Mark Cutifani: Leaving his mark at Anglo

On the day that the first case of Covid-19 in SA is confirmed, Anglo American CEO Mark Cutifani is in town, and desperately trying to keep a safe distance. At the Anglo American precinct in the Joburg CBD, which looks more Masonic lodge than corporate HQ, Cutifani playfully holds his foot out, offering a "Wuhan shake".

It is still hours before the SA case is confirmed, and locals have yet to become hyperconscious about physical contact. Not Cutifani. As the head of a multinational mining company, he’s more aware than most. To steer the ship of Anglo American, a global perspective is critical — as is regular travel across no fewer than six continents.

It is also days before Anglo, along with every other mining company, sees its share price plunge as world markets digest the full horror of a Covid-19-induced global shutdown. Quite how miners — and Anglo — will bounce back is an open question.

While SA has only 202 confirmed cases right now, the problem is China. Figures released this week show how devastating Covid-19 has been to China’s economy: industrial output sank 13.5% in the first two months of the year, retail sales plunged 20.5% and fixed asset investment crumbled by 24.5%. It’s far worse than expected.

Sanlam Private Wealth portfolio manager Greg Katzenellenbogen, a longtime Anglo fan, says: "We’re in uncharted territory so it depends how deep the crisis is. Anglo’s balance sheet is better than it was in 2016, but if demand falls off a cliff, they will be affected. If this is a short-term crisis, it should bounce back quickly."

Michael Cuoco, head of fund sales for metals and bulks at INTL FCStone, told Bloomberg: "We have seen demand shocks across the industrial metals complex before, but this time there needs to be an understanding that a return to normalcy could be slower."

Cutifani’s company isn’t making any hard predictions of recovery either. "It is hard to speculate on market impact at this stage, as we don’t know what the full extent of this will be," it says. "What is crucial for us ... is to protect the safety and health of employees and maintain business continuity."

It’s not as if Anglo, or Cutifani, hasn’t weathered market disasters before. When he joined Anglo from AngloGold Ashanti in April 2013, Anglo was reeling from a disastrous $6.7bn investment in Brazilian iron ore project Minas-Rio. It had been signed off by former CEO Cynthia Carroll, whose tenure at Anglo isn’t remembered fondly by punters.

It was under Carroll, after all, that the company squandered billions buying back shares at the top of the market — and overpaid for the Brazilian asset, which has only now started to produce the goods.

And Cutifani delivered. From the day in 2003 he took charge to February 21 this year — before Covid-19 began seriously rocking world markets — Anglo American’s share price had gained 80.4%. Since then, however, its stock has shed 37%, to R260.

Virus aside, there’s no question that Anglo is in vastly better shape.

And the good news for shareholders is that Cutifani plans to be around to help Anglo navigate through the Covid-19 ruckus.

During an extensive interview with the FM at Anglo’s iconic 44 Main Street office, from where it grew to become SA’s largest company and a global powerhouse, Cutifani says he’s committed to delivering Anglo’s Quellaveco copper project in Peru, scheduled for first production in 2022.

Quellaveco, he says, is critical to rebuilding Anglo’s credibility: it is its first major venture since the Minas-Rio disaster.

"It would certainly be a fitting milestone , but whether it’s the right milestone would be the board’s decision — and my decision," says Cutifani. He believes "there’s always 30% improvement in any business, I don’t care how well run the business is … The day I can’t [see 30%] is the day I go. Or if age and ineptitude beat me there."

Ineptitude isn’t a word you’d associate with the straight-talking Australian — a point, he is unembarrassed to note, that is backed up by Anglo’s performance relative to its biggest competitors: Rio Tinto, BHP, Glencore and Vale. Anglo, says Cutifani, until the coronavirus rout, delivered an annual 34% total shareholder return since he took the job in April 2013.

"We may not have got everything right, but that’s despite a 5% drop in commodity prices. So we’ve swum against the tide and still delivered. No-one’s done that."

He argues that Anglo has cut operating costs by 29% — which makes it the "biggest improver in operating margin" across all its peers — and it has also doubled productivity per employee.

"We still think we can outperform in the next five years with growth," he says.

Yet if you look at Cutifani’s assertion over a longer timeframe — since 2005, for example — it’s clear that Anglo has been lacklustre for some time. On a pure share price basis, it has returned just 135.8% since then — against BHP’s 255% gain, the JSE all share’s 278% increase and the S&P 500’s phenomenal 556.9% surge.

