Clock is ticking on Duncan Wanblad’s plans

The clock is ticking on Anglo American CEO Duncan Wanblad’s radical restructuring plan. Having promised to simplify the 107-year-old group in as little as 18 months, he must do so amid a complexity not dissimilar to BHP’s proposed takeover (see box).

BHP’s bid was finally rebuffed on May 29, the day on which South Africans voted to end the ANC’s majority rule. BHP could yet return for Anglo at a later stage, along with new, rival bidders — especially if Wanblad fails to deliver. The most daunting part of his plan is the sale of De Beers. The unbundling of its platinum business, Anglo American Platinum (Amplats), for value, is no walk in the park either, even with the possible London listing Wanblad suggested in recent days.

Both transactions are complicated by the dramatic outcome of the national election. Asked about how an uneasily assembled coalition or government of national unity could influence the regulatory procedure of Anglo’s South African divestments, Wanblad tells the FM: “If there are any massive changes, we will have to adapt. We will rely on the institution of government to move it forward.”

In truth, Wanblad doesn’t know what to expect. Gwede Mantashe, an ANC heavyweight who has a side hustle as the country’s mineral resources & energy minister, previously defended Anglo’s rejection of BHP’s proposal. But recent media reports suggest he may encourage the ANC to reject a coalition with the pro-business DA. While the direction of the minister’s alliances are difficult to predict, Wanblad says he trusts that the government recognises Anglo’s relevance to the national cause.

Even if Wanblad restructures Anglo as planned, by mid-2026 at the latest, he might not have guaranteed the “next 100 years” for Anglo, as he terms his ambition. While BHP’s takeover proposal failed to entice Anglo’s board into detailed discussions, the Australian firm can at least take comfort from extracting one red line from Anglo. Absent from Anglo’s rejection of BHP’s third proposal was criticism of the proposed share ratio that priced Anglo shares at £31 a share including the South African subsidiaries.

Failure to rerate in two years’ time — BHP’s last proposal priced Anglo without Amplats and Kumba at £21.24 a share, according to a JPMorgan report — would be a blood in the water moment for Anglo. It is now trading at £25.63 a share including the subsidiaries.

“We think that this new, smaller business would be seen as an extremely desirable group of assets both by investors and potentially by industry participants,” said analysts at Bank of America in a report on May 14.

On May 31, Citi said: “The best defence [Anglo] management can offer in the medium term is to execute flawlessly in operations so as to achieve that rerating rapidly so that potential acquirers balk at valuations.”

What’s certainly clear from BHP’s offer is that mining companies are choosing buying over building new mines. By Anglo’s own estimation, the world’s 20 best undeveloped copper resources containing an estimated 172Mt of the metal are sterilised mostly by ESG factors, with community and water constraints the key determining factor. Longer permitting timelines as well as supply chain disruption and inflation are leading to increasing capital intensity in copper mine development.

According to Robin Griffin, an analyst at industry consultancy Wood Mackenzie, $700bn in new investment is needed to meet copper demand between now and 2050, of which $450bn is needed before 2040. Wind power, which requires a copper intensity five times that of power station energy, drives most of that investment. All in all, a 2.5% annual increase in copper demand is expected from 2023 to 2033. “You can understand why BHP wants to acquire tier one assets; it doesn’t want to wait,” Griffin says.

Investors are obviously plugged into these expectations. Even producers in the 90th cost percentile are registering 60% margins this year; which means most producers are doing better. It has driven huge investment interest in pure copper producers, to the detriment of the diversified mining group which Anglo, with its platinum, coal and diamonds, typifies. “Despite the strong fundamentals of the diversified miners, they do not currently command the valuations they have seen in the past, or the current valuation of the copper mines,” says Goldman Sachs analyst Matt Greene.

“Additionally, we believe the sector is witnessing an influx of targeted capital seeking clean, single-metal exposure that aims to avoid the complexities associated with understanding a broad spectrum of industrial and consumer commodities,” he says.

