Rising from the ashes
This April, straight-talking Aussie Mark Cutifani will have
been at the helm of Anglo American for seven years, a year longer than at
AngloGold Ashanti, which he joined in 2007, and outlasting the ‘generation’ of
CEOs who in 2013 joined but have since left Anglo’s most commonly - cited competitors
– BHP and Rio Tinto.
Cutifani may even see off Ivan Glasenberg, provided the
Glencore boss backs up recent hints that 2020 will be his last year in charge
at the Swiss minerals trading and mining firm.
“I’m young and feeling energetic,” says Cutifani when asked
by finweek if retirement had crossed his mind lately. “I have a good
relationship with the board. We continue to think about the future, but there
are no plans for me to go in the immediate term.”
Cutifani’s longevity is a remarkable achievement for a CEO
at a major mining company, especially one that’s been on Anglo’s kind of
rollercoaster.
The company’s shares slumped to R55 apiece in 2016 as
commodity prices bottomed out, following a decade of unsaddled, head-over-heels
supply growth that burdened balance sheets and earned the world’s mining sector
a reputation for wasteful capital spending.
Until the coronavirus (Covid-19) crisis struck, however,
Anglo’s stock was at R415 a share, challenging its latest five-year high
achieved in January.Analysts like the fact Anglo has delivered on its promises.
Despite an 18-month stutter during 2015-2016 in which
Cutifani toyed with the sale of the firm’s South African iron ore- and thermal
coal- producing companies – Kumba Iron Ore and Anglo Coal – before changing his
mind, the company has done what it said it would.Return on capital employed
(ROCE), a metric favoured by Cutifani because it shows what shareholders are
getting for their money, was 19% in the group’s most recent financial year.
This is better than the 15% ROCE Cutifani promised in 2013
which, at the time, seemed like a stretch target of note.“Anglo remains one of
our top picks on valuation, growth and medium-term re-rating potential,” said
Deutsche Bank analysts Liam Fitzpatrick, Bastian Synagowitz and Nick Snowdon in
a report authored on 20 February, just as the coronavirus was extending its
tentacles into the European mainland.
“Despite delivering a substantial improvement over the past
three years, market-implied returns are conservative and we believe Anglo
hasthe most compelling and undervalued growth profile from the majors,” it said,
anticipating a 30% uplift in structural earnings before interest, tax,
depreciation and amortisation (ebitda) by 2022-2023.
In an interview with Miningmx last year, Cutifani
acknowledged that had he not acted, Anglo would barely have seen out its 100-year
anniversaryin 2017. Yet, having survived the 2011 to 2015 turndown in the
commodity market, the challenge was to take Anglo from survival to prosperity,
and after that, establishing, if it could, industry-defining pre-eminence.
“We came to the end of the firstphase in 2018 and we
redefined ourambition; we reset our drive towardsquality,” he told finweek in a
recentinterview. “In this second phase, in terms of what I want to do as a
leader: I hope to have made significant ground on Quellaveco and have improved
group margins. That will give the next person [his successor] a running start.”
Quellaveco, a $5bn to $5.3bn copper project in Peru, has a
kind of totemic relevance for Anglo American. Firstly, it’s a large,
high-quality copper resource, and those are becoming increasingly rare
globally.
Secondly, however, it has a scale that is exactly the kind
of asset Anglo in its pomp used to develop. As such, the project looks back as
much as it looks forward: a cultural affirmation for Anglo as well as a signpost
of future direction.
Bank of America Merrill Lynch analysts Jason Fairclough and
Patrick Mann think Quellaveco is Anglo’s best ticket to future earnings. It
also helps overcome a common problem for the largest mining houses, which is
finding ventures that are large enough to make a difference to the bottom
line.“We’ve written extensively about the difficulties of growing a big miner,”
the analysts said.
“A key challenge for big miners is deploying enough organic
capital, fast enough, to make an appreciable difference to production volumes.
On this front, Anglo’s relative smallness meansthat, for example, a $5bn copper
project does make a difference.”Not all projects have worked out well,
especially in Anglo’s recent past.
The Minas Rio iron ore mine in Brazil cost the group
hundreds of millions of dollars in write-downs.It was bought at the topof the
previous commodity cycle and headed a pipeline of other growth-oriented
enterprises that was so clogged and disordered Cutifani described it as “constipated”.
Smart for the future
How then, was Anglo able to get from an over-burdened,
capital-inefficient behemoth on the verge of extinction to the favoured mining
stock it is today? The answer is quite simply (not merely) attracting the right
people able to fit into a strategy Anglo dubs ‘FutureSmart’. The name does
smack of a highly-paid consultant on too much coffee, but the idea behind it is
ingenious.