While he’s right that it has improved since he took over in April 2013, Anglo’s shares, up until March 1, are still streets behind the S&P’s 223.9% gain to that date. Sure, it has outperformed rival BHP and the wider JSE, but it’s hardly been a rocket.

A Sisyphean effort?

The question is, why should investors put money into a mining company that is subject to factors beyond its control, and so cyclical? Especially at a time when the biggest buyer of commodities, China, is now likely to tip into a virus-induced recession?

"It depends on your starting point as a measurement," says Cutifani.

"For a company like ours you’ve got to look in 20-year cycles. It’s been a poor performance over 10 years [because] you’re looking at the peak of the commodity cycle as the starting point. Anglo’s come off over that period, and that’s not surprising."

So, is he saying an investor should have a 20-year timeframe for a mining company?

"No — I’m saying a 10-year timeframe is just a point in time. An informed investor has to understand what timeframe they’re investing for." Also, he says, "don’t forget that Anglo American had a couple of disasters in the middle of that too, like the Minas-Rio issue. It’s not simply a mining issue in our case – we made some serious mistakes in terms of capital deployment."

It’s hardly as if Anglo has been alone in throwing billions of dollars at projects that turned out to be wasteful lemons. In 2007, Rio Tinto, for example, wrote off $28bn after buying aluminium producer Alcan for $38bn, just before the market crashed.

BHP, long regarded as the gold standard for diversified mining companies, wrote off about $13bn against investments it had made in US shale assets.

Seen in that context, Anglo’s $10bn write-off for the Minas-Rio operation seems positively benign by comparison.

"Mining," says Sasfin deputy chair David Shapiro, "is a shitty industry.

"You can’t control the [commodity] price. You’ve got to dig holes and hope what you thought is there is there."

But the billions wasted on megaprojects that turn into millstones is a recurring theme for mining companies. It remains one reason why their credibility remains low with investors. Again and again, mining CEOs have proved unable to resist a big deal at the wrong time, when everything is expensive and commodity prices are on a high.

So are mining firms doomed, like Sisyphus, to repeat the blunder every cycle?

No, says Cutifani. "Not all mining companies have that track record ... [take] Randgold Resources. Mark Bristow is an example of someone who has managed his company well over a long period. And there are other cases. What people forget to do is analyse why they may have been successful."

Success, he explains, is about "delivering sustainable free cash flow through the cycle". The second metric is return on capital employed, or put simply, how efficiently shareholders’ funds were used to get that cash flow. This is an important barometer, says Cutifani, "because you can spend a lot of money on an asset and destroy returns, yet still generate lots of cash flow".

"A 10% return on capital employed [puts you in the top quartile]; 15% is best-in-class. At the moment we’re above 10%," he says.

The third measure is sustainability. "If the leaders in the industry got those points right, we wouldn’t have the disasters we’ve had: it’s keeping it simple."

But if it really is that simple, why is so much money wasted, time and again?

"People in many cases don’t know what they’re looking at, they don’t understand the investment they’re making and [they] get some aspect of it wrong, or they [simply] may not have the assets," he says.

Anglo itself has just signed an R8bn deal to buy phosphates miner Sirius Minerals, which is building a polyhalite operation in the UK to provide fertiliser feedstock to the world. (Celebratory drinks had cut into Cutifani’s sleep the night before he met the FM, after Sirius shareholders voted in favour of backing Anglo’s bid for the cash-strapped Sirius Minerals.)

While the market doesn’t seem to understand the Sirius idea, Cutifani certainly does.

"I don’t think people understand how unique [Sirius is] and, we think, how much potential there is in the nature of the product," he explains. "The reason Sirius is unable to get the funding to finish the project is it is the bottom of the market, there is still a lot of capital to invest and there is market risk."

He is quick to point out, however, that the deal is nothing like Minas-Rio. "With Minas-Rio we paid $5.5bn – at the top of the market – for an undeveloped resource off a concept study, and then we still had to go and get all the licences, and then build. The project unfortunately wasn’t scoped terribly well, so that ended up being a blowout as well."

With Sirius, Anglo isn’t just buying a feasibility study. "The project is in execution and the detail work has already been done. They’ve already invested $1.1bn in the ground," he says.

While Minas-Rio is still held up as the poster child for Anglo American’s poor capital allocation, the irony is that it’s actually starting to come right. Last year, it produced the best cash flow in the group, while its costs were 30% below what was envisaged.

"It shows how far we’ve taken and improved the business. I can’t get the capital back, but I can make the asset grow," says Cutifani.

