Anglo upbeat despite 25% loss in earnings

CEO says the group remains on track to turn things around by 2016/17.

Despite a 25% drop in EBIT to $4.9 billion and an almost comparable $3.9 billion impairment charge, Anglo American plc’s CEO, Mark Cutifani, is pleased with the company’s financial performance. In light of last year’s demise of commodity prices, Cutfifani said the group had achieved “significant operational improvements that cushioned the blow quite significantly”.

“Our diversified product portfolio provided us with a degree of insulation from the particularly sharp price falls for the bulk commodities of iron ore and coal, albeit in an environment where weaker commodity prices accounted for $2.4 billion of underlying EBIT reduction,” said Cutifani in a recent Sens announcement.

Speaking to Moneyweb on Friday, Cutifani said the absorption of the commodity price decline would have been even more impressive were it not for South Africa’s five-month platinum sector strike which ended in June 2014, saying the drop in earning would then only have been 14%. This would have put the company on par with the best performers in the industry in terms of coping with sliding prices.

The market also responded positively to the results, with Anglo’s share price rallying by 3% to close at R216.31 per share on Friday.

Worthy of a special mention was the De Beers Group, which contributed $1.4 billion, or 28%, to underlying EBIT in 2014 – the second largest contributor to the group’s total, behind Kumba Iron Ore ($2.6 billion). The diamond producer’s integration into Anglo American has allowed it to benefit from lower finance costs and more efficient mining process, while at the same time experiencing a growth in prices and favourable exchange rate dynamics.  

While on the face of it, net loss widened to $2.51 billion in 2014 from $961 million the previous year, and net debt increased to $12.9 billion from $10.7 billion, expected to peak at around $13.5-$14 billion in 2015.

Said Wickus Botha, Africa mining and metals leader at EY: “Considering that most of the commodity prices the company is exposed to have decreased by 40-50% compared to the comparative period, a drop in earnings by 25% suggests that it has done a good job in cutting costs and increasing production.”

He added that impact of revenues declining by 50% in one year, would more than likely have been disastrous on any other business.

On track for 2016/17 turnaround

In the mining industry, which is heavily exposed to price fluctuations, companies can only really influence volumes and the cost of producing those volumes, and even that is to a degree, said Botha.

On that basis, Anglo seems to be making all the right moves to cope in a difficult environment. Kumba’s Sishen mine was able to meet target production levels for 2014 of 35 million tonnes of iron ore, while all capital expenditure on the Minas Rio iron ore unit, which was devalued by $3.5 billion, will be suspended until the project can deliver on its targets as well. Cutfifani said the group had intended to remain in the iron ore sector because of the performance of Kumba, which delivered a strong performance in spite of a 47% decline in prices last year.

The platinum assets also have the potential to be flagship business for Anglo, Cutifani said, but this was dependent on how plans to restore operations would unfold.

“We had certainly fallen away with our operating performance, but this set of results shows that each business has outperformed its targets, so we’re starting to get some predictability and reliability,” said Cutifani.

All this was part of a plan to reach return on capital to 15% by 2016, whereby those that are seen to be dragging down that average would be sold.

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