How Anglo cut to the chase

Mark Cutifani, CEO of Anglo American, looks cheerful. Having just presented the mining giant's full-year results, with the first pre-tax profit in five years, he has reasons to smile.

Cutifani took the reins at Anglo in 2013, with a remit to improve efficiency and help the group, which celebrates its centenary this year, make up ground lost to rivals. But commodity prices fell off a cliff, bringing the industry to its knees.

In December 2015, with the share price collapsing, Cutifani announced he was going to end the company's involvement in a raft of commodities to focus on three areas where Anglo was strongest: diamonds, platinum and copper.

But 2016 confounded expectations. The prices of items such as coal and iron ore rallied on the back of economic stimulus in China. The mines Anglo had put up for sale suddenly became profitable, forcing Cutifani to admit last week that he would keep them after all.

"Today we're producing more product than we were three years ago. We're doing it with 40% less assets and 40% less people. That's why our costs are down 30%."

He recalls December 2015 as his lowest point. "Three months earlier we were forecasting $1-billion positive cash flow in 2016. Then commodity prices dropped about 17% in three months and we went to being in negative $1-billion cash flow."

Sentiment began to turn the following February: "We delivered more than 40% improvement in margin for the year, despite lower prices," says Cutifani.

Today the debt has been hacked back to $8.1-billion, with a target of $7-billion by the end of 2017. He wants a further $1-billion in cost savings and to "hold discipline" on capital. Shareholder returns must come first, he says. Anglo, which cancelled its dividend in 2015, plans to bring it back next year.

"Discipline" is a word Cutifani repeats. "The mining industry and discipline are not words that usually go together," he says, drily. The industry has been tarnished by giant, expensive white elephants commissioned in the boom years. Anglo sank billions into Minas Rio iron ore in Brazil, a project which is only just starting to make money.

Untangling Anglo's operations in South Africa is high on Cutifani's to-do list this year. Anglo wants to sell off its domestic thermal coal mines here, and seek a way of divesting its Kumba iron ore division. But the matter is complicated by ownership requirements, which seek to have 26% of a company owned by historically disadvantaged groups. The government is considering raising this threshold, causing a headache for Anglo.

"We are concerned that if they dial up ownership requirements, then shareholders who've bought in, in the belief that 26% was where it would stop, would see that as not being consistent with the promises they were given," Cutifani says.

Pay is a sensitive topic at Anglo, which has redrawn its remuneration policy after a wounding shareholder revolt over executive pay at the AGM last year.

"I understand why people look at those salaries and say: 'Gee, they're pretty high'," Cutifani says. But Anglo has to compete to hire people all over the world: "When I recruit a mining person, there aren't a lot of them in London, therefore I'm competing on a global basis."

Cutifani insists he will keep Anglo's costs low so that it can withstand any change in policy by China, which could tip commodity prices back the other way. With a turnaround largely under his belt, his focus is on what lies ahead.

"For guys in my role, we're paid to deliver and to continue to evolve and create a better company. The mining sector has over many years tried to take on things too big for their balance sheets. We certainly wouldn't do that. We've learnt a lot of lessons the hard way."

- ©The Daily Telegraph