Anglo faces messy divorce in birthplace

File picture: Nadine Hutton

File picture: Nadine Hutton

Published Dec 8, 2016

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London - In 1917, Ernest Oppenheimer met

with South African general and soon-to-be prime minister Jan Smuts to seek his

blessing for a new mining company called Anglo American. Smuts wanted one

assurance, the company was there for the long haul.

Anglo,

along with its sister company De Beers, made Oppenheimer a billionaire and his

descendants one of Africa’s richest families.

The company became South

Africa’s biggest, a conglomerate once

spanning brewing, publishing and gold mining. Now a century later, Anglo is

trying to cut many of the ties with the country where it all began.

While South

African mines were cash cows for decades, Anglo now wants to sell them next

year to cut debt accumulated during the commodity boom, when it spent $14

billion on Brazil’s

Minas Rio. How to package the assets and which to include will be major choices

for Anglo, and it faces opposition from a government pension fund that is also

the biggest investor. With so much history and national identity wrapped up in

the company, it will be a complicated divorce.

“South Africa’s

economic development basically began with gold and diamonds, and Anglo was a

major part of that,” said Dave Mohr, who helps oversee 110 billion rand ($8

billion) as chief strategist at Cape Town-based Old Mutual Multi-Managers.

“Decisions were made to buy very expensive assets at the top of the commodities

cycle. That’s their biggest problem and the main reason they’re now having to

sell.”

Unwanted mines

Many of the

South African operations weren’t profitable when metal prices were depressed,

and allegations of widespread government corruption and uncertainty over mine

regulation have long been a concern for investors.

The company

will need to balance its goals of raising cash and paying down debt with the

demands of the Public Investment Corporation, Anglo’s top shareholder and the

state-owned manager of government pensions. Already, the PIC has repeatedly

disagreed with plans to sell assets piecemeal.

Read also:  Anglo American rallies again

Anglo

operates 15 mines in South Africa

alone, owns controlling stakes in Kumba Iron Ore and Anglo American Platinum and has

other joint ventures.

Anglo wants

to sell its iron ore, coal and manganese operations in South Africa, and retain the Venetia

diamond mine and some platinum mines including Mogalakwena, the world’s biggest

open-pit platinum mine. That would reduce the country’s Ebitda contribution to

15 percent from 37 percent, according to Credit Suisse Group.

Shareholder pressure

Platinum

may be a sticking point. The PIC is pressuring Anglo to include the prized

platinum assets in the divestment, according to people familiar with the

matter. That sets up a conflict for Anglo’s CEO Mark Cutifani, who considers

platinum a core commodity, along with copper and diamonds.

Anglo is

leaning toward bundling the South African assets into one listed entity,

instead of selling them off piecemeal, according to people familiar with the

matter. The miner wants cash from any divestment to pay down debt, said the

people, who asked not to be identified because the talks are private.

One option

being considering is to combine Kumba, which owns Africa’s

largest iron ore mine, with Anglo’s coal and manganese operations, according to

the people. Any bundling with Kumba is likely to require wide investor backing,

one person said. Anglo shares have quadrupled this year, making a spin off more

palatable to investors.

Read also:  Anglo shareholder wants vote on sale plan

But there

are other alternatives. The company could decide to sell the assets separately,

a plan that Anglo originally favored.

“We

continue to work through all the various options for divesting the thermal coal

and Kumba iron ore assets in South Africa, which may include packaging them for

sale to create a new South African mining company,” Anglo said in an e-mailed

statement.

In Anglo’s

favor, as metals prices rebound, there’s less pressure on the company to

quickly raise cash, giving it time to find the best solution, said Paul Gait,

an analyst at Sanford C. Bernstein in London. He estimates the plan can be

found in the next 12 months, even if the eventual retreat takes two to three

years.

“All

options are on the table for Anglo,” Gait said. “What’s critical is that they

don’t remove any options too soon.”

-With

assistance from Janice Kew and Loni Prinsloo.

BLOOMBERG

 

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