February 2015 will live in the memory as the day Mark Cutifani stared down a sceptical market which believed he’d responded too slowly to the breath-taking deterioration in metal prices. Now, with the company on an even keel, there’s a new, entirely different threat in the form of Anil Agarwal who is reportedly making plans for an asset raid, writes DAVID McKAY.
Being an Australian, you wouldn’t expect Mark Cutifani, CEO of Anglo American, to play a straight bat to a fiercely delivered question. That’s exactly what he does though. Then again, the Australian cricket team are now a fairly reformed bunch so perhaps Cutifani mirrors more accurately the modern national character, sans stereotypes. And the question on everyone’s lips when the subject of Anglo American comes up is what the group intends to do with its South African assets, and whether Anil Agarwal, the executive chairman of UK-listed Vedanta, has anything to do with the answer?
Working through his family trust, Volcan Investments, Agarwal has in the last 18 months taken a 2% direct stake in Anglo and a 19.35% of voting rights in the firm. The structure by which this was achieved is complex; almost inscrutable considering Agarwal’s explanation for doing so was for “investment purposes”.
Almost nobody believes this.
Firstly, the voting rights are through options on shares, a means that would be playing fast and loose with the family wealth; secondly, nobody risks a huge portion of personal wealth on a single company and, no disrespect intended to Cutifani & Co, on Anglo American in particular.
Long-term, shares in Anglo have been volatile and have – generally speaking – under-performed its rivals. At the time of writing, shares in Anglo since 2010 – which roughly marks the beginning of the end of the minerals and metals supercycle – have gained5.7% in value. In comparison, Rio Tinto, the Anglo-Australian diversified miner, has gained 13.6%. Even Glencore, which has underperformed its peer group since the beginning of this year by about 25%, has outperformed Anglo by some 10.4%, albeit from listing in November 2010.
Yeah, look: we regularly exchange or interchange with Mr Agarwal as you would with any shareholder,” says Cutifani.
He [Agarwal] currently holds about 2.5% of the company. He has voting rights; he has his option positions on a bigger range of shares so obviously we also interact with him on the basis of our AGMs in making sure that he’s happy with propositions that are being put forward and that’s how we operate. He’s a fan of South Africa, and so are we.
One school of thought is that Agarwal sees a pathway to extracting assets from Anglo, if not a full-blown merger itself. Why do they think this? For starters, Agarwal has already publicly been there, albeit seeking Anglo’s non-South African assets. In 2016, he proposed some kind of combination involving Vedanta’s Hindustan Zinc with Anglo’s zinc assets. It was “a very friendly approach”, he told this publication in a 2017 interview, adding: “We wanted to create a company with cash flow of $10bn with no debt and that would be in the league of BHP Billiton [as BHP was then called]”.
Then there are other pointers. Agarwal has exhorted Anglo not to sell its South African assets, lauded the group’s support of sub-Saharan Africa investment, and most recently – and most tellingly – proposed the buyout and delisting of Vedanta, the company he founded, by Volcan Investment, which has roughly 65% in Vedanta.
According to Indian publication LiveMint, this is the first of three stages in which Volcan Investments, once it has simplified the structure with Vedanta, will attempt the buyout of Anglo’s thermal coal and iron ore assets, the latter held through Johannesburg-listed Kumba Iron Ore, which will then be relisted as a new company in London. While acknowledging the speculation, RBC Capital Markets said such a thought would certainly help a further rerating in Anglo American shares.
It’s worth noting at this point, that the Volcan Investments approach to Vedanta is a moving target. Minority shareholders are thought to be against the offer which they believe is “opportunistic”, which is a by-word for under-valued.
Cutifani’s view on the matter is to take Agarwal at his word regarding his shares and voting rights in Anglo. “Yeah, look: we regularly exchange or interchange with Mr Agarwal as you would with any shareholder,” says Cutifani.
“He currently holds about 2.5% of the company. He has voting rights; he has his option positions on a bigger range of shares so obviously we also interact with him on the basis of our AGMs in making sure that he’s happy with propositions that are being put forward and that’s how we operate.
“He has said to us that he’s happy with the strategy … He would prefer that we don’t sell more assets. We said we had already made that decision so that’s clear.
“He’s a fan of South Africa, and so are we.”
Perhaps one of the factors that may give Agarwal hope of buying Anglo American’s South Africa assets is down to the perennial issue of the discount applied to them. Investors worry about the South African regulatory regime; they worry over disputatious labour, and they worry about productivity among a gallery of other sovereign risk factors.
“Skills, electricity and water shortages in South Africa may affect production and mining inflation more than we anticipate,” said Citi in a recent report. “As around 40% of Anglo’s assets are in South Africa, this could erode Anglo’s global competitiveness,” it added. That’s typical fare of the market’s view on Anglo American’s South African exposure, certainly during the administration of former president, Jacob Zuma.
Cutifani’s view, however, is that the group is more committed to its South African assets than ever before. “I have said, and I’ll say it again, in spite of what other players have said, I would never like to leave South Africa. I don’t care who said what: I’m not leaving.
“I said we can never sell platinum.
I said we are committed to Venetia (a De Beers mine). I said we may have to sell some other assets and I do make the point very clearly, we did more restructuring outside South Africa than we did inside South Africa.