Right man for the job

You’d expect Cutifani to be effusive about the mining industry though. Now aged 61, he has only ever worked in this one sector, which may colour his views.

After graduating top of his mining engineering class at the University of Wollongong in 1982, Cutifani got his first job at a local coal mine. He went on to hold senior executive positions at Australian companies Normandy Group, Western Mining Corp, Kalgoorlie Consolidated Gold Mines and CRA (later Rio Tinto), as well as Sons of Gwalia (which folded 14 months after he left).

In 2003 he moved to Canada to take up the post of chief operating officer at nickel miner Inco — a position he retained after the company was taken over by Vale.

In 2007 he moved to AngloGold Ashanti. Cutifani’s time there set him up for the job at Anglo American. When he got there, the gold miner had the biggest hedge book "in the world". He and then finance director Srinivasan Venkatakrishnan decided to close it out, to benefit from a resurgent gold price.

"The hedge book represented a $19bn liability, but we got there before the market turned," he says. The timing was spot-on. When the gold price began rising, AngloGold was able to take the full benefit.

Cutifani reveals that one of the reasons he was interviewed for the Anglo job is that AngloGold’s chair at the time, Russell Eddy, wrote a letter to Anglo chair John Parker, lauding Cutifani’s work on closing out the hedge. "The work we’d done was as good as he’d seen in the industry," says Cutifani. It seemed a good fit: Parker needed someone to clean up the Minas-Rio mess. Only, it would get a lot worse before it got better.

"When Mark Cutifani came into the job in April 2013, panic stations were already appearing," says Peter Major, mining director at Mergence Corporate Solutions.

"Anglo American had been underperforming everything since 2011 and then, in 2015, all commodities crashed. You had capitulation. Anglo was fairly highly geared and Mark had to calm the market.

"Cash flow was OK, but interest payments were a large and growing component, and the low and still falling commodity prices were putting them under pressure."

It prodded Anglo into selling assets — at the worst possible time. Even strategically important operations, like Anglo’s iron ore subsidiary Kumba, was on the table for a possible sale "But Mark was savvy. As soon as commodity prices turned up, he put the brakes on fire-selling assets, especially the good ones," says Major.

It irks Cutifani that the market never properly gave credit for the sweeping asset overhaul that Anglo initiated, before commodity prices tanked in 2015.

"In the first 18 months, coming into the role, we did a full asset review and identified that of the 68 assets we had in the portfolio, 37 were potentially long-term contributors, and Kumba was on that list. It was always in the long term," he says.

At the time of the 2014 review, commodity prices were starting to crumble, based on fears that the Chinese economy was in for a hard landing. Anglo committed to slice $1.8bn off its costs. But commodity prices continued to fall while Anglo’s debt ballooned to $13bn.

"That was an existential crisis," says Cutifani. "If we didn’t fix the debt, someone was going to come in and fix it for us. So what we said is: ‘We will sell assets to get the debt under control before we let the place crash.’ And I said: ‘We had the 37 [assets] – we’ll go down to 20 if we have to, to make sure we fix the place, but I’ll only sell for value.’"

Luckily, Anglo didn’t have to flog the crown jewels. In the end, the only sale he regrets was of Niobium Phosphate. "I would have loved to have kept it," he says.

By the end of 2016, Anglo’s debt had been winnowed down to about $8bn. Crucially, commodity prices began climbing — especially iron ore and palladium. Since Anglo owns 78% of Amplats, it benefited immensely from the platinum group metals spike. And after a year in which diamond sales had been obliterated, Anglo, through De Beers, was selling the gems again.

Today Anglo’s debt stands at $4.6bn, though it will rise with the Sirius deal. But the critical point, says Cutifani, is that Anglo is producing more with much less.

"We’ve grown production 12% [from 50% of the asset base] but in actual fact every one of the assets we’ve kept has improved more than 30%.

"So we’re actually producing more out of the 50% that we kept than out of the 100% we had," he says.

Says Major: "Under Cutifani, Anglo has run a much tighter ship ... since the Australians took over, they sort of dragged Anglo into the 21st century."

If it all seems obvious now, it wasn’t at the time – especially given Anglo’s stature as SA’s pre-eminent mining company. But Cutifani says there were simply too many assets taking management time and attention that were never going to be profitable.

For example, if Anglo Platinum were still "wrestling [its] Rustenburg [assets] to the ground, I’m not sure Anglo American would still be a company as it is today". So Amplats called it quits on Rustenburg, selling the assets to Neal Froneman’s Sibanye.

