At his zenith as CEO of Anglo American, in 2019, Mark Cutifani described the group in new terms. It was a ‘materials solutions provider’, he said. The notion of Anglo as a miner didn’t account for its customer-facing practices, or its industrialisation. Nor, he argued, its unique portfolio of diamonds, platinum, and a soon-to-be unveiled foray into specialised fertiliser minerals.
Cutifani’s vision for Anglo is now, only five years on, anachronistic to investors. The (dare one say it) miner’s current CEO, Duncan Wanblad, is in a foot race to make the group leaner. By streamlining production so it only produces copper and iron ore, Wanblad is bowing to investors who are ‘jam today, not tomorrow’ in preference. If he fails, Anglo will be eaten by a rival, most probably BHP, but possibly other predators lurking on the sidelines.
Driven by the potential of copper demand, investors – many of them holding Anglo shares through passive funds – don’t want the distractions of diversity that were the hallmark of Cutifani’s mining house and those of CEOs for decades before him. This preference is reflected in valuations investors give to pure-play copper companies that trade at a premium.
“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 miners,” says Matt Greene, an analyst for Goldman Sachs. The mining sector is also seeing 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 adds.
Anglo is not alone in seeking simplification; if anything it is actually quite late to the party. Each of its rivals, including BHP, which sought a takeover of Anglo in May, have narrowed their focus and simplified their structure. Wanblad’s plan is to unbundle the firm’s 79.2% stake in Amplats, its platinum group metals business, and sell De Beers, sell or mothball its nickel, sell manganese in South Africa, and metallurgical coal assets in Australia, the last and easiest of its tasks.
While fund managers don’t think the diversified mining company is entirely obsolete, a different approach to capital allocation is de rigueur. If there is any cardinal sin at the heart of big mining, it is cross-subsidisation of loss-making or developing businesses with cash from successful stablemates. “The theory is that ‘we always have positive cash and can invest it because we are diversified’,” George Cheveley, a fund manager for asset management company Ninety One said at the London Indaba in June. “But you can also do that by being very low-cost,” he added.
Active fund managers also feel they can do the reinvesting themselves rather than rely on a diversified miner to do it for them. “But I don’t think they are obsolete,” says Cheveley.
For instance, diversified miners have scale to tackle large, capital-intensive projects, Cheveley says. Miners can also diversify in ways that are currently unavailable to some fund managers who are tied to specific investment mandates. “Geopolitical diversification is an aspect that I personally seek,” says Tal Lomnitzer, senior investment manager at Janus Henderson Investors in London. “Firms that diversify political risk are more attractive than a single commodity company,” he says. He also backs companies with diversity in income stream through so-called intermediate or downstream production.
But is balance sheet heft and having institutionally bred project expertise enough for new investors? Most are saying no partly because the task of project building, always onerous, is being transformed by new factors. Greenfields projects are more complex today because the mineral deposits are lower in yield, and therefore technically harder to mine for profit. Today’s projects also take longer to permit owing to a tightening in the regulatory framework, itself a consequence of changing ideas of mineral custodianship. Water, community contentment, and fauna are political hot potatoes, especially in developing economies, but not only.
A new copper mine takes more than 20 years to build from discovery, as demonstrated by Anglo American’s Quellaveco mine in Peru (which took 30 years). Another mine, BHP/Rio Tinto’s Resolution, was discovered in 1995 and spent nearly a decade on its environmental impact permit process. The greater the time factor, the greater the capital intensity. A study of seven copper projects in Latin America by Goldman Sachs found that the average capital intensity of a project increased 50% from pre-feasibility study stage to production.
Faced with these challenges, investors think mining companies are increasingly embracing joint ventures, seeking to develop brownfield projects (or extensions of existing production), and even preferring merger and acquisitions, which were once more expensive than building from scratch, but now aren’t.
The percentage of completed mining deals involving the world’s largest 40 companies that were focused on “critical minerals”, including copper, rose to 40% in 2023 from 22% in 2019, according to a report by PwC in June. This underlines a “seismic shift driving M&A activity”, says Andries Rossouw, Africa Energy, Utilities and Resources leader for PwC. “Copper and lithium dominated such deals, accounting for over 70% of them by volume, up marginally from 2022,” he says.
The mining industry is really light years behind the oil and gas industry – Jim Rutherford, Centamin
The largest mining project in the world today is Simandou, an iron ore deposit in Guinea. Such is its scale, the $20bn project has been divided into concessions run by consortia, including Rio Tinto in one half of the deposit, and a large Chinese consortium on the other. Anglo sold 40% of its Quellaveco project to Mitsubishi. Despite evidence of them, joint ventures of this ilk are all too rare, however.
Jim Rutherford, a former non-executive director of Anglo who served on the group’s board when Cutifani was CEO, says the mining sector has for years failed to establish development partnerships despite having the rival oil and gas sector prove their worth. “The mining industry is really light years behind the oil and gas industry,” he says.
