[miningmx.com] – THERE was much to savour in Anglo American CEO Mark Cutifani’s first presentation to analysts in London last month; not least his ability to scandalise the group’s erstwhile communications team members with a call-to-arms in which with best Aussie twang, he said: “We need to get our arses into gear’.
He was speaking of his endeavour to improve the group’s dismal operational performance captured by the breathtaking disclosure that only 11% of the group’s assets met budgets, a deficit that cost shareholders $3.5bn in earnings. He also observed the group’s project pipeline was “constipated’.
Quite what Julian Ogilvie-Thompson, a former chairman of Anglo American, would have made of such colloquial flourishes is a source of wonderment; or for that matter, how the dapper Tony Trahar, another Anglo CEO, would have responded. Both were men of finance. Cutifani knows his financial ratios – especially return on capital employed (ROCE) – but he is first and foremost a miner with excellent communication skills, and a nose for marketing.
Thus he seized on Anglo’s interim results – in which earnings skidded 28% to $1.3bn – to haul out Anglo’s dirty laundry. Suddenly, there is was: at 11% ROCE is barely above Anglo’s cost of capital.
Cutifani wants a minimum 15% ROCE of which about half, equal to $1.3bn in cash flow uplift, has already been identified by improving the efficiency of capital project approvals, as well as operational, commercial and corporate savings.
There’s a limit to the amount of red tape one can cut but at least Cutifani has pared back direct reports to 11 from 15 by merging operating divisions in a restructuring that cuts across certain commodities and geographies, such as conjoining the metallurgical coal in Australian with the thermal coal assets in South Africa.
He also aired some of his favourite themes, such as the need for the mining industry to adopt an industrial approach to its pipeline management, and added some new ones: he suggested mining companies should syndicate large capital projects in the manner of the world’s energy groups which share the expense of gas or oil field exploration for instance.
As expected the widescale structural changes many believe Cutifani may consider – such as the sale of the group’s 78% stake in Anglo American Platinum (Amplats), the listing of De Beers, or the delisting of Kumba Iron Ore (Kumba), were not addressed directly.
Rather, Cutifani has started with technical rather than structural alterations of a company that is now entrenched as the unloved, bereft Cinderella of the piece whilst any one of BHP Billiton, Rio Tinto, Glencore Xstrata or Vale get to attend the ball.
Analysts were cautious. “The new Anglo CEO presented a credible, transparent initial action plan, although the market seems to be adopting a wait-and-see approach,’ said Investec Securities in a note.
“Baby steps,’ said Kieran Daly, an analyst for Macquarie Research. “The new CEO Cutifani certainly lives up to the “talks a good game’ description of him we have heard from investors and has so far said all the right things about shareholder value. His style is very different to his predecessor, so that in itself is a big breathe of fresh air,’ Daly said.
“Time will tell whether Cutifani and his team can cut costs and make the business a leaner machine. I am sure he will,’ said Sasha Naryshkine, an analyst for Vestact. He favours BHP Billiton over Anglo American, however.
Operational expediences aside, the key expectation of Cutifani is that he’ll attempt to remove the South African discount from Anglo’s share. Quite how this will be achieved is hard to say, especially cutting the strings is not feasible as Anglo’s ROCE from its South African assets has been consistently good: Kumba is its best asset, for instance.
Cutifani alludes to the fact he’s wrestling with the matter. “We have to position the business for success in South Africa and in a way that is successful for South Africa in its own right,’ he said. “We have to change it for the better for both parties.
He said a conversation had to begin and that the conversation – a favourite word of Cutifani not least because he speaks so convincingly – would not be time-bound.
Turning Anglo American around is quite simply, an enormous job. Cutifani has said he’ll call his managers to account if their operations fail to meet budgets for more than two consecutive quarters. One wonders how much time the market will give him.
Ratings agency, Moody, said earlier this month it could downgrade yet more the credit standing of Anglo American and its South African subsidiary, Anglo American South Africa, were the group’s cash flow to weaken further.
It said it was downgrading the South African subsidiary largely owing to its South African exposure which included potentially flammable relations with labour.