Another change under Cutifani was running Anglo as a global business. "[Anglo] had always been run as a set of fiefdoms and we said ‘stop’," he says.

Being able to draw on different skills across the group, irrespective of what mine they’re from is, according to Cutifani, what has fundamentally changed the company.

And yet, after all of this, Anglo’s critics, like Major, still rate it as "poor".

Major does concede that "most resource counters trade at a continually large discount to the S&P". He also admits that it has gained ground on its rivals: from 1998 to 2015, BHP outperformed Anglo by a factor of 10 — but that has now changed.

"Mark and the guys have done a good job overall, especially in outperforming BHP," he says. "The question now is: how does the team keep Anglo outperforming the JSE all share index and S&P 500, like it did from 1917 to 2010? That’s the million-dollar question."

Some say Anglo is set for a boom — presumably once Covid-19 fades, and the world (including China) can pick up the pieces.

In a February note to clients, Barclays analysts wrote: "The stars have finally aligned for us to turn more positive on Anglo: a pullback in the share price has left the stock at a 25% discount to peers (the widest in five years). On our estimates, the company has sector-leading organic growth."

So why does Anglo retain such a big discount, even if it’s bested its competitors in productivity these past five years?

The fact is, SA’s abysmal reputation abroad is probably to blame.

The SA handicap

"If you remember the nationalisation debate in 2011 — I’ll tell you a story," says Cutifani.

"AngloGold was the best-performing gold-mining company in the world for four years, up until that debate. [But after calls for nationalisation grew], it absolutely destroyed the perception of SA business … because all people could hear was one voice. One voice can destroy a country’s access to capital."

Now, says Cutifani, "we have different issues to deal with" — Eskom, for example.

"But the one thing we have to do is, the leadership of the country has to behave and speak responsibly — even the opposition parties — because the world is watching and in the end we need capital from the world to support growth in the country."

Clearly Cutifani is referring to Julius Malema’s EFF, which has become known for causing chaos in parliament and elsewhere.

"Quite frankly, in many cases [the EFF] has been very impressive [in] the way it has operated. But there are certain aspects that destroy the view of us globally … All I’m saying is, don’t destroy people’s perception of our democracy.

"That would be tragic, given the road we’ve had to travel."

But leaving aside SA’s politics, Anglo’s rating has also been pulled down by its exposure to thermal coal — the kind that’s typically used in power plants. It’s becoming a PR nightmare for companies which mine coal, as climate change concerns grow.

You might expect Cutifani to defend thermal coal, given his coal mining roots. But he isn’t sentimental in the least about it. At Anglo’s results presentation in February, he said he’d be surprised if Anglo was still in thermal coal in five years.

The coal assets have about 10 to 12 years left, and they need capital to extend their lives. But they’re the smallest contributor to Anglo’s earnings, at about 3%. So while the life of the assets could be extended, Anglo isn’t prepared to do so.

"Thermal coal doesn’t rate against the other options," says Cutifani. "Whether it’s copper, whether it’s Kumba, whether it’s platinum, that’s where we will direct our capital. Not into thermal coal."

Major agrees, describing coal as the "cigarette sector" of mining, attracting low ratings. "If you want to improve the rating, you have to get rid of coal," he says.

Like many other miners, Anglo will remain invested in coking coal — a higher-quality, cleaner-burning product that is critical for the manufacture of steel and for which, unlike thermal coal, there is no alternative at the moment.

Returning to the question of SA, Cutifani talks of how the National Treasury’s recent decision to relax financial controls sends an important message that SA is open for business and it’s OK to take money in and out of the country.

He may be Australian but it’s clear Cutifani has a strong affinity with SA. It’s no wonder, since he’s lived and worked in the country for 14 years, raising four of his seven children here. (He’ll even go as far as supporting SA over Australia at cricket on the rare occasion.)

But there is no denying that Anglo has ventured a long way from home. Once the definitive SA corporation, it feels less so than ever, particularly since it listed in London in 1999, and moved its headquarters to St James, next to Trafalgar Square.

Consider that in 1992 Anglo’s tentacles were in all facets of SA life. It had sizeable investments in 86 JSE-listed companies across all sectors, including Edgars, SA Breweries, paper company Mondi, Premier Foods, Toyota SA, Metro Cash & Carry and Clicks Stores. Today, the modern Anglo has just two JSE-listed subsidiaries: Amplats and Kumba Iron Ore.

