(Evaluation Of Market, Size, Turnover, Industry Classification, Market Share, Location Of Markets, Sourcing Of Materials)
Anglo American plc engages in the mining of diamonds, base metals, platinum, coal, ferrous metals, and industrial minerals in various parts of the world including Europe, Africa, North and South America, Australia, and Asia. Anglo mines and processes platinum group metals such as palladium, platinum, rhodium, ruthenium, iridium, and osmium in South Africa. It is also engaged in refining of these metals. Currently, Anglo holds interest in six copper operations in Chile; the Loma de Niquel nickel mine in Venezuela; the Codemin nickel and Catalao niobium mines in Brazil, the Namakwa mineral sands mine and plants in South Africa; the Lisheen, Black Mountain, and Skorpion zinc mines, and a controlling interest in Copebras that produce phosphate fertilizer and phosphoric acid. It also has a 99.4% interest in the MMX Minas-Rio project based in Brazil, as well as other interests comprising manganese ore and alloy operations, and carbon steel products. apart from this, Anglo American also produces metallurgical and thermal coals, gold, as well as crushed rock, sand and gravel, concrete and mortar, lime, cement, asphalt, and concrete products. [Anglo Americana, 2009]
Strategic Review Of Objectives
In October 2005, Anglo American announced some major strategic goals and restructuring initiatives. Presented below are the details of the strategies adopted by the company since 2005:
Focus on core mining business - Anglo American decided to focus essentially on its platinum, diamonds, coal, base metals and iron ore business as well as to evaluate other related opportunities in the mining sector. The diagram below shows contribution generated by each of these business divisions in FY 2008.
(Anglo Americanb, 2009)
Reduce AngloGold Ashanti shareholding: Anglo took this decision based upon various valuation metrics for gold shares and diversified miners. In terms of AngloGold Ashanti, Anglo American sold US$1bn worth of stock in April 2006, taking its shareholding down from 51% to 41.8% and allowing the reclassification of the investment as an associate rather than a subsidiary. This was followed up in October 2007 with the sale of a further US$2.9bn of equity, taking Anglo American's shareholding down to 17.3%. The company currently has a 16.6% position. Subject to market conditions, Anglo might sold its remaining shareholding as soon as possible. (Reuters, 2010)
Decision to review paper & packaging (Mondi paper & packaging): Given the different characteristics of this industry and mining, Anglo decided to review its investment in the Mondi paper and packaging business. After completing the review of its paper and packaging subsidiary Mondi, Anglo American decided that it would spin Mondi out to its own shareholders in a Dual Listed Company Structure, with Mondi plc being listed in London and Mondi Ltd in Johannesburg. The de-merger took place at the end of July 2007. Anglo American now has no exposure to paper and packaging. Anglo American allocated US$2bn of debt to Mondi in the unbundling.
Performance improvement at Tarmac - in 2005, Anglo took a decision to improve its returns at Tarmac by refining the portfolio, including divesting or turning around underperforming parts of the portfolio.
Initially, Anglo American intended to retain the bulk of Tarmac's business, citing the synergies between mining and the extractive part of Tarmac's business. Initial plans called for turning around, restructuring or divesting underperforming parts of the industrial minerals portfolio. However, following the appointment of Cynthia Carroll as Chief Executive, Anglo American announced in May 2007 that an evaluation of Tarmac's fit with Anglo American was under way. In August 2007, Anglo American confirmed that it had decided to sell Tarmac. However, with its 2007 results (released in February 2008), the company confirmed that it had ‘decided not to launch the marketing phase of the sale process until current credit market conditions improve'.
