It has been said that even a turkey can fly in a gale. Anglo American is no gale at the moment, but thankfully its new chief executive Mark Cutifani is no turkey. Even so, a credit rating downgrade the day after taking the top job has got to be tough to swallow, even for such a well-seasoned miner.
Credit rating agency Standard and Poor's downgraded Anglo's long-term corporate credit rating from BBB+ to BBB last week, saying it had changed its view of the company's financial risk profile to "significant" from "intermediate" based on expectations of a negative cash flow and higher capital expenditure.
Lower commodity prices mean Anglo is not the only big mining company struggling to keep the cash flowing. But while most are cutting back on capital expenditure to shore up their balance sheets Anglo has to keep the taps open to try to get some of its projects off the ground, notably the Brazilian iron ore mine Minas Rio, which is due to start shipping product at the end of next year.
The beleaguered Brazilian operation is three times over budget and five years behind schedule.
Anglo American spokesman Hulisani Rasivhaga said capital expenditure was expected to reach US$7.5bn in 2013 and US$8bn the year after, before it moderated.
But while the downgrade is going to make servicing debt more expensive, even the ratings agency does not think it is all doom and gloom.
In its report, Standard & Poor's said Anglo was liquid enough to make a further downgrade in the next 12 months unlikely - and, by 2015, if management actions and higher commodity prices contained debt increases, it could even be revised.
Tough times for mining sector
Clinton Duncan, an analyst at equity research company Avior, said mining companies in general were facing tough times, but prospects for commodities were likely to improve depending on what happened in China and the US - both of which were giving positive signals.
In a video interview last week, Cutifani seemed unconcerned about the swings in commodity prices, saying "there is always some uncertainty around commodities, it's the world we live in". He said that global growth of about 3% would naturally spur demand.
Not everyone is this positive. London-based analyst Peter Davey was quoted as saying he believed Anglo could not afford the downgrade.
While Minas Rio could not be delayed any longer, Davey said he would have preferred to see some expansions, such as coal, slowed down. Another option would be to try to find a partner with deep pockets for Minas Rio.
One of Cutifani's biggest and most immediate tasks is going to be trying to turn around Anglo Platinum, which accounts for 25% of Anglo's market capitalisation and which made losses last year.
Avior's Duncan said Amplats's position in its parent company's portfolio would undoubtedly be questioned, but it was unlikely to be spun off at the bottom of the cycle. "Cutifani and [Amplats boss] Chris Griffith will need a year or so to turn it around," he said.
Part of the turnaround will come by decreasing production, which should shift the market from a surplus to a deficit and increase demand.
Another test for Cutifani is going to be his negotiation of the dynamics in the South African mining sector but, as president of the Chamber of Mines and a former chief executive of AngloGold, there are few people better suited to the job.
That does not mean it is going to be easy.
As well as fractious unions, convoluted legislation and increased taxation, Anglo is not the flavour of the month at government level.
At a recent event held in his honour, Mineral Resources Minister Susan Shabangu declared: "Mark, this Anglo American plc, it's ours. It's a South African company."
The comment followed ANC secretary-general Gwede Mantashe saying that allowing companies to list on global stock exchanges denied SA part of its economic heritage and negatively affected the country's own exchange.
Source: Business Times via I-Net Bridge
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