Commodities

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

After dithering over the need for a wholesale restructuring of Anglo American, CEO Mark Cutifani has finally got the message. The overhaul the miner unveiled on Tuesday is much more radical than the outlines initially announced in December.

Anglo's Fall
The shares are 80 percent below their 2008 peak
Source: Bloomberg data

But at a time when all the big mining groups are downsizing, it is at least questionable whether he will be able to sell assets at prices that help the company substantially cut its $12.9 billion of net debt. Moody's has already downgraded the company's debt to junk citing the high execution risk.

Cutifani's plan to exit bulk commodities like coal and iron ore to focus on more consumer-facing resources such as diamonds and platinum makes sense given China's move away from investment-driven growth. Anglo said the assets it plans to keep generated about $2.8 billion of Ebitda in 2015, or more than half of last year's total.

Shrinking Ebitda
Anglo American expects to report $4.8 billion of Ebitda in 2016, more than analysts had estimated
Source: Bloomberg

But Plan A better work. Cutifani surrendered Anglo's best chance to raise fresh capital at reasonable valuations last year, since when the shares have slumped. With impairments causing the company to post a $5.6 billion net loss for 2015, the pressure is on.

Fixing Anglo's balance sheet means generating sufficient cash either organically (which is tough right now) -- or by selling the family's now tarnished treasures.

Anglo's plan relies mainly on the latter: it aims to sell as much as $4 billion of assets in 2016, twice the amount of deals it announced or completed in 2015. In the medium term, it hopes to cut net debt by more than 50 percent to about $6 billion.

That looks ambitious. As my Gadfly colleague David Fickling notes, there are still buyers out there for mining assets -- Sumitomo Metal agreed to pay Freeport-McMoRan $1 billion for a 13 percent stake in an Arizona copper pit on Monday, for example -- but Anglo American shouldn't get too excited: it wants to keep its copper assets after the overhaul.

Selling other bulk commodity assets such as iron-ore at multiples that create value at the bottom of an epic commodities cycle requires a giant leap of faith.

In addition, shutting or selling mines that employ tens of thousands of workers will likely take time with governments and trade unions involved. According to UBS, Anglo American derives about 50 percent of its revenue from South Africa, where platinum miners went on strike for five months in 2014.

Maturity Profile
Anglo American has limited debt to refinance in the next two years
Source: Company presentation
South Afircan bonds maturing in 2016 ($13 million) and 2017 ($39 million) aren't shown separately.

For the time being, Anglo has breathing space. Only $1.6 billion of debt matures in 2016 and $2.6 billion in 2017, so it's new junk status shouldn't trouble it too much for now.

Balance Sheet Buffering
Anglo-American hopes asset sales will help it cut net debt and regain an investment grade credit rating
Source: Company presentation
Anglo-American is targeting up to $10 billion net debt for 2016

The company now expects to generate $400 million free cash flow in 2016, helped by swings in currency and commodity prices, cuts in capital expenditure and other operational improvements, compared with the negative $1 billion it had previously indicated. It also expects $4.8 billion of Ebitda in 2016, about $1 billion more than the consensus analyst estimate collected by Bloomberg.

The shares fell 7 percent on Tuesday and remain almost 80 percent below their 2008 peak. With its dividend suspended, Anglo is now effectively a straight bet on whether Cutifani will deliver. He should forgive those investors who think it safer to wait and see. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net