The credit ratings agencies downgrading Anglo American PLC to junk status doesn’t sound the death knell for the mining giant, but it does underline that it has a very challenging future ahead of it.
CEO Mark Cutifani had come under a lot of criticism for not appearing to react quickly enough to the collapse in commodity prices last year, particularly in view of his firm’s mountain of debt, which was taken on when prices were on average some 50-70% higher than they are now.
Clearly, though, Cutifani wasn’t sitting on his hands. The restructuring plan he has come up with cannot be described as anything less than radical and if the firm gets the chance to successfully implement it, we will see a very different Anglo American a year or two from now.
The intention is it will be a firm with much less debt, but also many fewer mines, fewer employees and active in fewer product areas. Indeed, the headlines have all been about the firm’s intended exit from iron ore and coal, leaving it active in just three commodities; diamonds, platinum and copper – pretty much back where it started.
Anglo grabbed the headlines this week with news of a pre-tax loss of $5.5 billion on total revenue of only $23 billion after a series of huge impairments on several key assets. The announcement is what sparked the downgrade but along with that the restructuring, which will see the firm sell iron ore mines including Kumba Iron ore in South Africa and potentially its $13.5 billion Minas Rio iron ore project in Brazil if a buyer can be found.
In total, the firm plans to to shed around 30 “non-core” assets and shrink its headcount from 135,000 to 50,000 as it shores up its balance sheet and weathers a prolonged downturn in commodity prices. Anglo as good as admitted it in a quote to the Telegraph that the firm has become purely a China play.
What China’s Shift Means to Anglo American
As the Chinese economy has moved away from infrastructure investment, consuming less iron ore and coal, and towards consumption Anglo is clearly hoping this means it will continue consuming platinum, diamonds and copper.
Whether Cutifani’s plan is correct or not only time can tell, but in the meantime life is tough for the miner. This recent shocker was the fourth consecutive annual loss Anglo had notched up and by far the worst on record. The debt downgrade will make it the first major miner to be downgraded below investment grade although shareholders appeared to welcome the news as the battered share price rallied somewhat after the announcement. Probably on relief that there was at least a plan in place for recovery.
Coal accounted for one fifth of Anglo American’s earnings in 2015, while combined iron ore, coal and nickel accounted for half the firm’s revenue. If, and it’s a big if in today’s market, Anglo can offload what are, at current prices, are no more than marginally profitable assets, it will be a very different beast from the mining giant it was a few years ago.
How to Move Assets?
Anglo will largely retreat to its South African roots with a business heavily reliant on that country’s unstable unionized workforce and politicized business culture. With both labor and electricity costs rising, South Africa isn’t the mining Mecca it once was but arguably Anglo has enough history there to handle the challenging environment — the firm was started 99 years ago in South Africa by Sir Ernest Oppenheimer and the continent was its focus for decades before it began its forays into other products and regions after the turn of the century.
As Glencore has shown, there is life after downgrades even in the current and projected new normal of low commodity prices. It’s all about controlling costs and moving operations down the cost curve. However, Glencore moved early when the market began to slide, whether Anglo will find buyers for its iron ore and coal assets in today’s market remains to be seen. It is certainly a buyer’s market and further write-downs may be necessary to match book values to realistic market values on these resources.