But there are signs of change. Alliance-seeking beyond traditional sector boundaries is now in evidence. Miners are looking for different sources of capital or they are integrating new skills in specialised areas of technology and sustainability, says PwC, an auditing firm.
In some cases, this has led to some unlikely partnerships. In an effort to diversify from oil and gas in favour of local minerals, Saudi Arabian company Ma’aden formed a joint venture with the country’s public investment fund. The outcome is Manara Minerals, a company that’s in talks to buy a stake in Pakistan’s Reko Diq copper-gold mine where Barrick Gold is anchor investor and developer. In another example, Rio Tinto teamed up with Sumitomo and the Australian Renewable Energy Agency to investigate green hydrogen in power-intensive aluminium smelting.
Sovereign fund balance sheets are one solution to project financing; so are joint ventures with downstream users, semi-manufacturers, commodity trading groups, and other mining companies. But Rutherford says mergers between the likes of Anglo and BHP are perhaps the best solution to founding tomorrow’s megamines. Anglo’s $5.4bn Quellaveco copper project was “planned to death” after the group had previously “torpedoed” its balance sheet building the Minas-Rio iron ore project in Brazil, he said. “This industry has a problem of scale. That’s where I differ on the combination of Anglo with BHP,” he says in response to critics of the deal.
Wanblad’s foot race
I didn’t see that having two significant operators merging was effectively leading to additional tons of copper – Adam Matthews, Church of England Pensions Board
One vocal critic of BHP’s bid for Anglo was Adam Matthews, chief responsible investment officer for the Church of England Pensions Board. Speaking at the London Indaba, Matthews remade the case for Anglo’s survival. “I didn’t see that having two significant operators merging, and all the time and money in managing that process, was effectively leading to additional tons of copper,” he said.
More importantly for him, the takeover of Anglo put certain social investment at risk in emerging economies, especially in Southern Africa. “Anglo is a significant operator in Africa,” he said. Its merger with BHP “would have diminished the role it plays in a significant mining environment that needs good practitioners of a certain size in that society”.
Regardless of its standing in emerging market economies, the future of Anglo is expected to remain at risk for some time to come, even if it is able to restructure successfully. “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 Bank of America analysts in a recent report.
Wanblad’s restructuring, which he has pledged to complete in two years or less, will be hard to execute. In the view of Goldman Sachs’ Greene, it could see Anglo’s capital returns reduced in the interim as it keeps non-core business well capitalised as part of the sale process. “We see high execution risks that balance out the risk-reward profile,” says Morgan Stanley, an investment bank.
While the BHP proposal had its structural challenges, we struggle to see how Anglo’s new strategy can deliver value comparable to the final BHP bid – Richard Hatch, Berenberg Bank
“In our view, while the BHP proposal had its structural challenges, solutions were possible, we think, and we struggle to see how Anglo’s new strategy can deliver value comparable to the final BHP bid,” says Richard Hatch, an analyst for Berenberg Bank. Unbundling Amplats will take 18 months at least, he says. Sellling De Beers is yet more fraught.
The diamond market is at an ebb amid a slow growing Chinese economy. Anglo’s book value of about R7.5bn on De Beers is at odds with independent analysis. Investment bank Jefferies and Berenberg think it’s worth R3bn. It’s possible Anglo might impair the diamond producer as it prepares to sell the asset. There’s another view that Anglo will settle for a listing of De Beers because it will be too difficult to find a single buyer for the luxury brand and the mining assets.
In its structural and value contortions, Anglo best characterises the changing shape of mining investment. While supply of critical minerals, especially copper, is driving change, it’s also worth bearing Rutherford’s view in mind that investors haven’t forgotten the capital abuses of the previous commodity cycle. This is the so-called supercycle of 2008 to 2015 driven by China’s double-digit GDP growth.
The combined capital expenditure of the six largest diversified miners in those years was $410bn, more than half of all capital deployed in the sector, according to Goldman Sachs data. A further $110bn was spent on dealmaking, mostly buying assets or diversifying into new commodities. This was followed by $60bn in impairments after 2015 – a value loss that drove generalist funds out of the market, some permanently, and made specialist mining funds sceptical of mining house ambitions.
Capex over the past eight years for the big six diversifieds has fallen to about $190bn – 55% lower than the total spent over 2008-2015. Some $177bn has been returned by miners and a further $39bn in share buybacks.
In this context, Wanblad’s restructuring, if successfully completed on time and “for value”, is only part of the equation. High performance from the assets Anglo intends to keep, its copper and iron ore, will be critical, even as management attention is sapped by the multiple, big-name asset sales and unbundling. Failing to supply investors with the short-term returns they require will be the ultimate test for Wanblad.