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The case for unbundling Anglo American
As Moody's cuts Anglo American's credit rating, with a negative outlook, the specter of collapsing the group's pyramid structure looms ever larger.
Following Anglo American's announcement of 2008 results on Friday, an event that hardly charmed investors, Moody's, the credit rating agency, has cut its rating on the diverse mining group, and also added a negative outlook. Anglo American on Friday passed a dividend for the first time in 70 years, and unveiled more debt than a number of investors had been anticipating. Anglo American currently ranks as one of the worst performing mining stocks in the world.
Measured by prices in London, where Anglo American has held its primary listing since 1999, the stock has surrendered more than 70% of its value from its high point in May 2008, leaving it with a current capitalisation of just over $19,2bn, compared to $70bn at the top. On December 31 2008, Anglo American's net debt was at $11bn, more than double than a year earlier.
Relative to Anglo American's market value, this is one of the highest debt ratios among large mining companies anywhere, rivalled by the likes of Xstrata, now busy with a hugely dilutive rights issue, and Rio Tinto, busy trying to raise $19,4bn from Chinalco, a Chinese aluminium maker. Rio Tinto wants to sell Chinalco debt notes convertible into its equity, and also underlying equity stakes in some of its best mining assets. The proposed deals remain controversial.
Looming above everything, of course, are weak commodity prices (apart from gold), the ongoing credit markets crisis, the global slowdown, and depressed equity markets. Moody's expects that Anglo American's financial profile "will remain weakly positioned in the intermediate term considering the outlook for the group's operating profitability and cash flow, which should result in net funding requirements and further build-up in debt".
While Anglo American's market value currently hangs at $19,2bn, it currently ranks as 9th biggest miner in the world, a sharp move down from just years ago. Anglo American currently owns 80% of Anglo Platinum, which has slipped to 21st ranking among global miners with a stock price that remains as depressed as that of its parent company. Anglo American also owns 63% of Kumba Iron Ore; the stakes in Anglo Platinum and Kumba Iron Ore are currently worth nearly $11bn, more than half of Anglo American's current market value.
Anglo American's pyramid-style profile is further raised by minority stakes it holds in a number of unlisted assets. During 2008, Samancor Manganese, in which Anglo American holds 40%, was one of the group's bigger profit contributors. The other 60% is held by BHP Billiton, which also operates Samancor Manganese. The biggest copper mine in the Anglo American group, Chile's Collahuasi, is 40% held by Anglo American; Xstrata is the other big shareholder there. Anglo American holds 45% in unlisted De Beers, which last week emerged as requiring USD 500m in the form of loans from shareholders, in the face of a collapsing diamond market.
Anglo American also holds minority interests in listed entities such as Exxaro, Palabora, and AngloGold Ashanti (an 11,8% stake currently worth $1,3bn), and also 50% of Northern Dynasty. Starting July 2007, Anglo American entered a 50:50 joint venture with Northern Dynasty to develop the Pebble copper-gold-molybdenum project in Alaska, with Anglo American committed to $1,4bn in funding. Anglo American has demands in all directions, not least after the acquisition of controlling stakes in Brazil's Minas-Rio and Amapa iron ore projects for $5,5bn in 2008.
Depending on how the various global cycles play out, Anglo American may come under pressure to unleash some radical surgery. Just last week Mvelaphanda Resources announced that it would look to collapsing its pyramid structure, by selling down its stake in Gold Fields, paying down its debt, and recapitalising its key interest, Northam, so that it could develop its world-class Booysendal project. In the end game, Mvelaphanda Resources would unbundle its shares in Northam, leaving a more transparent, and stronger, structure. Under acute pressure, Anglo American on Friday announced that it had "reduced our shareholding in AngloGold Ashanti to 11,8%", realising total proceeds of $434m. |
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