Visit any good mine and you tend to see just how cleverly
integrated the process is. FutureSmart is that, but on speed. And realising it,
it must have people at the heart of it.
Cutifani has a way with people. At AngloGold Ashanti, he did
away with reserved parking for senior management. Managers do this kind of
thing all the time now, but its impact can’t be underestimated in 2007; that’s
how far SA’s corporate culture has changed in 13 brief years.
He’s also a dab hand at handling the media. He told an SA
Chamber of Mines (now Minerals Council) annual general meeting once, when he
was its president, that the industry got the press it deserved. Handle the
media correctly, and you might get better coverage.
No respectable journalist will agree to that kind of
mollycoddling, but the point is Cutifani has a winning type of personality. In
Johannesburg, he waxed lyrical about the city’s polyglot vibrancy rather than
its crime risk; now in Anglo’s London HQ, he quips about the fortunes of his
adopted football team – Chelsea – and lightly mocks Watford FC, the team
adopted by compatriot and chief financial officer, Stephen Pearce.
UK analysts probably find the sporting banter passe´, but it
makes Cutifani’s presentations an event for the mind and heart. And it was the
issue of people that he considered a key risk when first joining Anglo; or to
put it more clinically, the lack of people with the right skills.
What followed was a 250-person-strong rehiring strategy
filling key technical positions that had steadily exited the group under
previous management. The re-skilling process was led by Cutifani’s long-time
collaborator and ally (and his best man), Tony O’Neill, who is also Anglo’s technical
director.
In addition to know-how, Cutifani and his board set about
installing the right methodology, hence the development of its FutureSmart
strategy.
To hopelessly simplify, what’s going on in FutureSmart
Mining is to change operating practices in such a way that there’s real cost
improvement, about $1bn has been conservatively pencilled in for the 2022
financial year. The next element of the strategy is innovation, or to “change
the way the molecules flow through the process”, as Cutifani describes it.
The third part is project and de-bottlenecking
implementation. It’s like a complete retooling of the organisation.For
instance, FutureSmart works on reducing energy and water consumption and
improving capital intensity. There’s also more focus on optimising processing
and orebodies than automation.
Cutifani says Anglo likes to keep its intellectual property
open, but bespoke technology in coarse particle flotation and novel leaching
technologies are playing their part. A new take on bulk sorting is also being
piloted at El Soldado, a copper mine in Chile, which could be implemented in
the platinum assets if successful, according to Myles Allsop, a UBS analyst.
“In our opinion, Anglo is a technology leader in mining, and
this positions it well medium term,” said Allsop in a report last year.
“However, we expect the market to be sceptical with the financial targets as in
the past these are often lost to cost inflation or outweighed by moves in
commodity prices,” he said. It could take competitors three to four years to
catch up, he added.
In order to make the strategy stick, O’Neill chairs an
operating committee every two months.“Every one of the people that runs a
business looks at every chart and all the big gear and the productivities ...
So, it’s sharing: De Beers sharing its good and bad with copper [division] and
Kumba [Iron Ore, the JSE-listed iron ore company] and sharing the global
information and helping each other ratchet up performance,” says Cutifani.
Environmental sustainability
One of the other reasons to mark out April in Anglo
American’s calendar, other than to register its CEO’s work anniversary, is that
it’s the month in which its much-anticipated sustainability report is issued –
one of society’s and the mining sector’s pressing issues, until the advance of
the coronavirus.
It hasn’t perhaps been a report to raise headlines in the
past, but this year all eyes will be trained on Cutifani’s response in making
swifter changes to the group’s net zero carbon plans. Cutifani isn’t convinced
by some long-range commitments undertaken by his resources peer group.
It was bought at the top of the previous commodity cycle and
headed a pipeline of other growth-oriented enterprises that was so clogged and
disordered Cutifani described it as “constipated”.
“We are working through Scope 3 and we know this is very
complex,” says Cutifani. This is the new layer of corporate responsibility that
asks mining companies to monitor and control emissions by its customers.
Scope 1 and Scope 2 measures have focused on mine emissions
and those of suppliers.“We won’t throw a date or target until we understand the
consequences or the unintended consequences,” says Cutifani.
“There are too many companies throwing targets out there
that don’t seem to understand them or aren’t that serious about meeting
them.”Quite apart from the environmental responsibility companies such as Anglo
has towards society, there’s also the question of how Anglo intends to deal
with its extant SA thermal coal mines.
It sold its domestic and Eskom mines in 2018 to Seriti
Resources for about R3bn, including the New Largo coal project that will
eventually supply Eskom’s Kusile power station.
Selling the export mines, however, seemsmore of a challenge.
