Anglo American shocked the mining sector as it announced another 9000 jobs to be cut and declined to pay a dividend for the first time since the Second World War. Shares in the heavily debt-laden company fell by over 15% on the JSE on Friday after the company announced financial results for the year ended 31 December 2008. Ferronews.com sees what CEO Cynthia Carroll had to say and provides some commentary.
From a strategic perspective, the company said that the following divisions remained “core” to the group as the resource giant attempts to consolidate as the economic slowdown takes a grip: Base Metals, Platinum, Ferrous Metals` core businesses (Kumba Iron Ore, Scaw Metals, Samancor Manganese and Anglo Ferrous Brazil), Coal and Diamonds.
Cynthia Carroll, chief executive, said:
“Overall, Anglo American delivered a solid performance in 2008 – a year that saw the end of a lengthy period of highly supportive commodity prices as the trajectory of the global economy turned sharply downwards during the second half. We achieved operating profit of $10.1 billion and underlying earnings of $5.2 billion, with strong performances from our coal, iron ore and manganese businesses.
The breadth and severity of the global economic downturn and its impact on growth rates in key sectors and economies are difficult to overstate. From global automotive production to construction activity in emerging markets, there was a marked contrast between the first and second halves of 2008, when
commodity prices fell sharply. As we begin 2009, the economic outlook remains weak, with limited visibility and we are continuing to experience volatility and downward pressure on commodity prices. Against this backdrop, we have acted decisively to position the Group through the downturn, including pulling back planned production growth, reducing the size of our workforce by 19,000 by the end of 2009 in line with our revised production and growth plans and further cost cutting throughout the Group. These actions are necessary to ensure that Anglo American is well positioned through the cycle, both operationally and financially, to continue to deliver long term value to our shareholders.
In December, we announced that capital expenditure plans for 2009 would be scaled back by some 50% in response to the changed economic outlook. We nevertheless remain committed to our long term strategy and will continue to allocate capital to our existing businesses and the advancement of our portfolio of high quality development projects. Despite the current economic environment, we have confidence in the fundamentals and long term outlook for our core commodities. We therefore believe that our projects remain a key driver of future value creation for shareholders, with several projects well timed to enter production from 2011 onwards.
The three key cost-saving and efficiency initiatives that we have put in place over the last 18 months are well advanced and are already beginning to make an important contribution to our financial and operating performance.
Such disciplines are particularly valuable during these times. The asset optimisation programme has been rolled out across the Group and is expected to contribute a significant uplift to operating profit of some $1 billion over the next three years. This is in addition to the expected $1 billion in savings by 2011 we have announced from our procurement and shared services initiatives,which have already delivered value of over $200 million in savings in 2008.
While the global economy continues to face unprecedented challenges and, with severely constrained financing markets, it is critical for us to safeguard balance sheet flexibility as far as possible.
Notwithstanding the other measures we have taken, the Board has decided to suspend dividend payments in order to preserve the Group`s strategic growth options.
We made further strategic progress during 2008, including the significant achievement of securing `new order` mineral rights across our mining businesses in South Africa. We made further disposals of non-core assets, including the sale of the Group`s investment in China Shenhua Energy for $704 million, the sale of Tarmac Iberia for $186 million and the sale of Namakwa Sands and 26% of both Black Mountain and Gamsberg to Exxaro Resources for a total of $353 million. During the year, we also advanced our long term iron ore growth strategy by securing control of the Minas-Rio project and the
Amapa iron ore system in Brazil. Minas-Rio has multi-phase expansion potential, the first phase of which is due to begin production in 2012. In recent weeks, we have also reduced our shareholding in AngloGold Ashanti to 11.8%, realising total proceeds of $434 million.
I am encouraged by the much improved safety record of the Group over the last year. Of particular note was the significant reduction in the number of fatal incidents, though there is much work still to do. The changes we have made across Anglo American and in collaboration with the South African government, unions and the mining industry, are saving lives and reducing injury rates and we must continue to do all we can to progress towards our ultimate goal of Zero Harm.
Anglo American has a world class asset base with long life, low cost mines and a strong and geographically diverse project pipeline across the most attractive commodity segments. In light of the many challenges faced by the global economy and by the mining sector during the second half of 2008 and expected to continue during 2009, we have taken decisive action to position Anglo American through the downturn and to emerge in robust shape, ready to capitalise on the next phase of economic growth.”
Ferronews.com commentary:
These results will send a shudder through those businesses who supply into the mining sector. The consequences of the additional 9000 job cuts will of course be felt but scaling back on capex projects is going to bite. The reason being the long lead time it takes for these projects to be reinitiated. It is easier to go with the ebb and flow of job cuts and re-recruiting, but tendering out for projects and going through the whole project management process can easily take a year – especially if key people have been lost during the process.
The cutting of the dividend sends a clear message – the company isn’t expecting the economic climate to turnaround quickly in the next few months either. A big company like Anglo American takes a lot of time to turn around and reposition itself.
We also wouldn’t be surprised if the company announced further job cuts, mothballing of operations and even asset sales over the next six months as the slowdown bites deeper into their operations and they try to shuck some of the debt off their balance sheet.
Not a pretty picture, but there may be some positive spinoffs as a result of the recent surge in precious metals.
Ferronews.com will be writing a bit on the precious metals surge and some positive spinoffs around layoffs and gearing down shortly.