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Execution risk to Anglo’s restructure plan substantial – WoodMac

15th May 2024

By: Darren Parker

Creamer Media Contributing Editor Online

     

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Mining major Anglo American has accelerated its portfolio planning in the wake of rejecting fellow mining major BHP’s second bid proposal of $42.2-billion (£34-billion), or £27.70 a share, in a move that new research by consulting firm Wood Mackenzie (WoodMac) shows will take it from being the most diversified to the most concentrated major miner in the world.

The report titled ‘Anglo American to rationalise all but copper and iron-ore production’ states that the company’s decision to take a strategic focus on the highest return commodities of copper and iron-ore mirrors similar moves by BHP and diversified miner Rio Tinto in looking to future-proof the business.  

According to CreditSights, a Fitch Solutions company, Anglo’s management intends to divest or spin off its coking coal, diamond and platinum group metal (PGM) businesses and to cease operations in its nickel division.

After this strategic portfolio reduction, Anglo will focus primarily on its copper and iron-ore assets in South America and South Africa. The company's operating cost and capital spending budgets will also be reduced.

Despite the downsizing, Anglo will retain its Woodsmith fertiliser project in the UK, although the specifics of the project’s future are uncertain, given the significant reductions in capital expenditure (capex), including a cut to $200-million in 2025 and zero in 2026. The goal is to achieve a robust balance sheet with a target net leverage of 1.5x at the bottom of the cycle.

“We believe a major reshuffling of Anglo's portfolio was inevitable. But opting to divest or demerge whole segments of its portfolio does align with the company’s new strategic priorities,” says WoodMac metals and mining corporate research director James Whiteside.

The WoodMac report notes that Anglo’s iron-ore and copper segments have been outsized cash generators, delivering 58% of the company’s underlying earnings before interest, taxes, depreciation and amortisation (Ebitda) over the last five years.

“Looking forward, even without fresh investment, copper will overtake iron-ore in cash generation and this would allow Anglo to use the proceeds to focus on brownfield growth at these core assets,” Whiteside says.   

The WoodMac research indicates that Anglo could seek to realise up to $25-billion in asset value through divestment or demerger, gross of exit costs, of its other commodities assets such as platinum, steelmaking coal and nickel over the next few years. This represents a potential uplift of $9.1-billion over WoodMac's base net asset value (NAV).

However, the report also warns that executing the plan will not be easy and added that, by showing a willingness to deconstruct the company, Anglo has given credibility to BHP’s proposed takeover, potentially making it more palatable to regulators in key markets such as South Africa.    

“Anglo's strategic plan is undoubtedly bold and shedding the equivalent of 39% of 2024 earnings would be transformational. However, execution risk is substantial and borne entirely by Anglo shareholders so if an increased offer from BHP did materialise, it could be seen as a more straightforward option for shareholders,” Whiteside says.

CreditSights says the restructuring plans proposed by Anglo appear to be a viable alternative to being acquired by BHP, at first glance.

“Nevertheless, the strategy is fraught with execution risks and potential regulatory hurdles. Key questions include whether Anglo can sell its assets at fair valuations and whether South Africa will permit the spin-off of the PGM business.

“The future of the Woodsmith project is also in question with the planned capex reduction,” CreditSights says.

Based on a sum-of-parts valuation analysis put forward by CreditSights, the met coal divestment could generate about $4.6-billion, assuming a 3.5x Ebitda multiple.

Meanwhile, post-restructuring net leverage could reach as high as 1.5x if Anglo opts to allocate all proceeds from the asset sale to shareholder rewards, potentially leading to a one-notch downgrade to BBB-.

Conversely, if the proceeds are retained, CreditSights thinks pro forma net leverage could be about 0.9x, allowing the company to maintain its mid-BBB credit rating.

The firm says Anglo is likely to be cautious with any asset sale proceeds, given its desire to maintain a strong balance sheet, which suggests it will likely keep its mid-BBB rating.

“While a smaller and more streamlined Anglo is not necessarily a bad outcome, bondholders should still be rooting for an acquisition by A-rated BHP,” CreditSights says.

The firm adds that, if Anglo remains a standalone entity, it is likely that its credit spreads will widen and revert to trading wider relative to diversified miner Glencore.

“Currently, Anglo's 2034 bonds are trading about ten basis points tighter than Glencore's 2034 bonds, buoyed by the takeover bid from BHP. Before the bid from the A-rated large-cap miner, Anglo's bonds were trading about 10 to 15 basis points wider than those of Glencore,” CreditSights suggests.

Ultimately, CreditSights says it does not believe Anglo's restructuring proposal is better than BHP's proposal.

“In these desperate times, Anglo hastily assembled a breakup plan to fend off BHP's merger and acquisition (M&A) bid, but management has provided scant details about the proposal. Anglo's restructuring proposal seems more radical than BHP's, with intentions to divest four assets compared to BHP's plan to shed just two.

“Both proposals carry significant execution and regulatory risks. However, if Anglo remains independent, its shareholders will shoulder these risks. In contrast, if sold to BHP, a larger and more robust company would absorb the risks,” the firm says.

CreditSights notes that the market has shown a lukewarm response to Anglo’s restructuring proposal.

“If we were Anglo shareholders, we would advocate for a higher bid from BHP and encourage competition by inviting other bidders to participate, versus settling for management's proposal. As such, we still believe that a BHP M&A deal is the more likely outcome,” the firm says.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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