At one of those archetypal South African dinner parties the other night, the news that Anglo American CEO Cynthia Carroll had just resigned got more than a mention. One guest recalled that for decades, the hard men ensconced on the top floors of Anglo American’s 44 Main Street headquarters – the one with those magnificent friezes of African animals on the walls – controlled nearly 40% of Africa’s total GDP and that, in turn, meant something like 60% of the share value of the entire the Johannesburg Stock Exchange.
It was an empire almost without parallel – as if General Motors, Ford, DuPont, RCA and a half dozen other Fortune 500 stalwarts from America’s industrial Golden Age were one interlocking conglomerate. At its peak, Anglo’s organizational chart looked more like a complete depiction of the chemical relationships of the body’s Krebs metabolic cycle than a tightly structured industrial behemoth.
The late Harry Oppenheimer had guided the company to its premier place on the continent’s corporate and economic landscape, building on the heavy lifting that had been initiated by his father, Sir Ernest Oppenheimer, the company’s founder. The founder father had come from a cigar-making family, then demonstrated a preternatural talent with diamond trading before coming to South Africa and engaging in diamond mining leases in the former German colony of Southwest Africa after South Africa took over the mandate following World War I.
The launch of Anglo had been initially supported by American banking giant JP Morgan. The story goes that the original name of the company was to have been the African-American Corporation, until someone advised such a moniker would make the new company sound like something organized by Black Americans, thereby waving away potential investors. The new company’s name apparently was quickly changed to Anglo-American instead, despite the absence of a major “Anglo” component in the mix.
Regardless, over the next half-century, Anglo expanded into coal, copper, iron, gold, platinum and almost every other product and service imaginable that is part of a modern economy. Anglo’s reach extended deeply into the Zambian copper belt and, through complex ties via De Beers, into the secretive international diamond trade, around the world.
By the time Sir Ernest’s son, Harry, took over the store, Apartheid’s hold on South Africa was deeply entrenched. Increasingly, with fewer and fewer places for Anglo to invest beyond the immediate Southern African region because of South Africa’s obdurate racial policies, Anglo took to buying into or developing ownership interests across the length and breadth of the region’s economy – and well beyond its original focus as a primary minerals mining house. As Apartheid began to give way, however, Anglo was back on the move.
The writer has a vivid memory of meeting a courtly, soft-spoken Harry Oppenheimer when he was already in his 80s, around 1992. At a dinner in honour of the University of Cape Town (Oppenheimer was the university’s chancellor, a largely honourific position), Oppenheimer was guest of honour and keynote speaker. After dinner, there was small talk for a while and then he excused himself to leave for the evening. One instinctively understood the need an octogenarian might have to get in an early evening and a decent night’s sleep. But, instead, Oppenheimer apologized for slipping out, explaining he would be leaving first thing in the morning to head to a Russia in transition from its communist past for a hard week of renegotiating the company’s diamond mining deals.
Harry Oppenheimer had personally opposed the government’s Apartheid policies, first as a member of Parliament in the opposition, and then, when he began to head Anglo, through a wide range of contributions and support to organizations opposed to Apartheid or working to ameliorate its impact. As a company, however, Anglo followed Apartheid requirements to the letter in its labour relations and in its support for and use of the government’s dehumanizing migrant labour policies.
Back in the 1970s, this writer first toured gold and diamond mines in South Africa and saw first-hand how black migrant labourers were confined to the lowest skilled, lowest paid jobs when at work and then in those dreadful, degrading men’s hostels, outfitted as they were with concrete slab shelves masquerading as beds. The treatment of workers in mines run by Anglo, particularly the migrant workers, resembled George Orwell’s infamous descriptions of the pinched, dangerous, unrelenting life of English coal miners in the 1930s in The Road to Wigan Pier. The difference was that those South African hostels seemed even worse than the English miners’ boarding houses and tenements.
As Apartheid gave way to a new, non-racial democratic order, Anglo American’s circumstances changed as well. It is now the world’s largest producer of platinum, with around 40% of world output, and is a major producer of diamonds, copper, nickel, iron ore and metallurgical and thermal coal. It has operations in Africa, Asia, Australasia, Europe and North and South America. As the South African political system changed, Anglo began cutting loose many of its non-core business holdings and instead began hunting for offshore opportunities in mining instead. One such major effort has been its huge (and increasingly troubled, money burning) iron ore-mining complex in Brazil.