“Now in South Africa, we’ve gone from 31 to 17 assets, but on a global portfolio we’ve gone down from 68 down to 36 [assets] and so we’re pleased with the performance of the assets in South Africa today. We’ve got a 35% EBITDA margin, we’ve got a 23% return on capital employed and we think we’ve got good long-term positions in platinum or, I should say, precious metals, in iron ore, in diamonds, in manganese and even with our thermal coal, the current life of mines of which is around 14 or 15 years, which is pretty solid.”
It’s worth recording that in the LiveMint article, it also mentioned Agarwal’s plan was to move on De Beers and Amplats which, combined with the other South African assets, would create a $16bn to $17bn group. Given Cutifani’s allegiance to Amplats, it’ll be interesting to see how Agarwal progresses, assuming this is his plan.
Now in South Africa, we’ve gone from 31 to 17 assets, but on a global portfolio we’ve gone down from 68 down to 36 [assets] and so we’re pleased with the performance of the assets in South Africa today.
One final irony to the matter regarding Agarwal, Volcan Investments, and its alleged interest in Anglo American is the fact that Cutifani’s former colleague at AngloGold Ashanti, where he was CEO from 2007 to 2012, Srinivasan Venkatakrishnan, is due to leave AngloGold for Vedanta where he will become its new CEO. It’s tempting, therefore, to imagine the prospect of the two of them locking horns after years of comradeship.
Does Cutifani think the two will ever cross paths? “I would certainly expect to run into him. I have no doubt we’ll have cause to chat and compare notes … if for no other reason than to talk about old times”.
It’s fair to say that Anglo American has been among the most vulnerable of the major, diversified mining houses to take-over speculation. A so-called “merger of equals” proposition was launched in 2009 by Mick Davis, then CEO of Xstrata – a proposal first formally rejected, and then eventually foiled by a necessarily beefed-up board.
Anglo’s behemoth status is legendary. Once the owner of half of Johannesburg, it is said, by means of a property portfolio that was matched in heft by its industrial assets, and sprawling array of investments. The group’s move to a London listing in 1999 led to a drive to simplify its structure so it could be more palatable to the deeper pool of investors there – a process that was continued under CEO, Cynthia Carroll, partly in response to having survived the Xstrata ‘take-over’.
Even under Cutifani, the group has been pared, the most recent restructuring by dint of the collapse in metal prices from about 2012/13. Anglo has cut its South African assets under management to 17 from 31 since then, but it has also overseen a far wider restructure among its foreign assets, including the $1.5bn sale of its niobium and phosphate business and the sale of its 50% stake in Lafarge-Tarmac, an aggregates business, for $1.6bn.
By mid-2016 when a large proportion of the restructure had been unveiled, Anglo’s payroll had been reduced to 50,000 from about 135,000. The reductions might have been greater had the minerals and metals price slump persisted. In fact, the original plan as constructed in the teeth of the market downturn, was to cut Anglo’s global footprint to 20 to 25 key assets from 55.
The revival of the market happily removed the need for such drastic action, and with major surgery completed, the market has warmed up to the company, especially following the appointment of Cyril Ramaphosa as South African president, an event widely construed as pro-business for the country.
“We estimate the miners under our coverage can generate $80bn of “excess cash” over the next three years equivalent to about 20% of market capitalisation,” said Macquarie, an Australian bank, earlier this year. “Among the diversified miners, we prefer Anglo, BHP and Glencore. Of the three, we believe Anglo’s upside is likely to materialise the quickest.”
Having been five years at the helm – a period frequently viewed as the average CEOs corporate ‘life-span’ – the question has to be asked whether Cutifani has, effectively, done his work?
“We have literally doubled our free cash flow and our underlying earnings over the last five years. So, in my view, the question always has to be asked, can you see yourself doing that again. And the answer has to be: ‘Yes!,’ ” he says.
In fact, the goal over the next five years is to find another $3bn to $5bn improvement in pre-tax earnings; in essence, a repeat of what has been achieved since 2013. “Consistent with that approach, we can also see other opportunities but they haven’t yet been fully formed, and we’re not yet happy to have them built into forecasting,” he adds.
In June, Reuters reported that Anglo has been awarded “hundreds of permits” to explore for copper on the edge of the Brazilian Amazon in a mineral-bearing area described in the report as “… an open secret among Brazilian geologists”. Asked what this may portend – and whether it signalled a willingness by Anglo to add rather than cut properties to its asset base – Cutifani was somewhat ambivalent.
We have literally doubled our free cash flow and our underlying earnings over the last five years. So, in my view, the question always has to be asked, can you see yourself doing that again. And the answer has to be: ‘Yes!
“Yes,” he said in response to adding more assets. But one also senses he thinks Anglo has the assets it needs and the challenge is when to release those no longer deemed core. “We believe the assets we have are the assets that we think we can take forward as a company, and build, and improve.
“The normal ebb and flow when an asset gets towards the end of the life that we see for it – five years before the end – is to look at a sale. We do this on the basis that it doesn’t affect our longer-term approach and also if we think others might see value in some other angle and, instead of getting five years, they might get ten or 15 years.
“But we like the assets that we have; we like the positions we have; we’d like to build on those positions.”