Analysts in the South African mining industry believe that new Anglo American CEO Mark Cutifani’s biggest challenge might be platinum mining company Anglo American Platinum (Amplats), based on the recent volatility of the sector, plagued by violent strikes and uncertainty.
The significantly overbudget Minas Rio iron-ore project, in Brazil, is a close second.
Cutifani replaced former Anglo American CEO Cynthia Carrol on April 3.
Mining Weekly reported in January that Liberium Capital analyst Ben Davis had said that the challenges arising from the “structurally defunct” Amplats and the continuing capital cost increases at the Minas Rio project had no easy solutions.
South Africa’s Public Investment Corporation said that Anglo American’s “main issues” centred on capital allocation, project management and operational challenges, which, taking Cutifani’s experience into consideration, could be dealt with.
Amplats posted its first loss last year, with the loss partly stemming from flat metal prices and cost increases of more than 15% a year and from illegal strikes rooted in a turf war between members of the Association of Mineworkers and Construction Union and the National Union of Mineworkers.
Amplats confirmed that, as a result of the illegal industrial action and the subsequent ramp-up period of its mines that started in November, total lost refined platinum equivalent production, including that from joint ventures and associates, amounted to 273 000 oz during the fourth quarter of 2012, of which 82 000 oz was lost during the ramp-up period, Mining Weekly reported in January.
Mining Weekly also reported that Amplats was set to embark on a restructuring programme after a year-long review of its operations had revealed several unsustain-able operations.
The group said it would reconfigure its Rustenburg operations into three mines – with processing operations – and sell off its Union mines “at the right time” to increase value under different ownership.
“The platinum business has attractive underlying fundamentals, but we are facing tough decisions in trying to restore profitability to our operations. We must evolve to align the business with our expectations of the platinum market’s long-term dynamics and address the structural changes that have eroded profitability over time,” said Amplats CEO Chris Griffith.
Amplats proposed to reduce production at its Rustenburg operations to between 320 000 oz and 350 000 oz across three operating mines, while placing its unsustainable, high-cost Khuseleka 1 and 2 shafts and the Khomanani 1 and 2 shafts on long-term care and maintenance.
Griffith said this would slash the com- pany’s production by about 400 000 oz/y, with a baseline production target of 2.1-million to 2.3-million ounces a year.
The group would also consider whether to shut down its Waterval upper group two concentrator and No 2 smelting furnace as it aligned its processing operations with the restructured operations.
Amplats also said it would halt mining activities at the Union North Declines, combine the Union North and South shafts into one operation and place the Mortimer Merensky concentrator on long-term care and maintenance as it prepared to sell the operations.
The company believes that new owners could derive greater value from the operations.
Another proposal included cutting back on expansion capital expenditure over the next ten years by about 25% to R100-billion and shifting investments to low-cost, high- margin projects.
The efficiency and cost-reduction initiatives were expected to deliver benefits equal to R3.8-billion, including savings of R390-million a year, by increasing the efficiency of the company’s overhead structure.
As a result of the proposed changes, up to 14 000 jobs might be affected, 13 000 of which would be in the Rustenburg area.
The company, however, added that it would attempt to create at least 14 000 new jobs through housing, infrastructure and small-business development initiatives in Rustenburg to offset the number of possible job losses caused by restructuring.
This announcement received a strong reaction from government and the unions. Amplats, the Department of Mineral Resources (DMR) and organised labour engaged in a tripartite meeting on January 28, where they resolved to postpone the con- tinuation of the Section 189 process under the Labour Relations Act to allow for a detailed consultation process to take place between the DMR, Amplats and organised labour.
Following this decision, Amplats stated in a media release last month that it had agreed with the DMR to extend the bilateral con- sultation process by a further 30 days to allow for sufficient time to conclude the process. Amplats also expected that the process would be concluded by the end of this month.
“We have made progress and have had constructive discussions with our stakeholders; however, the volume of information and data has necessitated the proposed extension. We will continue to engage constructively with all our stakeholders and will com- municate progress updates . . . when appropriate,” Griffith said in the media release.
Meanwhile, Cadiz Corporate Solutions mining and resource manager Peter Major points out that Amplats still has significant resources in the ground that should be recoverable.
“If managed correctly, Amplats could be Anglo American’s largest, most profitable asset,” he tells Mining Weekly, adding that, when Amplats runs optimally, it generates about one-third of Anglo American’s net asset value.