In response to the challenge of drawing in new investment capital (or, as some argue, in response to growing uncertainties of remaining domiciled in South Africa in the increasingly choppy seas of South African politics and mining regulation), the company moved its corporate headquarters to London, and completed a merger with Minorco, an allied company that was managing Anglo’s offshore holdings and interests.
Along the way, as well, the company began its move out of gold, engineering a merger of its gold mining holdings with the Ghana-based miner, Ashanti Goldfields, into Anglo Gold Ashanti, and by 2009 Anglo had wound down its investment in gold mining entirely. Along the way, too, it purchased the entire Oppenheimer family holdings in De Beers, the diamond miner, consolidating Anglo’s interests in diamonds. (Criticism persists, however, that it paid a high price for this, especially in light of the world financial and economic crisis of the past five years and the weaker demand for gemstones.)
Ensconced in its London home in 2007, it took its most untraditional move of all, reaching beyond its famously closed male leadership fraternity and picking Cynthia Carroll – an American and a woman – as its leader. But the years since have not been especially kind to Anglo American, or to Carroll. Between March 2007 and October in this year, Anglo’s market capitalization has actually fallen to £26.9-billion from £35.9-billion. Competitors like Rio Tinto have headed in the other direction, rising to a market cap of £60-billion from £41.6-billion in the same period. In the same period, BHP Billiton’s has risen to £112.7-billion from £62.4-billion and Vale to £60.5-billion from £40.7-billion.
As the Financial Times reported over the weekend in discussing Carroll’s planned departure, “The company’s return on equity – a key measure of financial performance – dropped in the first half of the year to 8.3%, the lowest since the Great Depression of 1929, and nearly half of the average level of 16% achieved since the company was founded almost a century ago. ‘To sum up then, the history books won’t be kind on her tenure,’ says Kate Craig, analyst at Liberum Capital in London.”
Carroll will be leaving a company that is navigating some increasingly troubled waters. South African developments such as the strikes and walkouts outside of the routine labour relations process in its iron and platinum mines have suddenly made Anglo seem increasingly vulnerable. But it has other difficulties as well. These include its money-gobbling iron ore efforts in Brazil, a dispute with Chile over the forced disposal of its copper mining efforts and troubles with its coal mining in Australia.
Despite Carroll’s now-planned departure, analysts add Anglo’s problems will not be healed simply by a change in the resident of the penthouse office. “Ms Carroll cannot take all Anglo’s problems with her,” said Heath Jansen, a mining expert at Citigroup. So far at least, there is no plan to make changes in the company’s board of directors. This implies the company’s overall direction will remain more or less on the same course, even though some industry experts said the board’s orientation has been a key culprit in the company’s financial underperformance.
Some problems may be beyond repair. Its Brazilian Minas-Rio iron ore mine is plagued by massive cost overruns and development delays. However, since Anglo has already spent over $10-billion on the acquisition and development of this project, the company may want to believe it is now in too deep to give up on it; the money pit phenomenon.
Then, too, experts argue, no new chief executive will be able to reverse the forced sale of its 50% stake in Chilean copper mine or go backwards on that $5.1-billion already put down to acquire 40% of diamond producer De Beers. Given these problems, any new corporate head will spend the early part of their tenure in damage minimizing mode rather than boldly planning and carrying out brave new initiatives and investments. “Even if a strong CEO is appointed, we believe he or she might want to kitchen sink Anglo’s issues, which could mean another year at least of very poor returns. (The) structural operational problems will not go away overnight,” Jansen said.
Along with everything else, of course, there are also Anglo’s increasingly problematic platinum operations inside South Africa. The parent company holds 77% of Anglo American Platinum – familiarly called Amplats – but that investment has deeply affected by the wildcat strikes that have swept the platinum mining zone around Rustenburg – and so far, at least, the company has no fundamental solution to its troubles in its sights.
Business Week, reporting on Carroll’s surprise decision, explained her replacement “will have to confront its unprofitable platinum unit as the most pressing challenge.” Anglo’s losses at Amplats, whose mines in South Africa and Zimbabwe account for 40% of global supplies of platinum, had put increasing pressure on Carroll. She had already set in place a review of Amplats, which had posted a record first-half loss of $54-million and which had cut its 2012 output forecast in the wake of those wildcat strikes in South Africa, but the review was probably too little and too late, once the labour unrest took hold.
