Thursday, 19 December 2013 - 20:00

 

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Seed Weekly - Anglo American plc ? Investor day outlines opportunities

History

Anglo American is one of the largest diversified mining companies in the world, with operations spanning bulk commodities, base metals and precious metals across the globe. The company is synonymous with mining in South Africa, and can trace its roots back to 1917 when it was founded by Ernest Oppenheimer with £1 million in capital from UK and US sources.

In 1926 Anglo became the largest single shareholder in the De Beers diamond company, kicking off a long period of expansion and acquisitions. In 1961 Anglo made its first major investment outside Southern Africa by investing in the Hudson Bay Mining and Smelting Company in Canada. The group entered the steel industry in 1967 with the acquisition of Scaw Metals, and established the Mondi Group in the same year to ensure exposure to the paper and pulp industry.

In 1999 Anglo merged with its Luxembourg-based affiliate Minorco to form Anglo American plc, with its primary listing and headquarters in London and secondary listings in Johannesburg, Switzerland, Botswana and Namibia. The group has since focused on streamlining its assets and concentrating on its core mining portfolio. Measures taken include the demerger of the Mondi Group and the sale of Anglo’s shareholdings in AngloGold Ashanti, Highveld Steel and Vanadium, Namakwa Sands, Tongaat Hulett and Hulamin.

Investor day

At a recent investor day, Anglo has outlined the current context in which it operates, presented their asset reviews and operational priorities and put forward a strategy to improve its Return on Capital Employed (ROCE).

Operational Context

In the six years up to 2012, the estimated industry ROCE has dropped significantly from 24% to 10%. Anglo attributed the decline to the following factors:

• Commodity prices dropped from 10 year highs
• Companies over capitalised their assets in pursuing growth at any cost
• Takeovers “at any price” driven by desire to dominate markets
• Operating costs increasing reflecting(1)Deeper operations and lower mining grades; (2) Lack of planning and execution discipline and (3) Lack of control on discretionary spending.
• Projects overspent and behind schedule as detail lost in “need for speed”

Anglo believes its diversified and high quality commodity portfolio is a distinct competitive advantage that makes it the only truly diversified miner. In the graph below, Anglo’s 2012 Earnings Before Interest, Tax, Dividends and Appreciation (EBITDA) is split by the various underlying commodities and compared to 4 industry peers.

Over the last four years, the average capital employed by geography have moved slightly
from South Africa towards Australia and South America, a trend that is expected to continue as future growth is expected in the latter regions.

Asset Review

Anglo has reviewed all its operating assets across the globe in an attempt to identify key risks faced by each asset and to determine each asset’s full potential. A “Pathway to Value” methodology was proposed whereby each asset is first improved from an operational perspective and then from the management side.

The contribution to Anglo’s 2012 earnings is skewed heavily towards 13 of the group’s 57 assets, with Kumba being the largest contributor. The challenge ahead is to improve the contribution of the “Wave 3” assets in the graph below.

Return on Capital Employed

In its 2013 interim results presentation, Anglo has set out a strategy for improving its attributable ROCE from 8% to 15% or more by 2016. Management has identified ongoing capital expenditure and operational risks as possible detractors, and their current projects and further operational improvements as future positives.

In the latest presentation, Finance Director René Médori has reiterated that the target is realistic and that optimal capital expenditure, reduced overheads and unlocking of supply chain benefits will be key to achieving success.

Seed believes that the turnaround of the struggling giant under new CEO Mark Cutifani and his quality management team is well under way, and we hold Anglo’s at a 2.5% weight in the Seed Model Share Portfolio.

Kind regards,
Cor van Deventer

Seed would like to use this opportunity to wish all our faithful readers a very blessed Christmas.

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Thu, 19 Dec 2013

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