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A strong sign for the sector: Anglo American is shrinking by 60%

It appears like an urgency situation after the Anglo announcement of a US$3 billion loss in the first half of the year, which came along with the sale of two mines in northern Chile and the stake in Lafarge Tarmac.

Anglo anticipates its restructuring will reduce capital expenditures by US$1 billion in 2015 and 2016, and about $2.5 billion in 2017.  Six divisions will be consolidated to three: “Bulk commodities” division (coal and iron), "Industrial” division (Platinum and Base metals) and the diamonds business with De Beers.

As a result, Anglo will shrink its portfolio by 60% and would generate about US$4 billion by selling its low-priority assets, including its phosphate and niobium businesses. For Niobium business, we question ourselves about the long term view of Anglo. Ferro-niobium imports prices in China are relatively stable; however the supremacy of CBMM (Cia. Brasileira de Metalurgia & Mineracao) in that market could interfere the new ambitions of Anglo.

Finally Anglo would face socio and managerial risks. The human resources reduction will undoubtedly impact the Anglo image and the mining sector in South Africa.

Mark Cutifany explains the willingness to keep Anglo strong to adapt to deteriorating market conditions. The company’s net debt guidance at the end of 2015 was US$13.5 billion.

The magnitude of the decision could remind us what happened in 1998 with the spinoff of Anglogold from consolidation of the gold mining interests of Anglo American. In 1999, Anglo acquired 100M shares in Anglogold (50.4%) and increased interest in Anglo American Platinum to 50.3%. It also acquired Tarmac for $1.9billion and makes significant disposals of non-core assets (about $1billion). But at that time the moves were mainly focused on growth opportunities taken and debt reduction. But today the views are a drastic contraction of the business for a return to a cost control.

The deteriorated market conditions of these last four years has also impacted on commodities-diversified-mining companies such as Anglo American. This statement question us about the size limit of these big mining companies, which at the end are tributary of metal prices. Should we see the limits of the horizontal diversification in the sector? Or should we consider that the risk management has to evolve? Mark Cutifany himself recognized in a conference call(http://www.angloamerican.com/~/media/Files/A/Anglo-American-PLC-V2/presentations/2015pres/2015-interim-results-conference-call-transcript.pdf ) " Last year … The one thing that struck us at that time was the pressure on commodity prices. And we took the view that it was likely that commodity prices were going to be pressed further. Quite frankly we didn’t expect to see the route to be so dramatic…"

The wave of restructuring adopted by the biggest mining companies (BHP, Barrick, GoldFields…) aims to simplify their structures, to reduce debts, and a fortiori to reduce risks; but also to attract new groups of investors.

Such restructuring are not always a win-win situation for shareholders and companies. In 2014, Anglogold had to make a U-turn after its proposal to spin off its international assets into a new UK-listed company. The proposal was highly criticized by shareholders (including John Paulson).

All these events have shown the whole world the financial fragility of the Majors mining companies and in some way discredit the effectiveness of managers. Moreover, Anglo has decided to cut dividends as Freeport, Glencore, Cliffs Natural Resources, Vale and Teck Resources. This sounds like signs of an ultimate capital preservation in a critical stage of the commodity cycle.

However the last two years have also shown that the sector understands that cost control also requires risk control and master the application of modern management methods in how to anticipate risks.

This development is major for the sector and will participate undoubtedly a more sustainable management of resources. It is not impossible that some majors could verticalize their diversification efforts towards metallurgical processes and recycling.

Regarding the explorers, the skimming of speculative assets and opportunistic managers tends to be completed. The sector clarifies itself and promises the emergence of new values.