Anglo American break-up would be fraught with difficulty
ANALYSIS: Review of assets expected after CEO exit. Focus will be on problematic platinum mines
The departure of Anglo American’s chief executive has revived talk of radical ways for the miner to boost its flagging share price, even going as far as a break-up of the group.
Analysts and industry sources, however, say that there is unlikely to be a quick or dramatic fix on the horizon.
Politics and social unrest in South Africa, combined with Anglo’s own operational troubles and difficult commodity markets, mean that breaking up one of the world’s largest mining companies is far easier in theory than in practice.
“It is very easy to say that if you unbundle Anglo, it is worth that much more. First, I am not sure that is true.
Secondly, getting to this unbundled or split-up state means a lot of fences to climb,” RBC Capital Markets analyst Des Kilalea said.
Splitting Anglo into its constituent parts — Anglo American Platinum (Amplats), Kumba Iron Ore, diamond producer De Beers and a rump of other assets — could arguably add value. Anglo, like many of its peers, trades at a discount to the sum of its parts, and analysts estimate the uplift to its net value at somewhere between 10 and 30%.
A new chief executive, particularly one from outside the company, could well be better disposed to pushing that agenda than outgoing boss Cynthia Carroll. The former CEO, who resigned on Friday, was a staunch defender of Anglo’s continued involvement in platinum.
The sale of problematic South African assets could also boost interest from some institutional investors, such as BlackRock, which has pushed for reduced involvement in the country.
It could also pique the interest of suitors, including Xstrata, which came knocking in 2009 only to be rebuffed.
But that is all on paper. In reality, a simplistic split of South African and non-South African assets is highly unlikely, analysts and industry sources say, not least because South Africa accounts for more than half of the group’s forecast earnings.
A radical break-up would also present significant fiscal and political hurdles.
South Africa, preparing for leadership elections for the ruling ANC this year and a general election in 2014, could view a split with Amplats, for example, as posing a risk for thousands of jobs in a country with 25% unemployment.
“I don’t see, particularly in South Africa as it is now, that anyone has the flexibility to do half the things various hedge funds would have them do,” said one mining industry banker who declined to be named.
“Spinning off Amplats? A nice idea intellectually, but practically, it’s not going to happen.”
To make matters even more complex, many analysts argue that the increase in value from a split could be subdued. Though its shares have under-performed the sector this year, Anglo is trading at a discount of only 5% to its peers.
“If (Amplats) were to be unbundled tomorrow, would the share price go up or down? My guess is down,” RBC’s Kilalea said, pointing to the implicit support provided by parent Anglo’s balance sheet.
Carroll’s successor, already being sought by the board, is expected to focus on the operational issues that have dragged on its shares — delays and cost overruns in the Minas Rio iron ore project in Brazil and, of course, platinum, where low prices and high costs were squeezing margins even before strikes hit.
A review of the platinum business is due by the end of the year. Some observers argue that the “burning platform” created by strikes in recent months has made it easier for Anglo to make deep cuts and close unprofitable shafts, but the political and labour environment remains tough.
And even if a break-up of the group looks unlikely, calls to unbundle Amplats are unlikely to go away.
Anglo’s options would be either to sell Amplats — more than difficult in the current market — or simply spin off the almost 80 percent-owned subsidiary, potentially by handing paper straight to shareholders.
Neither is likely to satisfy investors.
“The whole point of business is you buy low and sell high. If anyone is telling them to sell platinum (assets) in this market, it doesn’t make any sense,” one veteran platinum analyst said.
He suggested that Anglo should instead buy out minorities and repair Amplats before looking ahead.
Investors, for now, are pinning their hopes on a new chief executive.
“You need someone who is good on the diplomacy in South Africa, somebody who can understand the unions in South Africa and someone who can understand operations. There aren’t too many of those guys around,” one mid-sized investor said. - Reuters