Cutifani is talking about “a just transition” insofar as protecting jobs and
transferring assets to a buyer that will manage the mines responsibly.
There’s also the question of getting value. Prospective
buyers are likely new entrants or smaller players with limited budgets who may
not have the opportunity to publicly list the assets given the way investment
markets shun big carbon-emitters.
This, in turn, raises the question of whether the ‘balance
sheet’ is leaving the SA thermal coal sector at a time when Eskom needs fresh
investment in the fuel to safeguard the country’s electricity supply. Bear in
mind that other companies with suitably large balance sheets such as Glencore
and South32 are exiting the thermal coal market in SA over the short to long
term.
Says Cutifani: “The investment proposition won’t disappear
[for thermal coal], but it will certainly change. I think there’ll always be
thermal coal production from SA especially when you look at India and China
which need to buy it for power generation. There’s also the need for poverty
alleviation: that is the biggest issue for Africa, not climate control.
“Anglo streamlined itself many times before,” he says of
selling the thermal coal mines. And it continues to do so. The £400m cash
purchase of Sirius Minerals, a UK business developing a mine aiming to produce
specialist fertiliser, is a clear example that Cutifani isn’t entirely
satisfied with the commodity mix of the company.
The way he describes it, Woodside, the polyhalite product
Sirius is developing, can benefit from the technical skills Anglo has at its
centre, and certainly from its balance sheet (the Sirius chairman said in
January the company was facing bankruptcy). But it’s also an asset that has
potential.
Speaking to finweek in February, Cutifani said his group’s
new investment approach was to make decisions around the asset first, rather
than have a view that these are the commodities to which it’s stuck hard and
fast. Time will tell with Sirius: Polyhalite fertilisers are relatively
untested in the market and there’s a range of competitors developing potash and
phosphates that could fill the market demand as well, or better.
One consequence of having added Sirius Minerals to the mix
is that the special dividend paid this year is unlikely to be repeated, even in
the absence of the coronavirus. Cutifani, however, says the acquisition of
Sirius Minerals doesn’t represent a new period of growth for Anglo.
“In previous periods, all our resources were committed to a
single project. That’s not a mistake we will make again,” he said in clear
reference to Minas Rio in Brazil. “Now, we prefer incremental capital projects
across a number of platforms.”
Pandemic
The world doesn’t stop turning and Cutifani is facing a new
raft of challenges. Until this year, it was climate change, and while those
pressures continue to be age-defining, the proliferation of Covid-19 is a new,
barely-understood problem for Cutifani, as it is for the rest of society.
Already it has hit hard where Anglo would least like it. At
the time of writing, Anglo had embarked on the first day of a 15-day national
quarantine by the Peruvian government which has seen construction on Quellaveco
all but shut.
Anglo’s view is it was tracking aheadof the project’s budget
anyway, and that it thinks the closure as currently planned can be accommodated
in its 2020 budget.
Anglo won’t be drawn on where markets will land amid the
coronavirus contagion, especially on how long society will be in lockdown.
Officially, Anglo’s preference is to focus instead on measures intended to
protect employees. But with its exposure to consumers through diamond and
platinum jewellery, it has obvious risks, like any other mining company.
Cutifani certainly wasn’t alone in underestimating the
coronavirus outbreak. “We think it’s a more short term issue,” he said in
February at the firm’s annual results presentation. “We have a broader customer
base than most of our competitors, so the virus is not as significant for us.”
Then again: Less than a month ago, about 20 000 delegates
gathered in downtown Toronto for the Prospectors & Developers Association
Conference where handshaking was much in evidence. Few could have anticipated
the impact of the virus.
For Cutifani, it’s clear Quellaveco is a project he wants to
see bedded down before thinking of moving on.Potential heirsSeveral potential
successors to Cutifani have been identified: Bruce Cleaver is one, the CEO of
De Beers, the diamond producer in which Anglo has an 85% stake. The other is
Duncan Wanblad, head of Anglo’s base metals division, which has direct control
over Quellaveco.
The recent resignation of Chris Griffith, CEO of Anglo
American Platinum (Amplats), removes his name from the hat, albeit unfancied,
according to some. So, who will be the new ‘mini-me’?“I think the last thing is
to have a clone of the last person,” says Cutifani.
“All organisations have to evolve in different ways and the
board is prudent enough to choose a person with a strategic mindset but who
might also be a bit different.“
In terms of background, I’m less worried about their
certificate; it’s their ability to connect resources, develop industrial
processes, reach financial outcomes. The next CEO has to anticipate the world
and where it’s going in terms of climate change, the circular economy, material
sciences and digitalisation. They have to be part of that, have that
understanding and see that trajectory.”
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