Against this background, why wouldn’t larger rivals show an interest in Anglo once it has simplified, especially given plans to grow its total copper production to 1Mt in the early 2030s from its current 760,000t a year?

On April 24 a media report said Anglo American was in talks with BHP, which had submitted a takeover proposal. The speculation was confirmed the next day by BHP, which detailed an all-share proposal of 0.7097 BHP shares for each Anglo share held, including its stakes in Anglo American Platinum (Amplats) and Kumba Iron Ore, two Joburg-listed businesses.

Anglo rejected the offer the next day, triggering a public six-week battle.

BHP adjusted its offer twice, but in the end failed to convince Anglo shareholders. Instead, they accepted Anglo’s argument that BHP’s deal structure, which asked for the unbundling of Amplats and Kumba before the takeover, implied too much pricing downside.

On May 14, Anglo CEO Duncan Wanblad submitted the results of the firm’s own strategic review, first announced in February, in which he set down an intention to unbundle Amplats and sell De Beers, as well as cut net debt by selling Anglo’s coal assets in Australia and slowing a UK fertiliser minerals project in 18 to 24 months. Wanblad’s plan won the day, for now.

—  BHP loses its bid

Timing the diamond market

The Oppenheimer family’s sale of a 40% stake in De Beers looked like good business at the time, in 2008. Today, $5bn for a minority stake in the diamond miner looks like a steal.

Anglo’s book value for De Beers was about $7.6bn at December 31 following a steep decline in diamond prices, and losses in the second half of its 2023 financial year which resulted in a $1.5bn impairment. Since then, the diamond market has continued to underwhelm. Rough diamond sales for its last sales cycle were estimated to be $380m — a 20% year-on-year decline, and $64m less than the preceding third sales cycle.

Demand has “remained subdued”, according to banking group Morgan Stanley. Indian manufacturers, who cut and polish nine of every 10 stones globally, continued to destock. There was just a hint of desperation in De Beers CEO Al Cook’s conclusion that the lingering effects of pandemic lockdowns continued to weigh on engagements.

It’s in this context that Anglo must set about the most challenging limb of its proposed restructuring. Selling De Beers in the teeth of a prolonged market downturn is a tough ask. Anglo’s valuation for De Beers “seems too high”, says US investment bank Jefferies, which puts a value of “less than $4bn” on Anglo’s 85% stake.

There’s also uncertainty as to whether Anglo would be able to sell the mines and the De Beers brand, which would be attractive to the “luxury brand and financial investor”, possibly a Gulf state, according to recent speculation. But that is Wanblad’s plan. “It is a great business and has fantastic assets and an exceptional brand,” he told analysts. “On that basis it really deserves to be together.”

Analysts think that at this point in the cycle, disposing of diamonds could be value-destructive, and at odds with Wanblad’s divestiture-for-value playbook. “We believe there is a good chance that De Beers is still in Anglo American come 2026,” says Ben Davis, an analyst for investment bank Liberum. Given continued inventories in the midstream, the cutters and polishers, it won’t be until 2025 at the earliest that diamond prices improve meaningfully, writes Marina Calero, an analyst for Canadian investment bank, RBC Capital Markets.

De Beers is a complex business to unravel. Structurally it is complicated, given its joint ventures with Botswana principally, as well as Namibia. “Plus it’s a hybrid mining/luxury company; it’s just too unique a business for a sale to be easy,” says Paul Zimnisky, a diamond analyst. Billionaire tycoon Johann Rupert, the former CEO of Richemont, reportedly has no interest.

“That said, I think the best suitor would be someone that has deep pockets and can invest a sufficient amount in the business for the long term and someone like an LVMH [the French luxury group] could qualify in this way,” says Zimnisky. “But I wouldn’t hold my breath.”

