Anglo American screeches back into action

Dividend-obsessed investors can relax, as the group puts mojo into its big shiny cash machines.

JOHANNESBURG - 

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Anglo American's profits, underlying earnings and operating cash flow each roughly halved during 2009, in a performance that echoed the bleak numbers seen from other diversified transnational mining groups. The good news is that commodity prices generally were rising during the year, and have maintained that trend so far in 2010.

As a broad reflection of the group's outlook, Anglo American CEO Cynthia Carroll indicated that dividends could be reinstated this year, after being suspended for the first time since the group was founded in 1917. Across the peer group, BHP Billiton, the world's biggest diversified resources group, continued paying dividends during 2009, as did Brazilian supergroup Vale, the biggest player in the global seaborne iron ore trade. Rio Tinto cut its dividend from USD 1.11 a share in 2008 to USD 0.45 a share.  Xstrata followed Anglo American in suspending dividends in 2009, but last week indicated a reinstatement this year.

Investors are an impatient and curious lot, and seem to have completely forgotten that during 2007 - Carroll moved into the hot seat on 1 March - Anglo American returned USD 6.1bn worth of cash to investors by way of stock buybacks, and, to boot, paid cash dividends of USD 1.5bn during the year.

Adding the year before and after 2007, Anglo American returned cash of USD 16.4bn to shareholders. BHP Billiton is the only other group vaguely in that league, with cash returns over the three calendar years of USD 20.1bn. When Anglo American asked for a dividend holiday in 2009, a good number of investors were thrown into deep depression; others, including pensioners, were petulant and furious.

For Anglo American, much of 2009's performance, such as it was, came by way of strong contributions from 64% South African subsidiary Kumba Iron Ore, and Anglo American's copper division. Iron ore and copper were the big general stars during 2009, along with coal, of which Anglo American produces the two main varieties. Anglo Platinum, an 80% subsidiary, and 45%-held De Beer had train smashes, recently announcing USD 1.6bn and USD 1bn, respectively, rights issues.

Anglo American was - and remains - different. During decades under the rule of the Oppenheimers, the group extended its tentacles into every sector of the South African economy. Today, after more than a decade, reengineering of the group remains unfinished; Anglo American claimed today, however, that "major group reorganisation has been completed". The collapse in commodity and metal prices, generally commencing around mid-2008, galvanized most miners. Anglo American was given further impetus to adapt last year, when Xstrata made an offer that could have been characterised as a takeover, or even merger, had it ever materialised.

The results to date indicate that there was fat right across the Anglo American system. At Anglo Platinum, significant restructuring has been claimed; "flat cash" operating cost targets have been met; three high cost shafts are on care and maintenance, and labour productivity has soared 21% in two years.

Anglo American's broader asset optimisation and procurement programme delivered more than USD 1.6bn worth of benefits in 2009, with USD 1.4bn from core operations. The asset optimisation and procurement target, from core businesses alone, by 2011, is now set at USD 2bn.

Anglo American also claims significant cash cost reductions of USD 712m (5%) and productivity improvements achieved across the group during 2009; headcount was reduced by 23,400, of which 15,000 attributable to Anglo Platinum. At De Beers, the headcount dropped by 23%. The group corporate headcount has been cut by 25%.

The unfinished business at Anglo American is waiting for evidence showing that the group can leverage its new structure. The asset divestment programme, which raised useful net incoming cash of USD 2.4bn during 2009, continues. There will be more sales of assets; six significant ones have been earmarked.

The group outlook is dominated by recovering cash flows, and deliverables anticipated from the project pipeline. Copper production is scheduled to increase by a third by 2012; there are also expansions in nickel and coal. Overall, group production across-the-board is expected to increase by at least 33% by 2013.

Big things are expected from Minas Rio in Brazil,  which in 2007 and 2008 cost Anglo American USD 6.7bn (including 49% of LLX Minas Rio (port of Açu)). Another USD 3.8bn was budgeted for capital expenditure to fully develop the Minas Rio phase 1 (only) system, due to reach full production towards the end of 2013, at the rate of 27m tons a year.

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