BUSINESS MAVERICK

Anglo American is back

By Tim Cohen 28 July 2019
Caption
Anglo American CEO Mark Cutifani. (Photo: Gallo Images / Business Day / Martin Rhodes)

Anglo American’s interim results announcement on July 24 promised to be a fairly prosaic affair. But two pivotal events changed that. A surprising $1-billion share buyback was announced. And then came the decision by Indian tycoon Anil Agarwal to unwind his looming financial scheme in which he bought control over 20% of the company. Agarwal made a huge fortune from the bet, but the real winner is Anglo.

On his podcast “How I Built This”, renowned interviewer Guy Raz has quizzed such superstar innovators as electronic goods inventor James Dyson, Airbnb’s Joe Gebbia and Cisco Systems’ Sandy Lerner, among many others. One of his trademarks is to ask his myriad entrepreneurial guests one common question about their success: Was it skill or was it luck?

Most say it was a bit of both. It’s a safe answer. For successful (or failing) mining companies, it’s a particularly apposite question because unlike many other industries, mining companies are almost entirely in the maw of the price of the commodities they produce. Luck is crucial, and it is outside the company’s control. It’s a curse. And sometimes a blessing.

Four years ago, Anglo delivered the company’s biggest loss in its century-old history, a jaw-dropping $5.6-billion full-year calamity. In some panic, the fairly newly installed CEO Mark Cutifani announced a huge restructuring deal that would entail selling all but 16 of the 55 mines it operated at the time. The plan was to focus on just three commodities: copper, diamonds and platinum. Coal and iron ore were out, despite the roughly $14-billion the company had spent on developing its Brazilian Minas-Rio iron ore project.

But no sooner was the plan announced than commodity prices (which tend to move in the same direction because they are a function of the state of the global economy) changed direction. Anglo never ended up putting its plan fully into action, except by selling most of its coal assets. It now operates 35 mines around the world. The company that is almost synonymous with South Africa’s corporate history, came back from the brink.

But just as the turnaround began, the vultures began to circle. In this case, they took the form of Anil Agarwal, a remarkable Indian miner who began his career pushing a wheelbarrow and is now one of India’s richest citizens. In 2017, Agarwal entered into a complex financing transaction in which he essentially borrowed cash to finance buying a 20% stake in Anglo but left the buyers of the debt much of the upside if the share price increased.

The shape of this deal, in which he would get voting rights but limited upside, suggested he intended being more than merely a passive investor. It was the kind of audacious, confident deal that would surely have warmed the heart of the company’s founder, Ernest Oppenheimer. But for management and employees, the Agarwal buyout would have constituted a humiliating defeat.

On Friday July 26, Agarwal announced he was selling out of the deal even before the debt formally became due. According to a Reuters calculation, Agarwal pocketed just a 6% profit from his $4.3 billion investment even though the underlying shares rose over 50%. After paying back the loan, Volcan (Agarwal’s corporate vehicle) would have been left with a 1.9% stake that was sold in the open market for £519 million which would be his gross profit from the whole investment. Once coupon payments and the investment banking fees are accounted for, that sum dwindles to between £196.25 million and £213.7 million pounds.

Great win, you would think – particularly for the bankers who “advised” him. But in fact, since Anglo’s shares have risen more than 50% since March 2017 when Agarwal first announced the deal, he would have made more than five times as much if he had just bought the damn shares outright in the first place, albeit at a higher level of risk.

Still, whatever the case, Agarwal’s withdrawal means the company is now once again clearly the master of its own destiny without any looming takeover threatened. Agarwal has emerged financially better off, and in some ways, everybody won from the deal. Agarwal’s confidence in Anglo alerted the market to its value potential, and after being one of the best-performing companies on the FTSE100, the company now has a solid following among a broad range of top-tier investment houses.

But the share price rise also worked against Agarwal’s takeover intentions (which he always denied) because it increased the cost. Meanwhile, conditions for his own companies became more difficult. He has effectively been beaten back by force of circumstance, but also by Anglo’s gradual operational improvements.

There was some luck here too on Anglo’s part. The years of spending billions without a return on its Minas-Rio project finally came to an end when the Brazillian unit started shipping ore. Of all the major commodities that Anglo mines, iron ore has seen the most aggressive price increases, doubling from 2015. In the most recent results, ironically Minas-Rio was one of the biggest contributors and iron ore generally once again the star of the show.

The company is now rolling in cash. Its debt is trivial: for the half-year, it earned $5.54-billion before tax and intangibles, and is now on track to earn a little over $10-billion for the year before tax and accounting gizmos. The windfall prompted the $1-billion share buy-back, which is essentially a huge gift to shareholders.

More significantly, it is starting to outperform some of its competitors on an operational level, growing its profits faster than most of the other big miners excepting those with large iron ore exposures. The share price is also growing faster than, for example, its long-time Australian rival Rio Tinto over the past four years (which it could be argued, is not that difficult since it came off a lower base).

But, in general, what a turnaround. It’s just been amazing. Which brings us back to the question of luck and skill. At the recent results, Cutifani argued that Anglo’s earnings margins are now at 46%, up from 30% in 2012 when commodity prices were higher.

Yet, on that basis, a few of its competitors are actually doing better. By some calculations, BHP Billiton earns a margin of around 50%. But so much of these numbers depend on what ores the companies are mining. Diamonds are holding Anglo back at the moment, but, as a precious commodity, they tend to retain their value better in the down periods.

So, luck or skill? As unsatisfying as it may be, could we settle on a bit of both? BM

Story adjusted to reflect a more detailed estimate of the Angarwal’s financial transaction.

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