LONDON/JOHANNESBURG – Shares in Anglo American are up more than 200 percent this year, like prices of the coking coal it mines, and yet the group is sticking to an overhaul accelerated when commodity markets were rock bottom and it was in deep trouble.
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Now that Anglo American is the best performing blue chip on the London Stock Exchange and some minerals have rebounded, shareholders want the firm to achieve top prices as it sells swathes of its bulk commodities business under a strategy of concentrating on high value minerals.
The global miner hatched the strategy three years ago. However, it needed to speed up the asset sales and job cuts last year, when its shares dived 75 percent as investors worried about the group's ability to cope with a heavy debt burden during the commodity slump.
Since last December's announcement that Anglo American would offload three-fifths of its assets and focus on diamonds, platinum and copper, the rally in bulk commodity prices has transformed the market mood.
Bulk commodities such as coal and iron ore are generating cash for Anglo American, and shareholders are demanding that these assets are disposed of at high prices - or not at all.
Chief Executive Mark Cutifani rules out a fire sale and says Anglo American will reduce its portfolio of businesses at its own pace, agreeing deals when the price is right.
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"We said at the outset in 2013 that we needed to focus the portfolio. So, the asset strategy hasn't changed, but we needed to accelerate at the end of 2015," Cutifani told Reuters this week. "That is what we are doing and we are progressing pretty well to that plan."
Questioning of the divestment policy intensified after the appointment in September of a new chief financial officer with a track-record at iron ore giant Fortescue - even though iron ore is one of the assets Anglo American says is no longer central to its portfolio.
Robust production results this week reinforced the view that the firm has less need to sell assets that are generating cash.
The group's top shareholder, South Africa's state-owned Public Investment Corp, is critical. "The PIC is not in favor of Anglo American's asset sale plan in its current format. Talks are ongoing to see what's best of all for shareholders," a source familiar with the fund's thinking told Reuters.
PIC fears that much of Anglo American's South African assets will be sold piecemeal to foreign buyers.��"The PIC would like to see a break-up where Anglo creates an Africa-focused local company, owned and run by South Africans, and keeps its overseas operations," the source said.
A PIC spokesman had no immediate comment.
WHAT A DIFFERENCE A YEAR MAKES
A year ago, Anglo American's debt reached $12.9 billion, and slumping commodity prices had wiped out its profits. In December it suspended dividend payments until the end of 2016.
Now the firm says it is on track to reduce the figure to less than $10 billion by the end of the year. Low interest rates can also allow it to cut servicing costs by rolling over debt.
Anglo American is also making progress on another measure of balance sheet strength in the capital-intensive mining sector - the ratio of its net debt to its earnings before interest, tax, depreciation and amortization (EBITDA).
This is around 2.4 times, it says, in line with its target of a ratio sustainably below 2.5.
Further asset sales could improve the firm's credit-worthiness. The Moody's agency moved Anglo American's rating up a notch in September, although it remains two notches below investment grade. Further upgrades could follow "greater visibility" on disposals of iron ore and coal, Moody's said.
"We expect the company's net leverage to decline to around 2x net debt/EBITDA at the end of this year," Elena Nadtotchi, a vice president at Moody's, said.
"A sustained increase in net leverage to above 2x net debt/EBITDA could lead to a downgrade, while a further decline in net leverage would be credit positive."
Many analysts also say Anglo American's disposal strategy makes sense longer term, but the urgency has disappeared.
"The risk of selling assets at the bottom of the commodity price cycle - and thereby crystallizing losses - has to a significant extent dissipated," analysts Bernstein said in a note this month.
The most imminent sale is meant to be of Anglo American's Australian coal assets to a group headed by private equity firm Apollo , sources close to the deal say.
This has been held up by price negotiations and analysts expect any agreement to include an escalator clause under which Anglo American would get more if the coal market keeps rising.
Richard Knights, analyst at Liberum, said a price of say $1.5 billion would equate to about 9 months' cash flow at current coal prices. "I would be surprised if they did a deal without some sort of price escalator," he said.
Together with Anglo American's other big sale this year of its niobium and phosphates business to China Molybdenum for $1.5 billion, the coal deal would take it to at least the lower end of its 2016 target of selling assets worth $3-$4 billion.
CASH GENERATION OR DISPOSAL
While placing the focus on a high-value core, Anglo American always said bulk operations, such as iron ore and coal, would be managed, for "cash generation or disposal over time".
For now, they are generating cash. Coking coal has sold for well over $240 a ton, up 210 percent this year. Australian thermal coal spot prices have hit $100 per ton for the first time since 2012, a nearly 100 percent rise since June.
Anglo American estimates a $10 per ton price increase in coking coal creates a $142 million rise in pre-tax earnings, while for thermal coal it leads to an extra $54 million to $200 million, depending on the region.
Iron ore's gains are smaller at around 30 percent, but margins are high. <.IO62-CNI=SI> A $10 per ton rise adds $491 million to pre-tax earnings, Anglo American calculates.
Prices of Anglo American's core commodities have by comparison barely moved, but their time will come, analysts predict.
They are expected to rise late in the commodity cycle when other raw materials fall as China, for instance, switches from smelting new metal, which uses high volumes of coking coal and iron ore, to recycling scrap.
Copper and platinum are also regarded as plays on a more environmentally sustainable future. Copper, as the best conductor of electricity, could benefit from grid upgrades to carry power from renewable sources, while platinum is used in catalytic converters to make cars less polluting.
(additional reporting by Vikram Subhedar in London and Swetha Gopinath in New York)