will be higher than first expected this year (7%, not 5%), although the US economy will be more domestically driven, she said. “We’ve never sold more iron ore than now,” said Carroll, who adds the cost of iron ore production in China is leading domestic output downwards and providing opportunities to exporters.

Platinum jewellery sales are “extremely high” – offsetting the downturn in autocatalyst demand. And “met [metallurgical] coal has been pretty strong for us.” There’s a shift in tone among some analysts. In a June note banking group Goldman Sachs suggested the end of Chinese de-stocking of copper, signs that de-stocking may end in Europe and then a sudden, surprising, surge in new investment flows were promising signs for copper, a metal that often presaged similar trading behaviour for other metals.

But Mike Stuart, an analyst at British stockbrokerage Numis, is less optimistic. He also remarked on the Chinese buying copper but believed it was motivated by opportunism. “Chinese buying is the transfer of copper stocks from LME warehouses and producers to Chinese public and private sector stocks, as opposed to any major increase in Chinese consumption.”

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