By Scott Patterson and Alex MacDonald
LONDON-- Anglo American PLC's shares tumbled to a new all-time
low on Monday, reflecting the harsh verdict by investors on a
business model the U.K. company and other big miners have long
pursued: Digging up a diverse range of materials.
The idea behind diversification is simple. Miners that produce
and sell a broad range of commodities said they could perform
better in a downturn than miners with a narrow basket, as strong
performance by some commodities could balance out a poor showing by
others.
Anglo is among the most diversified miners, with earnings before
interest and taxes spread among iron ore and manganese (27%), coal
(14%), copper (9%), diamonds (31%) and platinum (14%) in the first
half of 2015.
The problem: In the latest downswing, nearly all commodities
have slid amid softening demand by their biggest consumer, China.
Iron-ore prices traded Monday at about $39 a ton, according to the
Steel Index, down from highs of more than $191 a ton in 2011;
copper fell 0.3% early Monday and is down about 27% on the
year.
"What you tend to find in most crises is that correlations
[between commodities] move one way and everything craps out
together," said Sanford C. Bernstein analyst Paul Gait, a former
Anglo executive who still advises buying the company's stock
because of its large reserves of commodities such as copper.
Anglo's shares have plunged nearly 70% this year, closing at
GBP3.69 ($5.57) on Monday in London, down 1.9% to the lowest level
since the company went public in 1999.
Now Anglo is moving to fortify its balance sheet amid the rout
in commodities, looking to sell off assets and cut costs. The Wall
Street Journal reported Thursday that Anglo, the fifth biggest
miner by market valuation, plans to slash its dividend, a move it
could announce Tuesday at its "investor day," or early next year,
people familiar with the decision said. The company also says it is
cutting 53,000 jobs--a third of its workforce--over the next few
years.
Glencore PLC, which in September said it would suspend its
dividend, has also touted its diversified earnings engine, which
includes its trading arm and a mining division exposed to copper,
coal, zinc and aluminum, among other commodities. Glencore
executives said the firm's trading business would generate solid
profits no matter which direction the market was moving, giving it
a cushion during hard times.
But investors revolted against the model this year as the high
debt load carried by its trading arm, on top of the mining
division's debt, sparked concerns that Glencore would get hit with
crippling credit-rating downgrades as commodity prices tumbled.
Glencore's share price has fallen nearly 71% this year.
Mining giants BHP Billiton Ltd. and Rio Tinto PLC, who are far
more exposed to a single commodity--iron ore--have performed far
better than their more diversified competitors. Iron ore accounts
for nearly 60% of adjusted earnings at Rio and BHP. The companies
have been able to weather a sharp downdraft in iron ore prices
because their mines run at far lower costs than competitors,
including Anglo.
Anglo spokesman James Wyatt-Tilby defended the company's
strategy, noting that various commodities have swung lower with
"differing timing over the last two years." "We expect different
sequencing on the way back up," including a swifter rebound in base
metals than bulk commodities, Mr. Wyatt-Tilby said.
No big miner has talked up the benefits of diversification more
than Anglo. Its chief executive, Mark Cutifani, in February said
that in 2014 its "diversified product portfolio provided us with a
degree of insulation from the particularly sharp price fall" in
commodities.
Then, the argument made some sense. Anglo's majority-owned De
Beers unit, which produces about one-third of the world's "rough"
diamonds, posted an 11% gain in revenue to $7.1 billion in 2014
from the previous year on strengthening U.S. demand. That helped
offset poor performance at its iron ore and coal mines.
But diamonds have been a disappointment this year amid
lackluster demand and falling prices.
Some investors think Anglo's business model could still work
out. James Henderson of Henderson Global Investors Ltd., a London
money manager that owns 2.3 million shares of Anglo, said he thinks
the market isn't appropriately valuing De Beers. He said he has
been scooping up Anglo shares recently.
"I think this is an opportunity," he said. "I think their
balance sheet is OK for them to toughen it out for the next two to
three years. It's just hard work."
Other investors are more glum.
"The bottom line is that most commodities tend to move together
most of the time," said Nik Stanojevic, an equity analyst at Brewin
Dolphin Ltd., a $45 -billion private wealth manager. If a company
is a low-cost producer, "you'll make money no matter what the
commodity price...[but] Anglo American is not the lowest-cost
producer in many of its commodities."
Mr. Stanojevic has advised his fund managers to sell Anglo's
stock for the past five years, pointing to the company's elevated
cost of insuring its debt against default as a sign. Anglo had net
debt of $13.5 billion as of the end of June, or $11.9 billion on
the closure of the sale of its stake in Lafarge Tarmac Holdings
Ltd. buildings-material joint venture in July.
"For Anglo, the problem is that the balance sheet of the company
has become weak," said Yohan Salleron, a fund manager at
Paris-based Mandarine Gestion which owns about $23 million worth of
Anglo stock.
The diversified mining model seems to be a good strategy over
the long term, but the company has to sell unwanted assets, said
Fidelis Madavo, head of equities at South Africa's state-owned
pension fund Public Investment Corp. Ltd., Anglo's largest
shareholder. That process has been slow, he said, pointing to a
September deal to shed labor intensive platinum assets in South
Africa that could take over a year and a half to conclude.
Write to Scott Patterson at scott.patterson@wsj.com and Alex
MacDonald at alex.macdonald@wsj.com
(END) Dow Jones Newswires
December 07, 2015 19:58 ET (00:58 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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