As Glencore leads, Anglo will follow – cut dividend, rights issue on cards

When Mark Cutifani left gold mining to tackle the turnaround at South Africa’s century old resources major Anglo American, he would have had no idea anything could be tougher than where he’d come from. But soon after moving into the new hot seat, a collapse in Chinese demand sent commodity prices spirally to their lowest in 16 years. And with a debt mountain inherited through over-investment in a number of questionable projects, Cutifani the miner was forced to morph into Cutifani the financial engineer. If that wasn’t enough to digest, whatever turnaround strategy the highly rated Australian harboured could now be shelved. Investors have had their way with Glencore, run by its largest shareholder, the independently-minded South African billionaire Ivan Glasenberg. That group has agreed to raise fresh capital to pay down debt and slice deeper into its cost base – suspending copper operations in Zambia and DRC to the great cost of those countries. After those decisions led to an immediate rebound in the Glencore share price, Cutifani will find it difficult to resist growing pressure to follow suit. – Alec Hogg

A worker walks past a board outside Anglo American offices in Johannesburg, August 21, 2015. South Africa stocks ended weaker on Thursday, despite strong gains by resource stocks, with MTN the main loser among blue chips because most of its business is in emerging markets. Shares slumped across the board on the JSE as comments by U.S. Federal Reserve chair Janet Yellen, made after the close in Asia, Europe and South Africa on Wednesday, hit the markets on Thursday. REUTERS/Siphiwe Sibeko
A worker walks past a board outside Anglo American offices in Johannesburg. REUTERS/Siphiwe Sibeko

By Thomas Biesheuvel and Jesse Riseborough

(Bloomberg) — Glencore Plc’s billionaire chief executive caved this week to shareholder demands that the commodity-trader bolster its balance sheet. Now attention is turning to whether rival Anglo American Plc will follow.

The two companies have been among the hardest hit by China’s cooling demand for commodities on concern they’ll be unable to withstand raw-material prices at a 16-year low and pay off a combined $43.5 billion in debt. Measures might include cutting its dividend, which is yielding a record 9 percent, higher than the level in 2009, when the company last scrapped the payout.

Read also: Glencore CEO Glasenberg: Impossible to read China or bottom for commodities

The collapse in commodity prices is undermining Anglo’s Chief Executive Officer Mark Cutifani’s efforts to turn around the fortunes of a business that mines platinum and diamonds in Africa and iron ore in Brazil. Glencore shares rallied the most in almost three years on Monday after the company outlined a $10 billion debt-reduction plan, including selling $2.5 billion in shares and suspending its dividend.

Band-Aid Rip

“If you’re going to have a problem, it’s better to rip the band-aid off than not,” said Rob Clifford, an analyst at Deutsche Bank AG in London. “Glencore just did it and the stock went up. So any companies who are thinking about strengthening their balance sheet might look at Glencore’s outcome and consider it as well.”

Anglo shares slumped 42 percent this year, a decline second only to Glencore in the U.K.’s FTSE 100 Index.

The company is seeking to raise $3 billion by selling assets and is cutting jobs to trim costs. It already raised almost $2 billion this year by offloading its tarmac business and two copper mines in Chile. Anglo’s platinum unit will make an announcement today on selling higher-cost mines in South Africa to Sibanye Gold Ltd

“Anglo’s first priority will be trying to deliver the turnaround program, including the asset-sale process,” said Marc Elliott, an analyst at Investec Plc in London. “They will be trying their damnedest to get that done.”

$1 Billion Dividend

If it falls short, the company may have to follow Glencore’s lead, Elliott said. Anglo reported a $3.02 billion loss in the first half of 2015 and the company said in July that it has net debt of $11.9 billion after the tarmac business disposal. Its has a long-term borrowing target of $10 billion to $12 billion. The dividend costs the company more than $1 billion.

Anglo surprised investors in July by maintaining its 32 cents a share dividend. Cutifani said at the time that it’s always under review. “In these sort of environments, you take each six months as it comes,” he said on Bloomberg Television.

Read also: Anglo to slash another 13% off its book value after R100bn iron ore folly

Glencore’s decision to halt its dividend came less than three weeks after the commodity trader and miner said it was confident it could continue to make the payment to shareholders and preserve its credit rating. CEO Ivan Glasenberg made the U- turn after two weeks of discussions with shareholders from North America to Europe. The fresh approach was triggered by the almost-universal bearishness on commodity prices that investors expressed in talks, surprising Glencore’s management, a person familiar with the matter said, asking not to be identified because the meetings were private.

Glencore Precedent

“Glencore has set a precedent,” said Elliott. “It makes it easier for Anglo to cut the dividend, and to some extent a lot of people are already pricing it in. It will still hurt nevertheless if they do it.”

Cutifani’s predecessor, Cynthia Carroll, stopped Anglo’s dividend in 2009 for the first time since World War II as the global financial crisis roiled markets. That sent the shares tumbling 17 percent that day and came to define her stewardship of the blue-chip mining company.

“Unlike other management teams in the sector, Glencore has acknowledged its debt problem and is taking steps to address it,” wrote Bank of America Corp. analyst Jason Fairclough. “Anglo has a geared balance sheet and will be cash flow negative after dividends for the next few years. While the company has ample liquidity, we don’t think the equity market will reward this approach.”

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