Anglo cautious despite comeback year

[] — ANGLO American CEO Cynthia Carroll left some sell-side analysts a tad disappointed paying 40 US cents per share in its final dividend.

Including the interim payout, the total dividend was 65c, but based on a one third/two thirds interim/final split, the final dividend should have been higher.

The UK boutique, Libertas, described the return as “pathetic’ given that the group had pledged to return cash to shareholders in the absence of acquisitions or excess capital.

So why the conservatism? The short-term risk to Anglo’s business is possible inflation in China, but in keeping with its peer BHP Billiton, which reported earlier this week, Anglo believes the general outlook for commodities remains as strong as ever.

Perhaps Anglo’s board isn’t yet completely confident the state of affairs that encouraged Xstrata to launch a merger of equals has sufficiently improved.

Still, it will not go unnoticed that Anglo matched Xstrata’s claim to a 50% increase in production by 2015 or, in fact, that optimisations, the raison d’etre for Xstrata’s merger, totalled $2.5bn in Anglo’s financial year ended in December.

Fashioning a suitable asset mix also continues to occupy Anglo’s board with divestments totalling $3.3bn, helping to further tame the balance sheet.

Net debt declined to $7.4bn from $11.3bn taking net debt to equity at 22%, a comfortable level especially with the kind of expansion numbers on the table.

Talking of expansion, one figure worth absorbing is that Anglo will double its output of metals in 10 years following some $70bn in capital expenditure, a figure which echoes the $80bn in “indicative’ organic growth cash machine BHP Billiton has targeted.

A broker commented Anglo was perhaps pushing credence with this ambitious growth target, but the $16bn in capex it plans over the next three years is noteworthy since only about a quarter of it is in the South Africa assets.

About 12 projects comprise the capex, of which half is in South American copper and another fifth in metallurgical coal projects Grosvenor and Drayton South.

It was a real advance last week when Carroll told delegates at the Indaba Mining Conference that the ability to plan for years ahead helped qualify a district for investment.

Security of tenure, or the lack of it, would count against the district as, indeed, would a lack of what Carroll described “the rule of law’. Both security of tenure and the law are central to the litigation Kumba Iron Ore, Anglo’s 64% iron ore subsidiary, is fighting against Imperial Crown Trading and, ultimately and ominously, the South African government.

So a generally good performance.

The progressive dividend policy is back, debt is becalmed, the divestment strategy almost complete (Scaw, Copebras and Peace River Coal in western Canada remain unsold); even Anglo Platinum has fallen into step. Carroll described the business as “transformed’. It must go as her best achievement to date to have lassoed Anglo Platinum’s runaway cost base.

It’s not BHP Billiton though, is it? The house that Marius Kloppers runs generates crazy numbers by South African standards. Even after announcing an increased buyback offer of $10bn, up from $4bn previously, and a higher-than-expected dividend of 46 US cents (from 45c), the company finds itself in a net cash position.

Analysts estimate that were it to embark on an inorganic expansion strategy, one that still can’t be discounted, it would have funding in excess of $50bn.

Assuming its indicative $80bn in capex, as well as stay-in-business capital, exploration and a progressive dividend policy, BHP Billiton outlays some $25bn a year over the next five years, and that’s before paying for the buybacks.

If ever there were a reason to reconsider an Anglo/Xstrata union, it would be to find a means of competing with BHP Billiton’s sheer market heft, and its ability to surprise.