[miningmx.com] — ANGLO American has selected the right chairperson in Sir John Parker – no matter what the South African government says. But this won’t alter the fact that Anglo has become a takeover target.
In the global business world Parker is regarded as one of the one of the most talented company chairmen of his time. That’s the reason why Minister of Minerals Susan Shabangu, who in the past week leading up to Parker’s appointment was pressing hard for a black South African to be appointed to the position, immediately did an about-turn when on Friday morning the Anglo board announced its decision for chairperson.
She welcomed the announcement, as Anglo clearly needed the best available business leadership.
This does not mean that Xstrata’s proposal of a merger between equals will be accepted. Indeed, this is an exceptionally opportunistic proposition because, among the world’s top 10 diversified mining giants, Xstrata probably occupies the lowest rung. Its market capitalisation fell 87% last year to $9bn and, even after a damaging rights issue of one new share for every two existing shares in January, Xstrata still maintains a net 30% debt ratio.
But Xstrata’s arguments in favour of a merger are convincing – not only for a possible Anglo-Xstrata marriage, but in the light of consolidation between the world’s major miners which have grown into conglomerates over the recent resources cycle.
The five or six biggest global mining companies are so much larger than the rest that they would hardly grow by absorbing more of the smaller mining companies. The only viable growth strategy is organic – by taking on gigantic new projects.
The largest is BHP Billiton, with a market capitalisation of some $115bn by the end of last year. Vale, the Brazilian iron-ore producer, is the next biggest with a market cap of $60bn, and in third place comes China Shenhua, a Chinese company that was not even ranked among the top 20 a year-and-a-half ago, but now boasts a market cap of $50bn.
In fourth place is Rio Tinto, worth $35bn, and then Barrick Gold at $30bn, followed by Anglo with $28bn.
To become a mining supergroup, a mining group needs to have a specific minimum size. Anglo does not comply.
Its Minas Rio iron ore project in Brazil is the main reason the sudden downturn in the resources cycle caught Anglo off-guard, and forced Cynthia Carroll to cut the group’s final dividend. Carroll borrowed $5bn to fund Minas Rio, but the resources downturn and the loan-servicing demands posed a threat to Anglo’s cash flow.
Iron ore is the big shortcoming in Anglo’s product portfolio. The group’s only iron-ore mine, Sishen, near to Kathu, delivers some 37m tons a year. It’s a prize asset, not only because it is the world’s biggest stand-alone iron-ore mine, but also because of the quality of its lump ore, which is considerably more valuable than the fine ore produced by most mines.
The price of Sishen ore has apparently fallen more sharply than that of fine ore, but it is so sought-after that Sishen had no need to cut production, while the downturn forced the three iron-ore giants to reduce production by about a third. But the three majors each produce 200m-odd tons of iron ore a year.
Anglo’s Sishen comes fourth, but is way behind the other three. The global market for shipped iron ore has risen from 442 m tons in 2000 to 845m tons last year. This year there will naturally be a decline, but when the global economy recovers iron-ore producers will again be masters of all they survey.
This is the reason Carroll thought it prudent to take on debt to build Minas Rio. Together with the expansions at Sishen and the Sishen South mine, its iron ore production will increase to 75m tons by 2012.
The problems that Minas Rio caused, however, Anglo showed that the group is not big enough to finance and execute such projects. Merger with another mining group of a similar size is the only option.
But it’s certainly not clear that Xstrata is the solution. The group is proud of its decentralised company structure and holds Anglo’s big head office up to shareholders as an expense item that can be eliminated. During a visit to South Africa, Thras Moraitis, Xstrata’s head of strategy, conceded that Xstrata would probably have to compromise.
“It will probably have to be a structure like BHP Billiton’s,” he said. Billiton has six head offices for its various business units, which are divided according to product groups, and two smallish central head offices in London and Melbourne.
In the financial world post the crisis, where companies and the financial landscape in particular will certainly be more strongly regulated, Xstrata’s company structure could easily be caught on the wrong foot.
The new Anglo chairperson will have to keep his finger on the pulse if he is to hold Carroll and her management team on the right course. A merger with another mining group may appear to be a solution, but it must then be the right marriage partner.
“Anglo-Xstrata” does not seem the appropriate solution.
*The writer is a shareholder in Anglo American.
** Sake24.com
