Commodities

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

(Updated )

To those unfamiliar with Anglo American Plc’s share price collapse in 2015, it might seem strange that a company in control of one-third of global rough diamond production couldn't spare a dime for shareholders.

On Thursday, chief executive Mark Cutifani tried to turn a page on that dark period of routed commodity markets by reinstating Anglo's dividend. That's six months earlier than expected. No question, the payout -- 40 percent of underlying earnings -- is positive, but it may not be enough to close a large valuation gap with peers.

Roaring Back
Anglo American's shares have gained more than 400 % since a low in 2016
Source: Bloomberg

Management had rightly prioritized cutting debt over dividends in recent months, even after rival Glencore Plc began talking up the potential for a bumper payout. But Anglo's efforts to trim operating expenses and capital expenditure, together with improved cash flow from rebounding commodities, have put its balance sheet on a much firmer footing.

Net debt has fallen to about $6.2 billion, below a $7 billion year-end target and less than one times annualized Ebitda. Though demand for platinum, one of Anglo's core commodities, has tempered lately (in part due to falling sales of diesel cars) and currency movements were unfavorable, the company generated $2.7 billion pounds of free cash flow in the first six months of 2017, more than double the same period a year ago. 

Cutting Bloat
Anglo's net debt has fallen by half, making room for the resumption of dividends
Source: Anglo American
Nb. The data shown correspond to Anglo's definition of net debt, which includes related derivatives.

Paying a dividend doesn't by itself create any additional value -- the cash already belongs to shareholders. But handily it does let Anglo American use funds that might otherwise be stranded. The company's large cash pile in South Africa  is subject to exchange controls there. But they don't apply if the money is needed to pay a dividend at the group level.

Anglo's South African iron ore and coal deposits are once more generating decent cash flow, which prompted Cutifani to renege on a plan to quickly jettison these bulk commodities. Yet investors remain skeptical about the company's exposure to politics and labor issues in South Africa. The country accounts for 40 percent of its Ebitda, estimates Credit Suisse. 

The latest blow came last month when South Africa ordered local miners to raise the level of black ownership under a new mining charter.  As a result the shares trade at a big discount to rivals. Anglo's shares trade on about seven times expected forward earnings, on a par with downtrodden airlines and carmakers.

Valuation Gap
Anglo American's exposure to South Africa is a worry for investors
Source: Bloomberg

Cutifani has indicated he remains open to a solution for the country's remaining South African assets,  though the new mining charter won't exactly help attract buyers, notes Barclays. Regardless, Cutifani's priority should be to find one. 

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

  1. Anglo owns 85 per cent of De Beers Group 

  2. This was $2.7 billion at year-end 2016.

  3. This also mandates a levy of 1% of sales for community development

  4. In April Anglo struck a deal to sell some South African coal mines

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

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net