Sale of Highveld Steel - Anglo American announced its decision to sell Highveld Steel in 2005. In July 2006, Anglo American, Russian steel group Evraz and Credit Suisse announced that Evraz and Credit Suisse had each agreed to acquire a 24.9% position in Highveld, with Evraz holding the right to acquire the 29.2% balance of Anglo's original 79% shareholding. Evraz acquired that stake in May 2007, and Anglo American generated total proceeds of US$678m from the sale of its Highveld stake. (ING, 2008)
Unlocking value in Tongaat Hulett - Anglo American encouraged the board of Tongaat Hulett to examine ways to unlock greater value. Prior to the restructuring, Anglo American held a 50.3% interest in the Tongaat Hulett Group. In February 2006, Tongaat Hulett announced plans to unbundle its 50% interest in Hulamin. Tongaat would remain listed and would hold the group's sugar, starch and agri-processing business, while Hulamin would obtain a listing and retain the group's rolled, extruded, semi-fabricated and finished aluminum products business. Following the introduction of black empowerment investors (25% in Tongaat Hulett and 15% in Hulamin), Anglo American has reduced its interests to 37.2% of Tongaat Hulett and 38.4% of Hulamin. (ING, 2008)
Exxaro was created in 2006 as a black empowerment transformation of Kumba Resources, in which Anglo American held a 64.9% stake. The iron ore assets were unbundled into Kumba Iron Ore, and Kumba Resources was re-listed as Exxaro, holding the non-iron ore assets of Kumba Resources, a shareholding in Sishen Iron Ore (the key asset of Kumba Iron Ore) and the coal assets of empowerment group Eyesizwe. After the transaction, Anglo American retained a 64.9% stake in Kumba Iron Ore (which in turn held 74% of Sishen Iron Ore) and 19% of Exxaro. In April and also September 2007, Anglo sold down two tranches of 19m shares. Anglo currently holds 10% of Exxaro. We expect this position to be sold in due course, probably in 2008. (Anglo Americanb, 2009)
Presented below is the side by side analysis of Anglo American with other metals and mining companies in the world:
(Google Finance, 2010)
Growth Strategy Through Acquisitions
Since moving its primary listing to London in 1999, Anglo American has made a number of acquisitions, but few recently. More significantly, until Cynthia Carroll took over as Chief Executive in March 2007, the company had made no acquisitions of consequence in this commodity cycle. Since her appointment, US$1.15bn has been spent on gaining a 49% stake in MMX Minas-Rio (Brazilian iron ore), US$403m on acquiring the right to develop the Michiquillay copper deposit in Peru, US$1,425m will be paid on a staged basis for 50% of the Pebble copper-gold project in Alaska and US$620m on a 70% stake in the Foxleigh coking coal JV (Queensland). The company is in the process of completing the acquisition of the remaining stake in Minas-Rio from MMX and that company's Amapá iron ore mine interest for US$5.5bn. The total acquisition expenditure of around US$9.1bn is dwarfed, however, by the corporate M&A undertaken by Xstrata (US$28.6bn in completed deals since listing in London), Rio Tinto (which recently paid US$38.1bn for Alcan) and BHP Billiton (US$7.3bn paid for WMC, and the potential share offer for Rio Tinto, current market capitalization US$139bn). However, it seems likely that Anglo American will participate in the final throes of mining sector consolidation. In the past, there have been various rumors of a business combination between Anglo American and Xstrata (eg, Bloomberg, 7 December 2007).
Overall 5 year review of the international operations of the company. To include geographical location of markets and sourcing of materials, extent of globalization and diversification, currency usage. Please benchmark your findings with other companies within the industry
Anglo American is a global mining company with a geographically diversified revenue base. Over a period of time the company has developed diverse revenue streams and is not overly dependent on any one market.
