Demerger of mines is “quickest route” for Anglo American to exit South African thermal coal

ANGLO American has given itself two to three years to dispense with its South African thermal coal export mines. This is in line with a response to questions at a virtual annual general meeting this year in which the group also disclosed that the divestment would be partial; that is, through a demerger with the new company floated on the JSE.

In reality, however, the intention is to get on which the job in a much shorter time-frame than three years. “Once you’ve made the decision, you’re better off getting on with it and the demerger route was the quickest route from our point of view,” said Mark Cutifani, CEO of Anglo American in an interview in June 19.

According to Cutifani, one benefit of the demerger is that it cuts down on red tape compared to a trade sale. “You’re handing back a share, so shareholders can make their own decisions about what they want to do with that share. It’s got less government issues, and the government is pleased to see a local listing.”

Cutifani is perhaps mindful of the route taken by South32, the Australian headquartered company which announced the sale of its South African coal assets in 2018, but has yet to complete the transaction. (It’ll be done by way of trade sale to Seriti Resources). Or the 12 months taken to sell his firm’s domestic assets, which was also to Seriti.

“That was the main issue: you’ve got at least 12 years life (of assets) so you’ve given the opportunity for that to be successful and at the same time we’re not trying to dictate to the country about what they should do with their natural resources,” said Cutifani.

Cutifani adds that he’s still be open to a trade sale, but the offers would have to be from companies Anglo could trust would not lead to recrimination later down the line.

The last thing Anglo needs is selling to a buyer who’d mismanage the legacy risks and therefore invite criticism from government as well as civil organisations. Having an ESG (environment, social and governance) issue blow up in your face is as damaging to mining companies these days as missing production guidance.

Interestingly, two of the companies most likely to tick that box in the event of a trade sale happening are Seriti and Menar Holdings. At face value, however, neither appear particularly interested in adding more coal to their respective asset bases.

“We are going to take over several businesses that are not in coal,” said Mike Teke, CEO of Seriti Resources in an interview with Bloomberg News earlier this month. “I want us to build a strong, formidable mining company.”

Menar’s MD, Vuslat Bayoglu, is of a similar mind. Menar, a Luxembourg-registered company with plans to take its thermal coal production to 20 million tons by 2022, an investment of some R7bn, has eyes for the manganese sector and is also drilling for gold in Kyrgyzstan. “Funding a coal mining project is now a big challenge,” said Bayoglu. “If Anglo runs a process (to sell its coal assets) we would be interested, but I’m not sure we’d do a big due diligence on it,” he says.

Menar ran a close second to Seriti for the South32 coal assets.

Bayoglu thinks in manganese there’s an opportunity to seize on the fact that a number of existing producers are taking organic growth via underground mining which is more costly than a new open pit mine such as Menar is contemplating.

Manganese is used in the steel making sector where it’s a strengthening agent. Another coal product – metallurgical coal – is also used in steel manufacture. Whilst metallurgical coal doesn’t have the pollutant properties normally associated with its thermal brother, its life in modern society may be limited, said Cutifani.

“We still think that metallurgical coal’s got a good future, but by 2035 it will be getting tougher there as well because the hydrogen technologies will be taking over in steel-making,” he said.

Companies like Anglo are trying to figure out how existing streams of cash flow attached to minerals like thermal and metallurgical coal, among others, are going to be either engineered out of existence, or not wanted by its customer and consumer base.

With its significant funding headwinds and the way in which society has turned against the fuel, thermal coal’s days look numbered in the long-term. The challenge for Anglo is moving forward in a way that does it right by stakeholders who rely on thermal coal.

“As I said, you can do a runner, and I’ve seen companies do that, but people remember,” said Cutifani. “We’ve done a lot of thinking about how to do this and we think we’ve come up with the right solution that ticks each of the stakeholder boxes. Hopefully, people remember we did it the right way.”