“We create value that lasts,” proclaims Anglo American’s website. Try telling that to the shareholders.
The shares, down 12% on Tuesday, have fallen 90% since high points in 2008 and 2011 and are now cheaper than when the 98-year-old mining company arrived on the London stock market in 1999. By market capitalisation, Anglo – extraordinarily – has drifted to the bottom end of the FTSE 100 index. The equity is worth just £4.6bn. Even Mondi, the obscure packaging and paper outfit that Anglo demerged in 2007, is more valuable these days.
If the share price is a shadow of its former self, that is also the chief executive Mark Cutifani’s plan for Anglo’s operations. The strategy is to sell or close 60% of the assets and reduce the number of employees from 135,000 to fewer than 50,000. The plush London head office in St James’s will be abandoned, as will dividends for at least 18 months. The claim of “radical” restructuring is justified.
On paper, cutting costs and capital expenditure, while selling mines that can’t prove their worth, sounds reasonable. As always happens in commodity markets, abundant demand has been followed by over-abundant supply. Prices of almost everything are crashing. So it is fair to conclude Anglo’s long-term health depends on slimming down to the best assets in a broad and ragged portfolio.
In practice, that means diamonds, where the De Beers unit has about a third of the world market; copper, where Anglo has some high-class mines in Chile; and platinum, where the market share is about 35%. If Anglo was starting from scratch, that collection would provide a solid core.
The trouble is, Anglo is not starting afresh. Cutifani, as he unveiled his vision of a smaller but more “resilient” company, left some huge questions unanswered. What happens to the nickel, coal and iron ore assets, none of which are trivial in the context of Anglo? They need to show they can drive down costs and produce cash consistently, argued Cutifani. “If not, they won’t be in the portfolio, it’s as simple as that,” he said.
Is it that simple, though? For a company such as Anglo American – tangled in South African politics and history for almost a century – selling, closing or restructuring local mines is never straightforward. The government, in effect, has the final say. After long and awkward negotiations, Anglo earlier this year secured a disposal of its labour-intensive, non-mechanised platinum interests in Rustenburg. But those talks might look a tea party if Anglo produces similar plans for its coal and iron ore mines in South Africa. Whatever happens, the company will not shed its heritage quickly.
Does it have the luxury of time? The finance director gave a decent account of how borrowings, forecast to be $13bn to $13.5bn at year-end, are manageable. Even if the debt is downgraded to junk status, the interest rate will not increase; and the facilities are in place to 2020.
Those features are clearly helpful but borrowings are still twice as large as the current value of the equity. Would-be buyers of assets will smell desperation. Nor can Anglo be confident that commodity prices will not fall further. Cutifani, in declining to raise fresh capital via a rights issue while he has the chance, is taking a big gamble.
Tesco’s portfolio is withering
Dave Lewis is not having much luck at Tesco. The garden centre chain Dobbies, one of those businesses the chief executive’s predecessors acquired during Tesco’s imperialist era, has just reported a £48m loss in accounts filed at Companies House.
The performance was not quite as discouraging as it sounds because a £54.4m property write-down was largely responsible. On the other hand, little in Tesco’s UK periphery is currently providing relief. Giraffe restaurants and Harris + Hoole coffee shops served losses; profits at the One Stop convenience chain halved; even the supposed jewel, the data firm Dunhumby, was down 9%.
None of those results would matter terribly if shareholders could be confident that Tesco’s supermarkets, where Lewis has understandably concentrated his efforts during 15 months at the helm, were set for a bumper Christmas. Last year’s seasonal performance was vaguely encouraging as Lewis, with little time to engineer a major overhaul, caught shoppers’ eyes with cheap vegetables and arrested the steep decline in sales.
Expectations will be higher this year – or, rather, they were. In fact, optimism has evaporated from the share price, which rallied from 160p to 240p in the afterglow of last Christmas but has now descended to a 15-year low of 156.5p. Life is tough for middle-market grocers, as nobody needs reminding, but the share price points to the fear that Tesco has spent a year going sideways. It will not feel that way internally, and maybe Lewis will be able to produce a surprise in the New Year update. But the pre-Christmas ad campaign feels almost invisible.
