The dividend/growth balance: Anglo’s truly amazing debt turnaround
Getting the debt/dividend balance right is tricky — very tricky for mining companies. Pile up too much cash, investors get antsy. Buckle to investors’ immediate desires, long-term growth gets hit. Years of divesting from non-core assets and implementing stringent spending programmes have allowed Anglo American to significantly reduce its debt load to US$4.5bn in June 2018, down from a peak of US$14.1bn in June 2015. In 2019 it was able to commit to 40% of cash resources to a dividend payout.
Significantly lower debt levels and more streamlined operations have global miners flush with cash. The major producers — BHP, Glencore, Rio Tinto, and Anglo American generated combined free cash flow in 2018 of about $87-million a day.
With total debt levels at US$669-billion still fresh in the minds of the world’s mining executives, there will be no grand shopping sprees just yet. Instead, management teams have indicated a desire to continue de-gearing and returning surplus cash to shareholders.
That was made clear when some released earnings in February 2019. Glencore announced a US$2-billion buyback programme and said it plans to return another $1-billion after selling non-core assets over the course of the year.
Commodities giant Rio Tinto pledged US$5-billion in dividends with an additional US$1-billion stock buyback. BHP Billiton, whose results came out in June 2018, returned US$10.4-billion to its shareholders through the combination of an off-market buy-back and a special dividend.
Anglo was the only diversified resources group not to have initiated share buybacks or special dividends in 2018/19. The group’s dividend yield ranked poorly alongside its peer group. Anglo declared a final dividend of US$0.51 per share, equivalent to the top end of its dividend policy of paying shareholders up to 40% of underlying earnings in the second half of the year to end-December. The final dividend brought the total return for the year to $1 per share.
At a media briefing after the group’s year-end results announcement in February, CFO Stephen Pearce tempered expectations of an improvement to Anglo’s cash payouts, while not completely dismissing the prospect.
“The thing about the balance sheet is a balance,” he said. “We think we have a good balance between rewarding shareholders, lowering net debt and investing in capital projects in a sensible, disciplined way.”
Equity analysts at SBG Securities, however, said in a research report that “hoarding cash is inefficient and unlikely, especially as profitability comes through from projects that are not currently delivering at full capacities like Minas Rio and Quellaveco”.
“We think that the company has a lot of good investment options in existing assets and though we prefer a cautious approach (paying for projects in cash below optimal debt levels), we have no doubt that in two to five years the market will reward growth and punish those without.
“We think that a period lies before Anglo where balance sheets are strong, growth options are many and where Anglo balances capital returns to shareholders (40% payout) with an accretive high internal rate of return growth into commodities that the market values.”
Anglo has gone through a massive change in nearly every year since listing in London in 1999. At the AGM in London at the end of April, Anglo CEO Mark Cutifani said whichever way you look, the company is a fundamentally different business.
“Since 2012, we have halved the number of assets, significantly upgrading the performance of each remaining asset, which has reinforced the sheer quality of the portfolio and our operating model impact.
“We are delivering 30% more product from each retained asset, translating into 10% more physical product in aggregate across the portfolio at a 26% lower unit cost (in nominal terms), and we’ve also doubled the productivity per employee. It’s quite a contrast from where we were,” he said.
Cutifani said Anglo now has a leading competitive position, where it is at the front of the pack on operational leverage.
“We have driven our mining margin up from 30% in 2012 to 42% today, and that’s with a lower price basket. As a result, we have a range of highly attractive, low-cost, high-return growth options within our business — so unlike a number of our peers, we don’t need to go out and buy growth,” he said.
“What’s more, when you overlay our portfolio with the major global demand trends of the next generation and more, our asset quality plays well to those themes. Through diamonds, copper, the platinum group metals and the high-quality end of the bulk products, we are well positioned to supply a fast-growing consumer world, a greener world and an inter-connected electrified world.”
Analysts at Bank of America Merryl Lynch say in a report released in April 2019, following first-quarter performance, that they still like the story and that their investment thesis has not changed, and consider the share a buy.
“We think that Anglo ticks the right boxes. Anglo delivers price, volume, and self-help” and that is what they say drives mining equity.
With volume, the report states that the company is maintaining production guidance across board, but production was a bit light with nickel, diamonds, platinum at seasonally low levels, however, this is expected to recover with Minas Rio coming back online and with growth at Quellaveco projected to bring 300 kilotons per annum new copper production on line.
Last, say Merril Lynch analysts, with self-help, Anglo has momentum in improving its operational delivery “and yet, due to its historical underperformance, we think there is more to do here, relative to other ‘best in class’ operators”. DM
Daily Maverick © All rights reserved