Sourcing Of Raw Materials
Anglo American owns and operates some of the finest raw material resources in the world, which helps its continuous supply of products. It owns the world's richest reserve of PGMs (platinum, palladium, rhodium, ruthenium, iridium and osmium metals) known as the Bushveld Complex, which contains PGM-bearing Merensky, UG2 and Platreef ores. In base metals, the company has six copper operations comprising the wholly owned Los Bronces, El Soldado, Mantos Blancos and Mantoverde mines, the Chagres smelter and a 44% interest in the Collahuasi mine. South American operations include the Loma de Níquel nickel mine in Venezuela, and the Codemin nickel and Catalao niobium mines in Brazil. In southern Africa, Black Mountain and Skorpion mines produce zinc and associated by-products such as lead, copper and silver. The company's European operations include the Lisheen zinc and lead mine in Ireland. In the ferrous metal resources, the company has a 63% shareholding in Kumba. In the coal segment, the company owns and operates eight mines and has a 50% interest in Mafube mine in South Africa. In South America, the company has a 33% shareholding in Cerrejon Coal, a 25% interest in Carbones del Guasare (CDG), which owns and operates the Paso Diablo mine in northern Venezuela, 74% interest in Peace River Coal Canada and other coal interests in Australia. Anglo American's diamond interests are represented by its 45% shareholding in De Beers, which operates mines across Botswana, Canada, Namibia and South Africa. Thus, because of having such a vast company owned and shared resources, Anglo American secures its position as a continuous supplier of its products. (Anglo Americanb, 2009)
Extent Of Geographical Operations:
In FY2008, the company's largest geographical segment, Europe, accounted for 37.9% of the total revenues; while South Africa, South America, North America, and Africa (other than South Africa) accounted for 11.4%, 11.1%, 5.6%, and 0.4% of the total revenues, respectively. For the same period, Australia and Asia contributed 33.6% of the total revenues of the company.
(Anglo Americanb, 2009)
Geographically diversified revenue base protects the company from fall in demand in any one country and reduces its business risk.
International Operations Pre And Post Restructuring:
Prior to the introduction of restructuring program at Anglo American in 2004, South Africa contributed to about 33% of the company's operating profit. the company had lot of exposure to various currencies including US dollars, british pounds and Africa's ZAR. post restructuring, in 2007, only 2% of operating earnings were derived from Europe and less than a percent from Australia. thus, the company has been successful in restraining its currency exposure to Africa and South Africa and South America.
Pre Restructuring (Operating Profits - 2004)
Post restructuring (Operating Profits - 2007)
(Source: Anglo American, Annual Report 2004 and 2007)
Critical appraisal of the risk profile of the company, especially its foreign exchange rate risk, country/political risk, financial risk and market risk. Identify the firm's strategy towards these risks. Relate theory with practice.
According to PESTEL model, any company operating in an economy and various geographies is affected by the political, legal, and social and regularity environment surrounding those regions.
Political, Legal, And Regulatory Risks
Anglo American has business activities throughout Africa, America and Asia and Australia. thus, it is perceived to carry high political risk as compared to its competitors like BHP Billiton and Rio Tinto which have diversified operations and hence derive lower part of their earnings from South Africa. however, diversified asset base and presence into various product segments lower the geographic concentration risk for Anglo. to counter political and legal risks arising because of operations in various economies, Anglo has started forming internal control committees that assess significant risk to business on social, legal, political and financial front.
In January 2008, a 91.4%-owned subsidiary of Anglo American called Minera Loma de Níquel (MLdN) was informed of the intention of the Venezuelan Ministry of Basic Industries and Mining (MIBAM) to cancel 13 of its exploration and exploitation concessions due to MLdN's alleged failure to fulfill certain conditions of the concessions. Issues such as these may have an adverse affect on the company's operations or the results of those operations. (Mineweb, 2005)
Because of operating in multiple geographies, Anglo American can face risks related to sourcing of raw materials and commodity pricing as well. The price volatility of its products could have a major impact on the operational performance of the company. The annual percentage increase in the demand and supply for copper and zinc was about 2.2% and 1.2% in 2008 as compared to 4.1% and 3.3% respectively the previous year. This fluctuating demand and supply has a major impact on the price of these goods. The price of copper declined from the highs of about USD 3,000 per ton in 1995 to below USD 2,000 per ton in 2002. The price later skyrocketed to over USD 7,000 per ton by 2007 and then declined to just below USD 7,000 in 2008. Similar price fluctuations have been witnessed in zinc as well that rose from lows of about USD 700 per ton in 2002 to highs of about USD 3,200 per ton during 2006 and 2007 before declining to below USD 2,000 per ton by 2008. These price fluctuations have had a material impact on the operating results of the company. (Anglo Americanb, 2009)
Global supply and demand and international markets are the prime determinants of commodity prices. Metal prices and raw material prices have been subject to a lot of fluctuation and substantial variation. the second half of the year 2008 witnessed significant reduction in commodity prices. Sustained reduction in commodity prices resulted in Anglo's inability to complete black economic empowerment (BEE) transactions in South Africa. This is because BEE partners might not have sufficient funds to finance their investments. Fluctuations in commodity prices have given rise to risks related to commodity prices across the company.
