Kumba to drive Anglo dividend, but Charter gloom gathers

NET cash in Anglo American was forecast to have topped $2.5bn on June 30 which has lifted hopes the UK-listed group would re-instate the dividend when it reports its interim figures on July 27, analysts said.

Given that net debt would be about $7.3bn – a whisker away from its $7bn net debt target for the year-end at December 31 – the likelihood of an interim dividend had grown, said Macquarie Bank in a report. Buoyant commodity prices might well take net debt to a much lower level at the year-end.

One of the drivers behind the increased cash is Kumba Iron Ore (Kumba) which had generated R6.2bn in net cash as of its year-end, equal to $480m at the current conversion.Kumba, which held the dividend citing volatile market conditions, is estimated by Macquarie to have contributed $800m of the interim net cash sum in Anglo.

The cash is held in Kumba subsidiary, Sishen Iron Ore Company. Given its South African domicile, repatriation of cash is only permissible at the dividend rate.

“Given balance sheet targets appear well within reach and the high level of political and regulatory uncertainty in South Africa that is only likely to increase into the ANC December [elective] conference, an interim dividend is likely to warrant serious consideration,” said Macquarie.

Investec Securities said in a recent report that Anglo “… continues to maintain the momentum established in 2016 with its net debt position expected to fall sub-$5bn by the year-end”.

“Anglo is expected to mark a return to dividends this year with an official policy to be announced with its interim results,” it added.

Said Goldman Sachs in June: “Our argument for previously expecting the dividend to be reinstated with the year-end results was our view that Anglo’s board would wait for the credit rating agencies to upgrade the company to Investment Grade (IG) before confirming the dividend, which we saw as a year-end event”.

“With two bonds recently placed with covenants similar to IG bonds and having been priced close to IG peers, we now believe the reinstatement of the dividend could occur as soon as 1H17 results,” it added.

In terms of production, Anglo is expected to have received good news from diamonds – through its 80% stake in De Beers – as well as iron ore, thermal coal and nickel. Less promising is its copper and metallurgical coal operations, said Macquarie in its report.

The pall of uncertainty presented by proposed changes in the South African regulatory system will dominate Anglo’s figures, however. “Anglo American has over the past quarter been the weakest performer of the four diversified majors, with the release of the South African Mining Charter being the key reason, in our view,” said Investec.

“Although there is little likelihood that the Charter will proceed in its current form, the ensuing uncertainty may ensure that Anglo continues to trade at the greatest discount to valuation and at the lowest earnings multiples of the group.”

The redraft of the Mining Charter was been criticised by South Africa’s Chamber of Mines for setting unrealistic transformation targets as well as for failing to recognise previous black economic empowerment. The document, which was published on June 15, also failed to take cognisance of mining industry input.