“A sale of De Beers to a sovereign fund at a price above $4bn would be a positive as well,” said Christopher LaFemina and Albert Realini, analysts at New York bank Jefferies, in a recent report. Its sum-of-the-parts valuation is $3.4bn for De Beers. But Wanblad has also suggested floating the diamond miner as an alternative strategy. This, however, would likely be done at a “low valuation” and would not unlock value, say LaFemina and Realini. “But it would simplify Anglo.”

Simpler is better, but the timing of a De Beers exit relative to the diamond market cycle is critical. “It is possible that Anglo waits for the markets to improve before exiting,” say the Jefferies analysts.

Another potential sticking point in selling De Beers is getting the Botswana government, a 15% shareholder, over the line. An “in principle” marketing agreement with Botswana was signed in July after more than two years of sometimes fraught negotiations. De Beers told National Jeweller magazine at the time that the marketing agreement would be most likely finalised in late 2023 or early 2024. “Yet here we are, and now they have the Anglo-in-play and De Beers divestiture to deal with,” says Zimnisky.

While the agreement hands Botswana improved economic power, it’s also unknown if President Mokgweetsi Masisi will be satisfied, given Anglo’s restructuring plans. He has already sought political capital while negotiating the marketing agreement with De Beers, telling reporters Botswana would not be pushed around. Wanblad argues it can’t be in Botswana’s interests to subvert the agreement.

Demerging Amplats

There was little to celebrate when the world’s platinum industry gathered in London last month. The past two years have been chastening ones for the once high-flying sector, during which time the platinum group metal (PGM) basket price fell 60%. Despite forecast deficits for some of the metals, prices had stirred a mere 9% this year. One talking point, however, was the impact of a demerged Amplats — a carved-in-stone event, whatever may eventually happen to the parent company.

“This would not be the first demerger we have done, certainly not in South Africa,” says Wanblad. He cites previous streamlining of the South African business empire, including the unbundling of its shares in paper manufacturer Mondi in 2007. “They have been extremely value-accretive to shareholders when they have been done in the right way and by the people who understood how to do these things in that country and in that jurisdiction.”

It took Anglo just over a year to demerge its South African coal assets into Thungela Resources, from April 2020 when the rumours about the transaction first emerged, to its July 2021 JSE debut, just as Europe was plunged into an energy security crisis after Russia’s invasion of Ukraine. The listing proved a major success. Shares in Thungela doubled in the first three months of listing to about R60 a share — the level of its final dividend a year later, by which time its shares were more than 700% higher.

But the PGM market has no such impetus, despite estimates that most of the physical selling pressure on metal prices is over. Prices will trade “broadly sideways” in 2024 as physical deficits “will likely have a great impact on prices this year”, says Metals Focus, a UK consultancy. But a standalone Amplats, stripped of its parent balance sheet, is expected to think differently about its portfolio, potentially furthering the current bout of production cuts. “Essentially, this would enable Amplats to invest more in the business and send less cash up to the centre,” says Arnold van Graan, an analyst for Nedbank Securities.

Amplats CEO Craig Miller says the need for capital discipline “doesn’t change as a standalone company. We will need to be able to stand on our own two feet in terms of capital deployment.

“We need to operate efficiently but we also need to invest capital diligently,” he says in an interview. “But it will also create opportunity for us to critically evaluate some of the projects we have, and how they compete for capital internally in business instead of across the group in Anglo.”

One suggestion is that the unbundling of Amplats might create scope for industry collaboration. “A fit-for-purpose, streamlined operation would be positive for the industry,” says Phoevos Pouroulis, CEO of Tharisa, a Joburg-listed PGM company. While he doesn’t believe Tharisa would bid for any of Amplats’s assets, such as its Amandelbult mining complex, part of which has struggled to be profitable, the prospect of broader collaboration has been heightened. “Certain assets need a rethink and restructuring,” he says.

