Cape Town - The mining industry had itself to blame for oversupply in the market, Anglo American’s chief executive said yesterday, and could not rely on a reversal of the commodities price slump anytime soon.
In his first public appearance since revealing an audacious turnaround plan in December, Mark Cutifani, told a conference in Cape Town that this year was looking like the “most challenging yet” for the industry.
“We can’t rely on a reversal of this price slump anytime soon. 2016 is already shaping up to be the most challenging yet. Opinions are divided on whether we have reached the bottom of the cycle… So things may still get worse before they get better,” he said.
Cutifani said for some producers, adjusting supply to align with decreasing demand growth might not make sense as they sought to maintain market share and drive competitors out of business. “This strategy generally has a net negative effect,” he added.
Anglo announced plans in December to whittle down its business to cope with severe falls in commodity prices. The plan involves offloading three-fifths of its assets.
“We will be making the appropriate commercial decisions to exit a number of our mines in several countries around the world – but let’s not see that as a negative step,” Cutifani told the gathering.
“For the assets that we choose to exit, it is about giving many of them and their employees a more sustainable future under new ownership that is better suited to focus attention and capital on those assets,” he said.
Anglo American is expected to give more details about its future portfolio alongside its annual results next week.
Anglo and Cutifani have faced criticism for moving too slowly on an overhaul that has been derided by some as too vague and lacking the urgency required in the current “doomsday” environment.
“Either that value is unlocked by Mark Cutifani, or Anglo gets taken out or broken up,” said Paul Gait, a mining analyst at Sanford C Bernstein, who used to work in corporate finance at Anglo American.
“The question now is which will manifest itself first: a successful execution of Cutifani’s restructuring plan, or an exhaustion of shareholder patience to tolerate Anglo American in its current form?”
While the Australian chief executive talked of “grim” markets, job losses and abandoning businesses for years, it has turned into a question of survival as he tries to salvage a century-old company from the wreckage of over-expansion funded by billions of dollars of debt.
Anglo, once South Africa’s biggest company, is among the largest and most high-profile victims of the commodity collapse. Weighed down by borrowing and with too many mines that don’t make money, it has become the canary in the coal mine for an industry trying to figure out when it will hit the bottom.
It was the worst performer in the UK’s FTSE 100 index last year. Even after a 45 percent rally last week as commodities prices picked up, the company’s stock market value is still down at $6.8 billion (R108.9bn), a little over half its $13bn of debt.
Cutifani has outlined an ambitious, if so far sparse, plan to turnaround its fortunes. The aim is to cut loose more than half of the company’s mines, shedding those that lose cash, to become a much smaller business. It will be centred around its dozen or so most lucrative assets: they include diamonds, through its De Beers unit, copper and platinum.
In a market awash with unwanted mines, investors say the company must deliver quickly. “There has to be some movement in terms of sales,” Norman Mackechnie, a fund manager at Momentum Asset Management, said. “The big issue is reducing debt.”
Anglo has already made some progress on sales, with tarmac assets, copper mines in Chile and marginal platinum operations in South Africa raising about $2bn last year.
Since December, when Anglo revealed its dramatic downsizing, the company has also offloaded coal mines in Australia.
The next target is to raise $4bn. For sale are assets related to coal, platinum, copper and niobium – a mineral used in alloy metals.
The future of its iron ore mines, including the Minas Rio in Brazil that cost $14bn to buy and build, remains uncertain.
More businesses are likely to be put on the block when the company reports full-year results later this month. Anglo’s biggest challenge will be finding buyers.
Should Anglo’s asset sales fail to gain traction, Cutifani will have to go back to the drawing board.
Getting money from the stock market may be challenging, with two of Anglo’s biggest shareholders reluctant to back such a move after the price collapsed 75 percent last year.
RBC Capital Markets says the $5bn the company may need to raise is more than the market can stomach.
More likely, Anglo American could consider selling one of its best assets, according to Mackechnie. That could include part of De Beers or some of its copper assets, RBC said.
Bank of America Merrill Lynch said it could raise between $2bn and $4bn selling its stake in the Collahuasi copper mine in Chile. Anglo’s share price closed 2.13 percent up at R84.50 on the JSE yesterday.