Environmental Regulations And Risks
The mining and exploration operations of Anglo American are subject to various government regulations including, regulations pertaining to environmental protection. Furthermore, the company also requires government approvals and permits to maintain mining and exploration activities. If it fails to comply with these regulations, it may be imposed with hefty fines and penalties, which could have a material impact on the profitability of the company. The company may also be denied new projects, which might hamper its business prospects.
On a pro forma basis (ie, excluding Mondi, other disposals and Tarmac), 49% of operating profit in 2007 was from South Africa, and a further 41% from South America. The company is more exposed to specific developing-market risks (for instance, power in South Africa, water shortages in Chile) than its peers. These issues may have an undue impact on its two largest business areas, base metals and platinum.
Again, excluding Tarmac and discontinued operations, emerging markets contributed 98% of operating profit in 2007, with 49% from South Africa, 41% from South America and 8% from the rest of Africa. This exposes investors to greater specific geographical risk than is the case with Anglo's peers. (Anglo Americanb, 2009)
Country Specific Risk:
Anglo America also faces some country specific risks like the power issues faced in South Africa and issues related to water shortages faced in South America.
Industry Specific Risk
Anglo American faces risks related to operating and capital costs in mining industry. The mining industry has suffered from significant cost inflation in recent years; a function of shortages of equipment and labor, and higher fuel and power costs. This has had a material impact on operating and capital costs, and has led to delays in project development. In some cases, this has also led to the suspension of development plans. The production volumes and growth of the company do get affected by natural disasters (flooding, earthquakes, etc), actions by other stakeholders (strikes, increases in taxation and royalties, etc), and other issues (such as power availability-related production shortfalls in South Africa), many of which, by their nature, are unpredictable. this induces a hidden risk in the operations of the company. (SEAT, 2009)
Foreign Currency Risk
Anglo American has geographically diversified operations which create foreign currency risk for its stake holders. The asset values, earnings and cash flows are influenced by a wide variety of currencies. The company's majority of sales are denominated in the US dollars, but the company earns its sales in many local currencies. The company is exposed to currency risks associated with the purchases, sales and borrowings from different markets. Any change in the exchange rate will affect the dollar value, thereby impacting its profitability. The changes in the exchange rates will result either an increase or decrease in reported costs. These changes will have major affects on the company's profitability. The company's business is at risk due to foreign exchange translations.
Presented below is Anglo American's earnings sensitivity
(Source: ING, 2008)
10% change in the price of Coal or the exchange risk can change Anglo's net profit by $53 million. a major change in the Rand/US$ exchange rate could result in a major impact on the currency translation of operating costs and thus have a bearing on mine cut-off grades and mine output.
To ensure that the company is not dependent upon a single country, Anglo derives equal amount of earnings from Africa as well as America. Thus, reduced dependence on a single nation helps to boost Anglo's pipeline of business.
Draw conclusions with regards the success or failure of the company with regards its business operations and the ability to manage its key risks. You are to make recommendations on the future strategy the company should consider.