One solution being discussed in mining circles now is for the company to hand off its 77% stake in Amplats to its various stockholders. “One way they could get rid of the platinum problem is to unbundle Amplats by handing shareholders Anglo’s Amplats shares and leaving the decision to sell or hold the stock to them. It’s a fairly elegant solution to quite a complex problem. Platinum will be the most pressing issue,” Suggested Matt Brenzel, an analyst at Cadiz Financial Services Group in Cape Town.
In its operating environment, besides the abovementioned labour unrest, Amplats has had to absorb South African electricity and labour costs that have grown at faster than inflation over the past several years, even as world platinum prices have been essentially flat. Analysts argue that the business is further threatened by efforts to give workers and people in the area of the mines a bigger share of earnings. What’s more, the ANC is considering a platform to increase taxes on mining, and Zimbabwe’s government wants mining houses to transfer effective control to local interests as well.
“Anglo has had this mentality that platinum is core to the business, that, because it is the biggest producer in the sector, it made sense to keep it. But the market hasn’t played ball,” said Brenzel.
Looking beyond platinum, major Anglo shareholders had been concerned about its poor returns for several years. BlackRock, a US fund manager that, with a 5.7% stake is the single biggest investor in Anglo, called for strategic changes in corporate direction two yeas ago. And South Africa’s Public Investment Corporation, a state-owned entity and Anglo’s second-largest stakeholder, has also now called for changes and had even pushed for Carroll’s ouster.
An anonymous major shareholder said, “The performance of the company over the past five years or so under leadership of the current people has been downward. The confidence was really waning in respect of the company’s performance.” Prior to announcing her decision, Carroll had said, “You never satisfy all shareholders. It is always a challenge. There will be some shareholders that will never be satisfied.”
For her part, outside observers said Carroll deserves credit for efforts to reduce the number of mining deaths in the company’s activities as well as building better relations with the South African government. She also reorganized the famously complicated company around the mining of seven core metals and minerals: iron ore, metallurgical coal, thermal coal, copper, nickel, platinum and diamonds, and she had drawn up a plan to double output across all of these areas by 2020.
However, the judgment of the market and investors is that she has failed to drive the delivery of those big projects on time and on budget, even if the decisions on those large capital allocations were at the board level. Was Carroll a victim of the industry’s famous machismo culture? True, Carroll never shook off the label of being an “outsider”. There were always rumours that she might not be made of the right stuff (as a woman) and that she still had lots left to prove.
Her supporters argue Carroll made some key institutional improvements. She assiduously preached a previously near-alien gospel of deeper community engagement, emphasized occupational safety and carried forward that effort to sort out and rationalize the company’s asset portfolio, as with the determination to gain complete control over De Beers. Nevertheless, analysts also said that the key is to follow the money – and on this front, Anglo’s share price rise after her resignation was announced, even as the FTSE was moving downward, shows the market’s judgment that her decision to quit was the right one for Anglo.
But, getting Anglo out of its current hole may be problematic for a new CEO, regardless of whether the company’s board remains with its current members or has new ones brought in to help shake things up. London-based mining analysts have already been telling the media the best path to restore financial performance at Anglo might well involve splitting the current company back into two separate entities again, reversing the 1999 merger between Anglo and Minorco. This is in addition to the idea of turning the company’s platinum interests over to shareholders to allow them to do what they think best with them.
Some analysts say such a split could reduce the company’s current discount in the minds of investors because of its difficult South African circumstances and would in fact generate $30-billion in value because the company’s international assets would be valued upward as a result of the split.
To go down the path to such a choice would mean, however, that under a new head Anglo would have to make fundamental choices about its identity. Along the way, the international profile of its South African-based operations might shrink even further, moving it ever further from its old position as the dominant South African industrial and mining colossus of the 1950s through the ’80s.
Rather than remaining an iconic South African institution, Anglo may end up as just one more middling mining company. This company, in its South African operations, will continue to face a hard struggle to balance growing worker demands for a decent living wage and insistence for broader ownership rights (or even nationalisation) with the market’s implacable demands for market share, profits and return on investment as the price of success. DM
Photo: Then Chief Executive Officer of Anglo American Cynthia Carroll attends the G20 CEO Summit in Seoul November 10, 2010. REUTERS/Aly Song
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