Cutifani, however, is at pains to affirm the group’s commitment to SA. Discussing the SA assets that Anglo has sold since 2015, he says "those are big calls and they’re hard calls and you’re asking people to give away a lot of the history of the organisation".

The problem is that when businesses have been inside companies for so long, "people can’t see the potential of the other assets. So this is where the global perspective is really important as CEO.

The team could only see what they’ve grown up with, but you need to be on the outside looking in, saying: ‘Guys, we’re looking at the wrong things.’"

Not that this "global perspective" has always been appreciated. When Cutifani took the reins in 2013, the National Union of Mineworkers (NUM) was critical of his appointment, bemoaning Anglo’s inability to find a suitable black or female SA candidate.

Speaking to the FM, NUM president Joseph Montisetse says: "We don’t encourage the import of CEOs into our country, because we realise some of them don’t share the interests of SA."

Yet Montisetse, who worked at AngloGold Ashanti operations in Klerksdorp during Cutifani’s tenure, praises him. "Mark was one guy who came from outside who has done well. I think he has contributed a lot to the economy of SA," he says.

If the company does appoint a South African to succeed Cutifani, it won’t be due to any historical loyalty – though Cutifani is quick to dismiss the suggestion that the board is anti-South African.

"Not right," he says. "That’s not our board. They will be looking for someone with global experience – that’s important. But where they’ve started from doesn’t matter."

What it means: After being appointed in 2013, Cutifani took careful stock of assets and began selling those that were not making profits

—  What it means:

And, he says, Anglo would still like to do more in SA, though Eskom’s power crunch remains a major issue. But he doesn’t share the view that mineral resources & energy minister Gwede Mantashe is SA’s biggest impediment to growth.

"You never wonder what the issue is, because you will get it between the eyes. And then you can have the argument, but you always end up getting to the issues and we get a response."

Cutifani says in some ways, the industry has made Mantashe’s job tougher in launching a legal challenge to the latest Mining Charter, mainly over certain black ownership provisions that could lead to some companies failing to renew their mining rights.

"He’s made it very clear that if we can negotiate, we can get there quicker, and that I understand," he says.

"It’s a matter of dialogue to find the right pathway. But we will find it."

Cutifani says SA has at last begun to confront its issues head-on. And though he’d like to see things move quicker, he understands the complexities that President Cyril Ramaphosa is dealing with.

"There is no tougher task, in my view, in the world of global politics, than the one that Mr Ramaphosa is navigating. So I tend to cut him a bit of slack.

"Now, do I agree with all his decisions? No. And we tell him, and we ask him to do it quicker. But at the same time I also understand how tough the role is when you’re looking over your shoulder and looking forward," he says.

Cutifani should know how leadership can be a thankless task — even if, in his case, Anglo has done better than its rivals of late.

But like SA, Anglo’s investors believe the company is still undershooting its potential. If he can fix that, he’ll leave an enviable legacy.

Deep, wide roots

Sir Ernest Oppenheimer, a Jewish German immigrant, founded the Anglo American Corp in SA in 1917. The gold mining company was started with financial backing from JPMorgan & Co and £1m that was raised from UK and US sources — hence the name Anglo American.

In 1926, the company moved into diamonds, buying a controlling stake in De Beers.

After World War 2 the company expanded and diversified, and it ultimately controlled large portions of the SA economy. By 1990 it derived just 54% of its income from mining operations.

But after listing on the London Stock Exchange in 1999 it began to refocus on mining as its core business.

As noted in the Journal of the Southern African Institute of Mining & Metallurgy, Anglo began its extension beyond SA in the 1920s, with exploration activities in what was then Northern Rhodesia that led to the discovery of the Zambian Copperbelt. But it was the closed SA economy in the 1960s and 1970s that forced the company to diversify outside SA. In 1961 it made its first big investment outside Africa, in Canada.

Its second major overseas investment came in 1975, when it bought a 49% stake in the Morro Velho gold mine in Brazil.

Though Anglo had already spun out AngloGold in 1998, it was only after a strategy review in 2005 that it began to exit a string of SA investments, including Samancor, Highveld Steel & Vanadium and, later, the Namakwa Sands, Black Mountain and Gamsberg projects.

It sold off all interest in AngloGold Ashanti, and in 2015 completed the sale of its Rustenburg platinum mines to Sibanye-Stillwater. In this time it made new investments too, listing Kumba Iron Ore in 2006 and establishing the Venetia diamond mine in Limpopo in 2013.