Anglo American has announced full year results and the results of its strategic review. As expected, weaker commodity prices have led to underlying operating income (EBIT) roughly halving to $2.2bn. Commodity price-related asset impairment charges of $6bn contributed to a reported loss of over $5bn. The shares rose 1% in volatile early trade.
As previously announced, Anglo American will not pay dividends until it has achieved a stronger financial position. Again, building on previous announcements, Anglo has detailed a new strategic plan that will see it focus on its Diamond, Platinum and Copper divisions, where demand is more driven by consumer rather than industrial/infrastructure markets.
The group has closed or moth-balled uncompetitive properties and intends to dispose of assets outside of the core. Even within Platinum, Diamonds and Copper, the group is pruning to focus on the highest quality assets. Net debts reduced by $600m in the second half to $12.9bn. Anglo has access to cash and undrawn borrowing facilities of $14.8bn.
The major disposal asset is the iron ore division, including the Kumba mine and the Minas Rio project in South America. Kumba could be spun off, whilst Minas Rio requires three years of development work before full value can be realised.
Operating costs are expected to fall by $1.9bn in 2016, relative to 2015, an improvement of $800m since December's plans. Capital expenditure is further reduced to $3.0bn in 2016 and $2.5bn in 2017, compared to spending of $4.0bn last year. As the group progresses its disposal plans, further reductions in costs are expected; up to 60% of the group's 11,500 support staff will migrate with assets as they are disposed.
The combination of lower capex and operating cost reductions aims to achieve a cash flow positive position in 2016, including at Minas Rio. With targeted disposals of $3-4bn in the year, net debt is expect to fall to circa $10bn by year end with a further reduction to $6bn in the medium term, by which point Anglo hopes to have regained a "solid investment grade rating".
The actions that Anglo American proposes will see the number of properties within the group fall from 45 to 16. Anglo's sees a structural demand shift, away from bulk commodity intensive infrastructure development, to rising demand for base and precious metals in homes, vehicles, household appliances and luxury goods. The retained assets, De Beers, Anglo Plats and the Latin American copper mines are considered well positioned for this evolution in demand.
As and when dividends are eventually restored, Anglo American expects to adopt a payout ratio policy to ensure that cash is available to the business even at times when earnings are under pressure.
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