Anglo’s ‘balance’ argument on returns informed by project pipeline

INVESTORS were a little sniffy about Anglo American’s reticence to go over and above its stated dividend policy of paying out 40% of earnings.

The frustration emerged during Anglo’s interim results presentation to analysts last week. One analyst asked if Anglo might have been more fulsome in rewards to shareholders than the 49 US cents interim payout – a question that Anglo CFO, Stephen Pearce, met with a resolute: “No, I think we’re aiming for a balance. It’s not one thing or the other”.

The group didn’t want to be “just” a company known for yield, or for rigorous debt reduction, or for just production growth, Pearce said. But is perhaps Anglo missing a trick considering that its peer group, including BHP and Glencore, are something of the ‘makers of manners’ in the sector, especially regarding returns?

A day after Anglo’s results, BHP announced the proceeds of the $10.5bn sale of its shale assets to oil giant BP – which exceeded expectations – would be passed back to shareholders. “This cash in/cash out transaction … [would] likely to appeal to investors in the short term …”, said RBC Capital Markets in a recent report.

A month earlier, Glencore announced a buy-back programme of up to $1bn of is own shares amid a share price under-performance with the possibility this could be extended yet further, according to analysts.

“I think we bring different things,” said Mark Cutifani, CEO of Anglo American when asked on the investment response to the dividend. “We have a high quality group of assets that we can start developing,” he said. This indicates that of the balance in its investor appeal referred to by Pearce, it’s growth Anglo believes might be its competitive advantage, although this is not likely to come with merger and acquisition activity.

“We’ve always kept an eye on the market, as we should,” said Cutifani on the prospect of Anglo M&A. “But growth will firstly come from internal efficiencies such as Mogalakwena [the Anglo American Platinum mechanised mine]. Secondly, there are innovation step changes. We have invested in innovation and technology because we see this as the best pathway to growth in terms of allocating capital.

“Thirdly, there’s our internal project pipeline. Quellaveco is a large step,” he said. Handily, Anglo’s joint venture partner, Mitsubishi, will invest the first $833m required of the project before it has to put its own hand into its pocket during which time Pearce is seeking to take net debt down further – which all points to Anglo’s focus on capital project spend.

There’s also the copper ‘discovery’ in Brazil, although Anglo is anxious to keep expectations down until there’s more information. The only reason Cutifani made mention of promising exploration ground in Brazil was because “… there’s so much chatter about it within Brazil … So I feel I have to say something”. He also added that “we’ve put about six holes through something”, although he hastened to clarify that this didn’t mean the group had found a prospect. “It’s far too early for that,” he said.

What’s interesting about Anglo currently, though, is that it’s ‘balanced approach’ to building an investment case seems to be working. Perhaps it was coming from a lower base, but its share is nearly 39% higher on a 12-month basis which compares well against its peer group. Shares in Glencore are down 2.4%; BHP is 25% higher and Rio Tinto is 18% higher over the same period with all these firms facing problems of their own.

Rio Tinto is heavily dependent on China demand (more than most), BHP has a less clear pathway to growth with the shale assets out of its portfolio; and Glencore has sovereign risk issues in the Democratic Republic of Congo (DRC) as well as the risk the US Department of Justice will launch an investigation of the company regarding its DRC, Nigeria and Venezuelan activities, most likely related to oil.

At one point in his presentation, Cutifani observed that the market had been guilty of ‘misadventures” when it came to capital allocation and projects of which Anglo had been a party. The reference was undoubtedly to Minas Rio, the iron ore mine currently suspended whilst a pipeline leak is located and fixed. Quellaveco – the best project Cutifani has seen in over 40 years of mining – is not going to be that mistake. But it will suck up capital and the risk this poses is a major part of the balance equation to which Pearce referred.


  1. Dear fellow Readers,

    RTZ ( or RIO) did report its interim results , and thus provides good context for analysing Anglo results without falling prey to Aussie shills and their salesmanship. I provide the following info ( company disclosures etc) :

    __________ 1HFY13____ 1HFY14 ______1HFY15____ 1HFY16_____ 1HFY17______ 1HFY18
    S&P GSCI____ 611________640_________ 412 _______ 335_______ 380 ________ 420

    Admittedly, this is an index heavily weighted to the oil price , but also the most diversified & comprehensive.

    Anglo, has the following key metrics, which will be the focus, of our analysis :
    ____________ 1HFY13____ 1HFY14 ______1HFY15____ 1HFY16_____ 1HFY17______ 1HFY18
    Prod(Cueq Mlb)_ 4376_____ 4363________ 3607 _____ 2869 ________ 3276 ________ 3702
    Costs ( $M) ___ 11484____ 11816_______ 10066 _____8167 ________ 8006 ________ 9121
    CapEx ($M) ___ 2397 ____ 2667 ________ 2035 _____ 1100 ________ 800__________ 1276
    FFO ( $M) ____ 3167 ____ 3510 ________ 2715 _____ 2561 ________ 3721_________ 3380
    TCC($/lb Cueq)_ 3,17 ____ 3,45 _________ 3,35 _____ 3,23 _________ 2,68 ________ 2,80

    The above does NOT include diversities etc , which impacts on apples-to-apples ( or constant portfolio basis) costs reduction. Resource & reserves changes are also excluded. The Cu price used is $3,7/lb , which is the received price at 1HFY13.

    Then , RTZ released the following over the same period :

    ____________ 1HFY13____ 1HFY14 ______1HFY15____ 1HFY16_____ 1HFY17______ 1HFY18
    Prod(Cueq Mlb)_ 7146_____ 7095________ 5242 _____ 4519 ________ 5632 ________ 5806
    Costs ( $M) ___ 18994____ 18881_______ 13545 _____ 12260 _______ 13011 _______ 14686
    CapEx ($M) ___ 6960 ____ 3845 ________ 2474 _____ 1318 ________ 1758 ________ 2363
    FFO ( $M) ____ 5517 ____ 5456 ________ 4435 _____ 3240 ________ 6308 ________ 5228
    TCC($/lb Cueq)_ 3,63 ____ 3,2 __________ 3,06 _____ 3,00 ________ 2,62 ________ 2,94

    From the above , the CEOs of the companies made the following statements :

    Anglo CEO :

    ” We are making Anglo imperious to china economic shocks”
    ” We have made productivity gains of 80% ” yes Readers , EIGHTY PERCENTAGE POINTS
    ” QUELLAVECO is the best mining project he has seen in over 40 yrs in mining ”
    ” There is no OpEx inflation that he can discern”

    The more sober minded J-S , made the following comments :
    ” The commodity price environment remains supportive”
    ” Cost inflation is going to hit..its already evident in some of our operations , mainly aluminium.”
    ” OT is one of the best Cu & Au mining project in the world”


    I tend to agree more with J-S. He has truly delivered as evidenced by his costs reductions vs those of Anglo boss. Furthermore, his portfolio has more meaningful growth options than those of Mark. OT will costs $6B for >500kt/yr of Cu at AISC = $0,9/lb . Whilst , Quellaveco will costs $5,2B for <300kt/yr Cu at AISC = $1,5/lb using SCCO operations ( Toquepala & Cuajone). Syndication only shares/minimises the risks , NOT does augment the returns. So OT is by far a better project under any economic assumptions , and more meaningful.

    As for his ( Anglo CEO) claim of 80% productivity gain, i beg to differ and advise him that we also did operational management courses at varsity. There is no way he achieved that given the above figures. His true claim is that AISC costs are down 10% on a Cu-eq basis over the 1HFY13-1HFY18. And that does NOT sound dramatic!

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