“I think Cutifani’s biggest challenge will be to get Amplats to make money,” Major says.
Some analysts are of the opinion that laying off workers could worsen the situation, as many of the overhead costs will remain the same, while fewer tons will be mined, he says.
“It is hard to believe that the current workforce cannot be used more productively. This situation requires out-of-the-box thinking, which Cutifani demonstrated during his time as CEO of gold mining company AngloGold Ashanti. Cutifani, together with Griffith, has to figure out a way to make Amplats profitable again,” Major adds.
Further, Anglo American’s Minas Rio iron-ore project, situated in the states of Minas Gerais and Rio de Janeiro, in Brazil, has been delayed several times, owing to a combination of regulatory and environmental factors. But despite these challenges, Anglo American is aiming to ship its first ore by the end of 2014.
The Minas Rio project review in February confirmed an $8.8-billion capital expenditure, a significant increase from the planned $5.8- billion, which included a $0.6-billion con- tingency and a $4.0-billion post-tax impairment.
Major states that Anglo American will now have to decide whether or not to spend a few more billions on the Minas Rio project, which is already significantly over budget.
Reuters reported in February that Carrol said the company could bring a partner into the Minas Rio project if it made economic sense.
“We have been talking about a partnership for some time. We really need to establish what that value is,” she told Reuters.
In February, Mining Weekly reported that Carrol believed the road ahead for the Minas Rio iron-ore project would be much smoother than in previous years.
She also noted during a conference call in February that Anglo American had cleared many bottlenecks in the last year.
“We have built up a lot of momentum on this project and we understand the regulatory framework, which has been changing. We also have huge support from government at all levels,” she stated.
Carroll added that the company’s Brazilian subsidiary had come a long way in securing the required licences and permits to deliver the Minas Rio project, with only 17 out of almost 300 documents outstanding.
She noted that her confidence in the project, the single largest mining project in Brazil and the largest foreign investment in the country, persisted, despite several injunctions imposed by the Brazilian authorities, which included the recalling of a licence to construct a transmission line.
Anglo American assured shareholders that these injunctions had all been lifted.
Carroll admitted that, although some challenges remained, these would be of a much lower risk than those faced in the past, as the company had the right systems in place to overcome them.
Major adds that, as Carrol had a good rapport with the Brazilian government, the project could probably be handed over to Cutifani seamlessly.
In a video interview released by Anglo American on April 3, Cutifani stated, on his first day as CEO, that he aims to start with the value proposition of being a diversified major as the first step in “peeling back the layers of the onion”.
He said that even though he had not been an engineer for many years, he was still logical in his approach to creating value for shareholders, stakeholders and employees, “which, in effect, is understanding how the business comes together, what it needs to do and how it needs to create value”.
“I will start by looking at the portfolio, the commodities we are in – do they make sense? Are they the right commodities for the future? The assets – are they competitive? Are they as good as they could be? Should we be doing things differently to realise value? The balance sheet – do we have the capacity to realise that value and are we flexible enough in the way we are operating?” Cutifani asked.
He also aims to focus on the systems and structures comprising the mining industry. He stated: “We are miles behind other sectors, which means that there is a lot of room for innovation.
“And then, finally, have we got the right people in the right roles, doing the right work?”
Cutifani stated that he was planning to put these pieces together within the next few months, generate major themes and understand what needed to be done to truly create value over the long term.
“This is the type of agenda I will follow. I will pin down the timing as I work through the process and see how big some of the tasks are. But within three or four months, you will start to get a sense of the key messages, the direction we are going and what we want to try to do as a team to deliver value to all of our stakeholders, in particular our shareholders,” he said in the video interview.
Major believes that Cutifani has the necessary skills and experience to be successful as CEO of Anglo American.
“Cutifani knows how to make big decisions that could go either way, with confidence, and this is what Anglo American needs,” he says, referring to Cutifani’s hedging decision at AngloGold Ashanti, which significantly transformed the company from the one he took over in 2007.
Major adds that it will also be beneficial that Cutifani is still perceived as something of an outsider.
“He is not perceived as being from the old Anglo American regime, which will count in his favour, as the South African government will not be able to pressure him so much by mentioning colonialism and apartheid,” says Major.
However, he is also regarded as a South African. He has been here for quite a while, has been patriotic and pro-South Africa, and is also head of the Chamber of Mines, which will all certainly count in his favour, Major concludes.