Anglo must restore productivity levels, says former boss

Mark Cutifani, Anglo American's former CEO

AFTER the brickbats come the plaudits. Or is it better to describe the positive ripple in Anglo American’s share price this year as a case of absolution? In any case, the JSE bellwether registered a year-to-date high at the end of March, while its sector peers Rio Tinto and BHP crashed.

Not that Anglo CEO Duncan Wanblad will take such short-term price movements too seriously. After all, the hard work has only just begun.

To deliver on his planned turnaround after last year’s production disappointments, Wanblad has to ensure the firm’s Quellaveco copper mine in Peru meets production guidance, and hope R10bn in cost-cutting at Anglo American Platinum (Amplats) is enough to offset poor prices for platinum group metals (PGMs).

There’s also the question of what to do about De Beers, the 85% diamond subsidiary. Wanblad told analysts in February he’ll pull every lever to halt the decline that saw the firm underperform the Euro Stoxx basic resources index by 25%, to use just one metric. But how far is Wanblad really prepared to go?

Though it’s barely two months since Wanblad’s “nothing’s off the table” speech, analysts are beginning to conclude that nothing as drastic as the sale of De Beers will take place.

Instead of broad portfolio changes, Anglo will rebuild investor confidence on three fronts: free cash flow generation, capital allocation and operating performance, say analysts at Morgan Stanley. “We see Anglo’s risk reward improving,” they say.

The sale of up to 45% of the firm’s expensive food mineral project Woodsmith will ease investors’ minds on cash allocation, while predictable mining volumes at Quellaveco will help on the operating performance front.

As for free cash flow generation, Amplats is being held up as the exemplar. “Amplats has been most proactive at reducing costs which help sustain earnings and the balance sheet,” says Adrian Hammond, an analyst for Standard Bank Group Securities in a comparison of PGM miners.

There is concern as to whether Amplats will pass the interim dividend in July, but in positioning for a smaller footprint the company is exhibiting the kind of approach Wanblad meant when he said Anglo would “finally be cash-generative through the cycle” — mining sector argot for making a bit of money, even when prices are in the sewer.

Covid hit hard

Wanblad’s former boss Mark Cutifani says there are a few reasons the group was in distress last year, including the relatively unacknowledged outsize impact of Covid on its South African and South American assets.

In his last board meeting at Anglo, the lag effect from Covid was a topic of discussion, Cutifani says in an interview. “If you run an asset with 30% fewer people, certain things aren’t being done. I said it would take him 12 months to sort those issues through,” he says.

Exogenous effects aside, Cutifani is eager to see mention again of the shareholder return targets he sought to popularise during his nine years at Anglo: 10% cash flow generation through the cycle, and a 15% return on capital employed.

“Right now, I’m not seeing those numbers,” he says. Cutifani thinks Anglo lost productivity during Covid and asks if technical expertise is lost in reducing head office numbers by decentralising the organisation.

“Covid, I think, still had a lot more impact than people appreciated; it’s taken a long time to get back off that and he’s [Wanblad’s] got harder assets in Rio and BHP — he doesn’t have the Pilbara, he doesn’t have the Bowen Basin, he doesn’t have their assets and so the centre was actually far more important to Anglo in terms of its technology and innovation because it had to be continuous,” Cutifani says, referencing mineral-rich regions in Australia.

These “criticisms” aside, analysts are generally positive on the company. “With operational performance and expectations troughing, we do see deep value in Anglo American shares,” say analysts at Bank of America in a recent report. Interestingly, they also think the asset review “could be a key catalyst to release value”.

Market recovery

What’s definitely helpful to Anglo is the prospect of commodity prices improving, copper specifically.

Morgan Stanley analysts have changed their outlook from a surplus in 2025 and 2026 to a likely supply deficit totalling as much as 700,000t this year, and significantly higher deficit conditions throughout the rest of the decade. This is owing to unforeseen supply disruptions to production, partly reductions in smelter output in China — a variable Wanblad and peers in the sector, such as Glencore’s Gary Nagle, have long predicted could happen.

“We think Anglo American’s investment case is improving; management has now formally committed to syndicate Woodsmith and undertake a portfolio review, all the while delivering on operational improvements,” says Morgan Stanley. “Though execution remains key, we see a positive risk-reward skew.”

A version of this article first appeared in the Financial Mail.