Amplats might be cautious of handing away optionality, however. Miller says that while there “has to be a role for us to collaborate”, the group has strong assets that will be supported by R10bn worth of cost-cutting unveiled in December. Says Miller: “We will grow when the time is right and extract most value for shareholders.”

The biggest challenge for Amplats, at least in the short term, is the implication of a flowback of shares from largely index investors, estimated in a recent JPMorgan Cazenove report to be $4.3bn, including the possibility of Kumba being unbundled as per BHP’s proposal. A secondary listing of Amplats shares in London is designed to achieve it. Miller says it’s still an option that “has to be considered” collaboratively with Anglo, and in the interests of all shareholders “including our minorities”. How a UK listing is viewed might also have to be tested with the South African government.

“I don’t believe the UK listing will be a problem for government,” says Van Graan, who points to offshore listings for Pan African Resources, which is even domiciled in London. But he acknowledges there will always be a level of overhang. “Anglo would like to do the demerger sooner rather than later but now is not the right time,” he says.

The declining South African connection

Not since Anglo American upped sticks and moved to London in 1999 has a company announcement struck as visceral a nerve in South Africa’s mining sector as CEO Duncan Wanblad’s May 14 statement on restructuring.

It’s hard to overstate Anglo’s relevance in South Africa. Between the 1980s and 1990s the group controlled companies in industry, property and media, as well as mining. Its presence on the JSE through investments, direct and indirect, ranged between 45% and 60% across those two decades, and it contributed 20% towards the national GDP. “We are South Africa Inc,” the LA Times quoted a prominent Anglo adviser as saying in 1992. “Our fate is tied up with South Africa’s.”

So it has proved. Despite the South African assets regularly contributing to Anglo’s earnings before interest, tax, depreciation and amortisation (ebitda) — as much as 60% in the group’s 2022 financial year — they have loomed large at investor meetings. In recent years, as the country’s infrastructure deteriorated and corruption increased, the question of Anglo’s “South African” discount gained momentum. Successive CEOs at Anglo have argued for South Africa, but the perception has presented a different picture.

Mindful of how a future South African government could influence its restructuring plans, Anglo has wisely steered clear of an exit-South Africa narrative for its restructuring. But the pie charts don’t lie. If Wanblad’s restructuring succeeds as set out in May, Anglo will complete a decades-long transformation from a colossus producing limestone to antimony to a dinky two-metal firm in which only 23% of ebitda is derived from South Africa, assuming Anglo exits its manganese joint venture with South32.

It will be smaller, but more profitable, with less drag from diamonds and platinum group metals, and with an estimated $800m in annualised pretax cost savings — excluding the previously announced $1bn in annual operating cost reduction starting this year. Slowing down its $5bn Woodsmith minerals fertiliser project will cut net debt and give Anglo the firepower to accelerate copper expansions, estimated by RBC Capital Markets to add $2.5bn-$3bn in additional value, equal to about 160p-190p a share.

There are risks, however. One is that slowing Woodsmith will invite another impairment (Anglo wrote the project down for $1.8bn in 2022). It may also fuel questions about whether the project remains viable at all, according to JPMorgan Cazenove analysts. And while the restructuring provides a rerating pathway to well over £30 a share, Anglo will remain “an attractive take-out target”, says Deutsche Bank.

“Of course this is a massive deal; it’s huge,” says Wanblad of the impact of his plans on South Africa. Anglo, though globally diversified, is viewed as a national asset, synonymous with the Joburg skyline (a large part of which it once owned). Attached closely to resource patrimony, mining companies attract emotions like no other; witness the concern in Canada when Glencore sought the takeover last year of Teck Inc. Or the intense pressure BHP fell under from its Australian shareholders to retain the Melbourne headquarters amid the 2001 merger with Billiton.

Wanblad, an Anglo lifer, insists “Anglo survives” under his plan. “Its DNA will be completely implicit, and it can grow.” He may be thinking of the next 100 years, but the group’s future will be decided in a much shorter time frame.