Altogether, Anglo American has one of the strongest project pipelines in the industry, with potential capital expenditure of around US$40bn, including around US$7.4bn of projects that are currently under development, and some US$30bn-plus of unapproved projects, of which some US$10bn could be spent in both the base metals and the iron ore businesses. Copper mine production at Anglo Base Metals could increase from 655,000t in 2007 to around 1.7bn t in 2016 with the successful development of the Quellaveco, Pebble and Michiquillay projects and the Los Bronces and Collahuasi expansions. The division's nickel production could increase from 25,600t in 2007 to around 144,000t in 2017 with Barro Alto and Jacaré both in production. The group's seaborne iron ore exports could rise from 24mt in 2007 to 150mtpa by 2017 with the expansion of Sishen and other projects in the Northern Cape, and the successful development of the MMX Minas-Rio project in Brazil. This would increase the group's share of seaborne trade from around 3% to an estimated 10%.
2007 Operating Profit ($9.6 billion)
Despite of all the challenges faced, Anglo has been in a strong market position. Anglo Platinum controls approximately 39% of the global supply of platinum. DeBeers, world's largest diamond manufacturing company represent's Anglo's 45% interest. Thus, the company can use its strong market position to bargain for commodity prices and for sourcing its raw materials at cheaper prices as compared to its peers. Further, Anglo should continue to maintain diversified operations as it will help to reduce its dependence on any single country. Having said so, it is also essential for Anglo to focus on improving operations in each of its operating segments. It witnessed a decline in the platinum, base metals, and industrial minerals segmental performance in FY2008. The platinum's segmental revenue declined from $6,673 million in FY2007 to $6,288 million in FY2008, a decrease of 5.8% compared with FY2007. The base metals segment recorded revenues of $5,878 million in FY2008, a decrease of 17.5% compared with FY2007. Similarly, Anglo American's industrial minerals segment recorded revenues of $4,371 million in FY2008, a decrease of 4.6% compared with FY2007. By diverting attention towards each of these segments, the company can boost its operating profits.
Striking further partnerships as done in 2007 in the case of Pebble Copper-Gold-Molybdenum Project (the Pebble project), in southwestern Alaska (the US), with Northern Dynasty Partnership (a wholly-owned affiliate of Northern Dynasty Minerals, a Canada-based mineral exploration company) can help Anglo in enhancing its portfolio of copper and copper-gold projects.
Share Price Performance And Financial Analysis
Share price performance for Aglo has improved significantly over the last three months. The company reached its all time trading high in January in the last three months. the company has a beta of 2.02. This signifies that the variation in the company's stock is much higher as compared to the movement in the market or S&P 500. High beta factor is also a result of geographically diversified operations and high dependence on economies like African and South America.
Presented below are few key industry as well as company ratios that help us to understand the positioning of AAL versus the industry
Anglo generated greater return on its assets and equity as compared to what other players in industry offered to their stake holders. However, the company has slightly high leverage on its books. following table presents a brief on the sales and assets position of the company over past 5 years:
Over the past one year, Anglos' sales have decline by over 35%, given the turmoil in the global markets. However, the markets still remain bullish on the company's earning potential and it still has the highest project 5 year EPS LT growth rate of more than 25% in the industry. By improving its capital spending capability and debt to equity ratio, the company can utilize funds for its growth and development and for creating shareholder's value.
Anglo Americana, 2009, [Available at] http://www.angloamerican.co.uk/ [accessed at January 21, 2010]
Anglo Americanb, 2009, [Available at] http://www.angloamerican.co.uk/aa/investors/ [accessed at January 21, 2010]
Anglo American Mining, 2008, [Available at] http://corpgov.net/wordpress/?tag=anglo-american [Accessed on January 22, 2010]
SEAT, 2009, Business for Social Responsibility, [Available at] http://www.bsr.org/reports/SEAT_Public_Evaluation.pdf [Accessed on January 22, 2010]
ING, 2008, Anglo American - going alone [Available at] www.ing.com [accessed at January 22, 2010]
Google Finance, 2010, [Available at] www.google.com/finance [Accessed at January 18, 2010]
mineweb, 2005, Is Anglo preparing to split? [available at] http://www.accessmylibrary.com/article-1G1-137173525/anglo-american-preparing-split.html [accessed at January 23, 2010]
Reuters, 2010, [Available at] http://www.reuters.com/finance/stocks/chart?symbol=AAL.L [Accessed on January 23, 2010]