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TABLE OF CONTENTS Mar 3 - 9, 2014 Volume 100 Number 3 - 0 comments

Anglo American making progress but still work to be done

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By: Anthony Vaccaro

This time of the year is normally referred to as ‘earnings season,’ as miners release their operational and financial results from the year before. But given the collective shock the industry has experienced in the form of slumping commodity prices over the last little while, it might better be referred to as ‘writedown season’ this time around.

In that regard Anglo American (LSE: AAL) is not much different from its peers.

The company reported a loss of US$1 billion, largely due to a series of one-time items, most notably a US$700-million impairment at its Barro Alto nickel mine in Brazil and a US$300 million impairment at its Michiquillay copper mine in Peru.

The numbers that recently appointed CEO Mark Cutifani would like investors to focus on, however, are operating profits, which were up 6% to US$6.6 billion. But that improvement on the operating side was not matched on the net income side as adjusted earnings were down 7% to US$2.7 billion for an earnings per share of US$2.09. That adjusted earnings number did, however, beat the Street’s consensus estimate of US$1.84 per share.

Since taking the reins last April, Cutifani has had his work cut out for him. Not only were there slumping metal prices to deal with, but also a host of assets in South Africa where wildcat strikes have become more common.

So Cutifani set out to find new efficiencies and create a leaner company. Investors got a peek into how well that process is going with the release of preliminary results for the entire 2013 year.

Anglo American credits the improvements on the operations side with a reinvigorated focus on mining processes, costs and margins, and that operational strength allowed it to maintain its dividend of US85¢ per share.

Breaking down some key features from the year past by operating division, the company saw a decrease in production at its Sishen iron ore mine in South Africa. But while production for the year dropped from 34 million tonnes to 31 tonnes, there was some improvement in the fourth quarter. Production totals improved in the final quarter compared to the third quarter as the company focused on critical ore zones and waste movement. Still, costs were up 35% at the mine due to production challenges and an increase in waste stripping.

Fortunately for Anglo, some of the lost production at Sishen was offset by strong operating performance at its Kolomela mine, also in South Africa, where production capacity increased to 10 million tonnes per year. In all, operating profits in its iron-ore business were flat at US$3.1 billion.

Things, however, didn’t look quite so good its metallurgical coal operations. There, Anglo American saw operating profits drop by nearly 90% to US$46 million due to softer prices. Weaker prices for thermal coal also hurt Anglo American’s bottom line as operating profits in that division were off 32% to US$541 million.

The company’s nickel division also staggered as it was hit by lower production as well as lower prices for the metal. Production was down 12% due to operations being stopped at its Loma de Niquel mine in Venezuela. The loss in production coincided with a 16% drop in nickel prices and showed an operating loss of US$44 million for the year.

Fortunately things didn’t look quite so grim in its copper division where operating profits were flat at US$1.7 billion despite a 26% price drop for the red metal. It managed to pull off the feat by increasing production by 17% to 775,000 tonnes. The company alerted markets to possible challenges for this year, however, as it said it will face lower grades at Collahuasi and Los Bronces in Chile plus lower production from its El Soldado mine, also in Chile, due to a geological fault intersection.

There was decent news from its platinum division, where foreign-exchange gains and higher production offset weaker metal prices and cost increases. In all the division saw an operating profit of US$464 million on platinum sales of 2.3 million oz., which was a 7% increase over 2012 totals. The company is restructuring the division as it shed 5,100 employees, reconfigured its Rustenburg operation from five down to three mines and increased reserves at the Mogalakwena mine in South Africa by 59% to 141.6 million oz.

But perhaps the best news came out of its diamond division where improved costs as well as favourable foreign-exchange markets resulted in an operating profit of US$1.003 billion. That marked a 42% increase over 2012 numbers. The strength came on the production of 31.2 million carats, which was 12% higher than last year, while at the same time unit costs were down 15% due to higher volumes and better exchange rates.

BMO Capital Markets analyst Tony Robson was one of the analysts who had his earnings estimate beat by the results. He had been expecting Anglo American to post adjusted earnings of US$1.94 per share compared to the US$2.08 it reported.

Robson was also impressed by the work that Cutifani and his revamped management team have done thus far and expects to see more benefits from the changes made in 2015.

He cautioned that capex growth this year and higher debt levels over the next two years could tamper the market’s enthusiasm for the earnings beat.

“Higher capex, higher debt levels and minimal cash flow contribution from Minas Rios in 2015 suggest it would be 2016 and beyond before the company could look to increase the dividend or return excess cash to shareholders,” he wrote in a research note.

Robson has Anglo American stock rated as “market perform” with a target price of £15 .

In London on Feb. 14 — the day the results were released — company’s shares were off 2% to £15.13.

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Anglo American CEO Mark Cutifani.
Anglo American CEO Mark Cutifani.
Anglo American took a US$700 million impairment charge for its Barro Alto nickel mine in Brazil. Credit: Anglo American
Anglo American took a US$700 million impairment charge ...
A blast sequence at Anglo American's Kolomela iron ore mine in South Africa's Northern Cape province. Credit: Anglo American
A blast sequence at Anglo American's Kolomela iron ore ...

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