Tuesday, 8 December 2015

Large cap mining speaks #1: Anglo American

It is a big week for the FTSE-100’s large cap miners.  With the Bloomberg Commodity Index yesterday falling to its lowest level since June 1999 sentiment is – to choose a suitable mining metaphor – crushed.  Glencore (GLEN) host an investor update on Thursday, Rio Tinto (RIO) have announced new capex cuts ahead of an update from their important aluminium division later today whilst Anglo American (AAL) has updated the stock market this morning.

It has been a long time since I have personally owned Anglo American shares.  Historically the company appeared more a series of different assets under a single formal coalition roof.  However there have been some efforts to simplify and today’s presentation focused on De Beers in diamonds and various copper and iron ore mines around the world whilst the still influential platinum assets – an area of particularly troubled headlines over the last couple of years – were relegated to one-liners concerning cash curves, commodity costs and financing. 

The big headline from the Anglo American update in tomorrow’s newspapers will probably be the suspension of the dividend until at least the end of next year but this is surely not a huge surprise to anyone given the company is closer to the indebted, low/no free cash flow morass of Glencore than the lower gearing and more first tier asset focus of say a Rio Tinto.  However what was analytically far more interesting were the announcements of over US$1bn worth of new ‘productivity improvements’ (cost cuts to you and me), capex down a further US$1bn versus previous plans both this year and next year and finally a US$2bn increase in disposal targets to a cool US$4bn.  

For a company with a market cap now of little more than US$7bn (and of course a decent slug of US$13bn+ of debt) that’s big darts.  No wonder they cannot afford the dividend and the anticipated number of employees is set to fall from around 135k currently to 92k by the end of 2017 and a targeted 50k for the ‘future Anglo American’.  Guess what the first analyst question? “Does there need to be a money raising?”

And therein lays the challenge for Anglo American and – by definition – its shareholders.  A future Anglo American with a super slim workforce focused on the better-than-average parts of their portfolio is an investable business.  De Beers is ultimately a solid business and big copper mines like Los Bronces will more than wash their face and there is a chance they will be last person standing in platinum. The trouble is everything else especially at a time of commodity price uncertainty.  They just don’t have time to wait.

But sentiment is crushed.  A spare US$20bn odd for a nil-premia takeout of Anglo American would wash its face and much, much more over time.  For the at-the-margin UK equity investor today give yourself less of a headache and less of a pressure to need commodity prices to bottom here and make sure you have some of the first tier and lower geared names such as Rio Tinto and the Brazilian mine debacle impacted BHP Billiton (BHP).  More detail and numbers will be forthcoming from Anglo American in February at the time of their full year numbers.  That’s when you have another look at this one.  

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