Announcing a loss of more than $3 billion for the first half of 2015, Anglo American said it would make moves to improve its cost structures to deal with declining commodities prices. Those changes include job reductions of more than 53,000 over the near term (6,000 corporate positions) and selling 27% of its assets. Most of those jobs will disappear as assets are sold. The company currently employs 151,000.
Anglo American’s share price had reached a 13-year low of $6 on Friday, July 24. Mark Cutifani, who assumed the role of CEO in 2013, explained that the transformation he set out for the company 18 months ago is progressing, despite considerable external challenges. He expects the operational turnaround to generate $1.2 billion of earnings upside over the next 18 months. “Structurally, we are focusing the portfolio around those assets that are of the scale and quality to generate most value,” he said. “We expect to generate proceeds of at least $3 billion from asset sales, including the $1.6 billion received from the sale of our 50% interest in Lafarge Tarmac. We are unrelenting in enforcing strict cost and capital discipline across Anglo American, building upon the unit cost reductions delivered to date.”
“Having defined our portfolio and significantly improved operational performance, now is the right time to accelerate the right sizing of the organization that supports the future business,” he added. “We are targeting a $500 million total cost savings, of which $300 million will be realized from our ongoing core business, through the reduction of 6,000 overhead and other indirect roles, a 46% decrease, including those that will transfer with the businesses we are divesting.”
If all goes according to plan, Anglo’s assets will drop from 55 to 40, reducing employment by 35%. The effect of declining commodity grades cannot be ignored.
“Our work to drive yet greater operational performance and productivity has continued, with a 14% decrease in copper equivalent unit costs (in U.S. dollar terms),” Cutifani said. “Cash costs were down $600 million, partially offsetting the impact of sharply weaker commodity prices.”
Looking to the balance of this year and into next, he expects the current period of volatile markets and economic uncertainty, fueled in part by pockets of geopolitical tension, to continue.
“Overall performance for the half year was solid and largely in line with our expectations, reflecting a number of planned or otherwise expected impacts, such as the rebuild of the nickel furnaces in Brazil and the water shortage in our copper business in Chile,” Cutifani said. “Of particular note was the performance of the platinum business following last year’s strike, with the Mogalakwena open pit delivering strong volume, productivity and unit cost improvements, while Rustenburg also showed greater productivity with its now optimized mine plan. Cost control is a major focus, particularly given our footprint in certain high inflation jurisdictions, and we recorded strong unit cost decreases in coal and with De Beers.
“In iron ore, Kumba’s production volume was in line with 2014 while costs improved by 4%. The Kolomela mine continued to perform strongly, although we have adjusted the mine plan at Sishen to reflect the current market environment and have revised Kumba’s volume guidance downwards for 2015 and 2016. Taking into account the volatility in the iron ore market, and to protect against the downside, we are positioning Kumba for a $45 per [metric ton] benchmark iron ore price by optimizing the Sishen pit design and restructuring overheads and support services while preserving the life of the mine.”
The company is taking the same approach to costs at Minas-Rio in Brazil. The ramp-up of the operation is progressing, Cutifani explained. “We are now in a position to reduce targeted FoB unit costs by $5/mt to $28/mt-30/mt once full run-rate is reached in Q2 2016. Given the significant further weakness in iron ore prices, we reviewed our near-and longer-term price assumptions at the mid-year, resulting in a $2.9 billion post-tax write down in the carrying value of Minas-Rio.
Anglo’s coal businesses in Australia and South Africa delivered a 3% increase in earnings due to a combination of productivity improvements, including cost reductions of 13% in Australia and 3% in South Africa in local currency terms, and volume discipline in Canada.”
“De Beers saw a continuation of the market weakness of late 2014 during the first six months of 2015,” Cutifani said, “In response to these market conditions, the business has revised production guidance for 2015 to 29 to 31 million carats, while continuing to focus on its operational metrics. De Beers also reduced unit costs by 10% in dollar terms.
“We are making fundamental changes to transform Anglo American — operationally, structurally and culturally — into a fit-for-purpose organization with an enhanced resource endowment,” Cutifani said. “Combined with our diversified strategy across the early, mid and late cycle demand segments, we are ensuring that the business is sustainable through the commodity price cycles, as well as shorter-term price shocks, and offers investors attractive and differentiated exposure to the mining industry.”