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.
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