The hounds bay for Anglo American

Now that transnational mining group Rio Tinto has capitulated to multiple...

Now that transnational mining group Rio Tinto has capitulated to multiple pressures, in recently abandoning its posed near-$20bn deal with smaller rival Chinalco, the barking at and baying around Anglo American has started up all over again. Much of the noise is coming out of London, where Xstrata seems to be most mentioned in terms of some kind of a deal - one that would reap badly needed millions for investment bankers.Rio Tinto seems safe enough for now, in announcing a supported rights issue to raise the equivalent of $15.2bn, and agreeing a joint venture with BHP Billiton over the two companies’ West Australian iron ore assets, valued at $116bn.Anglo American first raised some heavy eyebrows with its announcement of 2008 results on February 20, an event that hardly charmed investors. Anglo American passed a dividend for the first time in 70 years, and unveiled more debt than a number of investors had been anticipating. Moody’s, the credit rating agency, cut its rating on the diverse mining group, and also added a negative outlook, and Anglo American quickly progressed to the status of one of the world’s worst performing top 100 mining stocks.Measured by prices in London, where Anglo American has held its primary listing since 1999, the stock’s market value (capitalisation) fell from highs of nearly $80bn, seen in 2008, to as little as $20bn, before recovering to current levels around $37bn. But where the world’s top 100 miners, by value, have seen stock prices bounce from lows by a weighted average of 131%, Anglo American’s applicable number is a more modest 86%.Anglo American’s pyramid-type structure ranks as one of the group’s least appealing features, starting with its 80% ownership of Johannesburg-listed Anglo Platinum, which currently ranks as one of the worst performing among the world’s biggest 100 mining companies. Anglo Platinum has been missing targets for years; on the pricing front, platinum group metals remain generally weak, deeply aggravated by the rand’s ongoing unusual strength against the dollar. Anglo American also owns 63% of Johannesburg-listed Kumba Iron Ore. 

Anglo American’s pyramid-style profile is little assisted by minority stakes it holds in a number of unlisted assets. During 2008, Samancor Manganese, in which Anglo American holds 40%, was one of the group’s bigger profit contributors. The other 60% is held by BHP Billiton, which also operates Samancor Manganese. The biggest copper mine in the Anglo American group, Chile’s Collahuasi, is 40% held by Anglo American; Xstrata is the other big shareholder there. Anglo American holds 45% in unlisted De Beers, which in February emerged as requiring $500m in the form of loans from shareholders, in the face of a collapsing diamond market.Anglo American also holds minority interests in listed entities such as Johannesburg-listed Exxaro and Palabora, and also an effective 50% of Canada’s Northern Dynasty. Starting July 2007, Anglo American entered a 50:50 joint venture with Northern Dynasty to develop the pebble copper-gold-molybdenum project in Alaska, with Anglo American committed to $1.4bn in funding. Anglo American has demands in all directions, not least after the acquisition of controlling stakes in Brazil’s Minas-Rio and Amapa iron ore projects for $5.5bn in 2008.Anglo American has been pretty busy shoring up its balance sheet during 2009. In April it launched and successfully concluded an issue of $1.5bn in convertible bonds, a hybrid debt-equity instrument. In a speech at Anglo American’s AGM held at the time in London, CEO Cynthia Carroll said: "In terms of liquidity, you will also have seen that just two weeks ago we launched a highly successful dollar bond, for which there was extremely strong demand from investors in both North America and Europe".Carroll also announced that Anglo American had secured a $1bn loan from the Brazilian development bank, BNDES, for Minas-Rio. Earlier this year, Anglo American raised $434m and $1.3bn selling the final two legacy tranches of stock it held in AngloGold Ashanti.If the $1.5bn convertibles are considered as debt, Anglo American has upped its debt this year by $4.5bn. At the end of 2008, the group’s net debt (including cash) computed at $11bn, leaving current debt (ignoring internal group cash flows, which are unknown) at $15.5bn.Deducting the cash raised from selling the AngloGold Ashanti tranches, this would leave Anglo American’s current net debt at about $13.8bn, but now it has another $4.5bn in cash from the bonds, convertibles and BNDES, pushing net debt below $10bn. This still classifies Anglo American as one of the world’s most indebted mining entities, along with Rio Tinto, Rusal, Xstrata and Teck. At the end of 2008 Rio Tinto’s net debt computed at $38.17bn. These numbers can be compared with BHP Billiton, the world’s biggest diversified resources group, which ended 2008 with net debt of just $4.20bn.Investors have extracted top dollar returns from capital raisings by Teck, Anglo American, and Rio Tinto. Where BHP Billiton’s recently launched five year $1.5bn bonds carry an annual coupon of 5.5%; Rio Tinto’s five year $2bn bonds are at 8.95%, and Anglo American’s five year $1.25bn bonds are at 9.375%. 

Following this year’s combined raisings, Anglo American has made it clear that it has no further refinancing requirements until 2012. There have, however, been increasing criticisms of Carroll as CEO.  During a presentation last month at the Merrill Lynch Global Metals & Mining Conference, Carroll pointed to the "fundamental reshaping" of Anglo Platinum, and at De Beers, "decisive action to eliminate high cost, small scale operations with limited life", and for De Beers as a whole, a production cut of over 40%, annualised, for 2009.Carroll defended Minas-Rio as a high grade world class iron ore asset, with resources of 3.9bn tonnes.  Phase 1 production is expected to commence during second quarter, 2012, with design capacity of 26.5m tonnes a year, with the potential to expand production to 80m.Overall, Carroll argued that the majority of Anglo American’s assets fall in the "Q1 and Q2" positions on the cost curve; that the average project life is 40 years, "more than double the industry average", and that the group’s project pipeline totals $16bn, "with substantial opportunities beyond". Capital expenditure plans have been reduced by more than 50% for 2009 to $4.5bn; the group headcount is being reduced this year by 19 000.As mentioned, while Xstrata seems to be most often mentioned as the appropriate predator for Anglo American, Xstrata itself earlier this year sold 1 960m new shares in a massively dilutive rights issue, raising the equivalent of $6.7bn. Like Anglo American, Xstrata hardly ended 2008 unscathed on the debt front, with net debt of $16.50bn, more than $5bn higher than Anglo American’s comparable number.Like Anglo American, Xstrata did not declare a final dividend for 2008. During the so-called commodities supercycle from early 200 through mid-2008, Xstrata ranked as possibly the world’s most acquisitive mining company, yet the possibility that some deals were done at rich prices has apparently been forgotten.Anglo American has never so much mentioned the possibility of unbundling its pyramid structure, which could start, for example, by posting off of Anglo American’s shares in Anglo Platinum in appropriate ratios. But whether the group is attractive to any mining company, rather than investment bankers looking for fat fees, remains to be seen.