Anglo American through the ages

It launched South Africa’s industrial age to support its mining activities, but since 2012 has halved the number of its assets. Where to now? From Moneyweb.

When the EFF’s Julius Malema talks of white minority capital, he is referring of course to Johann Rupert and the Oppenheimers for the most part. These are the families that helped build South Africa and, for better or worse, guided its political discourse in a direction favourable to their business interests.

Anglo American founder Ernest Oppenheimer would be hard put to recognise the group he founded in 1917. By the 1980s it accounted for a staggering 25% of SA’s GDP and owned an estimated 60% of the JSE – the result of an international embargo that forced SA companies to reinvest profits locally, turning the JSE into an incestuous and distended bubble.

The group that built its castle on diamonds and gold in southern Africa is now a very different animal. Since 2012, it has halved its number of assets, but now delivers 30% more product from each retained asset. That doesn’t mean it is a smaller group. The repurposing of Anglo into a more profitable machine translates into a group that delivers 10% more physical product in aggregate across the portfolio at a 26% lower unit cost (in nominal terms) than in 2012. It’s also doubled the productivity per employee.

There wasn’t a corner of the economy Anglo hadn’t conquered

That’s a long way from where Anglo was in the 1980s. Back then, there wasn’t a corner of the economy that Anglo hadn’t conquered. Think of FNB, Scaw Metals, Highveld Steel, De Beers Diamonds, AECI, paper producer Mondi, Boart International and the British South Africa Company with its mining and agricultural operations across the sub-continent.

That’s not counting the best gold assets, platinum, coal, copper and base metals. Anglo had it all. It was largely responsible for the industrialisation of the country, pouring money into businesses that would feed its core mining operations.

Gencor was partially spun out of Anglo in 1980 as a kind of Afrikaner empowerment deal for its time. Gencor became mini-me to Anglo, with its own portfolio of financial, mining and manufacturing assets. Anglo had Mondi in the paper sector, Gencor had Sappi. Anglo had FNB, Gencor had Absa and Sanlam, and so on.

These assets have been shuffled many times over and now appear in portfolios elsewhere, but these were the hands and the businesses that built South Africa.

Anglo was huge, but not particularly efficient. A behemoth of this size is a breeding ground for sloth. Management had little incentive to up its game because weak profits in one part of the empire would be topped up from good profits elsewhere.

All highly illegal today

And let’s be honest – competition law back then wasn’t what it is today. Anglo’s price-setting muscle went virtually unchallenged, and it was not uncommon for directors to be invited onto competitor boards. All highly illegal today, but widely tolerated back then.

By 1994, the international embargo was lifted and foreign banks rained down on SA in search of deals. Their message was simple: we’ll help you break up your clunky conglomerates and get you battle-ready for the global gladiator arena. Some of this advice was of questionable merit, and many a South African company was hoodwinked into bad deals and untested foreign markets. But for the most part it worked.

There is no denying that Anglo attempted to ameliorate the uglinesss of apartheid. With the urbane Harry Oppenheimer at the helm, it shored up the Progressive Federal Party (which later morphed into the Democratic Alliance) as a buffer against the ruling National Party’s more savage instincts, and introduced basic labour and human rights into the workplace. In many ways, it set the tone for the rest of corporate SA. It’s easy now to downplay or interpret this as featherbedding for the inevitable political liberation that was to come, but back then, Harry was not afraid to insert himself into the political debate, and he did it with grace and, dare one say, some bravery.

There are few executives today willing to stand up to the bullies in government the way Harry did to the Nats.

Anglo supported urban housing for black people through the Urban Foundation, and in 1985 became the first SA company to recognise trade unions, out of which we now have President Cyril Ramaphosa – then an impoverished trade union leader who led the 1987 mining strike that crippled the industry. This marked the turning point for mining employment, which has been in steady decline ever since. Many on the political left argue that Ramaphosa was groomed for his current role by Anglo and its peers, and it’s hard to argue with this. If that’s the case, Ramaphosa’s benefactors will fully expect their man to make good on the IOUs accumulated over the years.

Even at its height, the Oppenheimer family never owned more than 9% of Anglo, though it exercised control through a system of cross-holdings.

Today, the family owns less than 1%. The big shareholders now are institutional investors like the Public Investment Corporation (PIC), which invests funds on behalf of government pension holders.

In 1992, two years before SA’s first democratic elections, Anglo opened its Venetia Diamond Mine in Limpopo. It is now the country’s largest diamond producer, with an output of three million carats a year. In the same year it acquired a majority interest in the Quellaveco copper project in Peru, the first of several South American investments.

Post-sanction era

With the noose of sanctions now loosened, Anglo scrambled to pick up quality mining assets abroad as a hedge against SA’s uncertain future. It may have been an architect of SA’s emerging democracy, but it was certainly not going to bet the house on it.

In 1994, the year of democracy, it was time to share some of its spoils with black investors. It carved up Johannesburg Consolidated Investments (JCI) to sell Johnnic and JCI to the National Empowerment Consortium and African Mining Group. At the time it was the country’s largest BEE deal and launched Ramaphosa on his path to riches. This was also the year it formed Namdeb Diamond Corporation, with Anglo and the Namibian government each owning 50%.

Over the next three years it acquired coal, copper and nickel interests in South America and a zinc and lead mine in Ireland. In 1998 it merged its gold interests with those of Ghana’s Ashanti Gold to form AngloGold Ashanti, then the largest gold producer in the world.

A decade later, by 2009, Anglo had divested itself of its last remaining shares in gold mining. For a company built on gold, this marked a point of no return.

Anglo without gold is like Donald Trump without tweets.

Precious metals are inherently fickle, relying on jewellery, central bank and to a smaller extent industrial demand to lift commodity prices. Platinum is essentially an industrial metal, but even here the gyrations in platinum and palladium prices make any kind of future planning difficult. From hereon, Anglo would refocus around base metals and minerals with more predictable demand, and in diverse geographical markets.

Another key milestone for the group was the decision in 1999 to migrate Anglo’s primary listing to London, prompting questions over its patriotism and protests over what looked to be a traitorous desertion of its home base. The explanation given at the time was the same one invoked by all South African companies (Old Mutual included) genuflecting to the world’s financial mecca – capital was cheaper and more accessible in London.

Part of the rationale for listing in London was to enable Anglo to compete against its international mining peers. It has successfully done this and is today a leading player in global mining, though still with a significant footprint in SA. At the time of the London listing, interest rates were around 22% in South Africa and 6% in London.

PIC’s investment grew to R56bn

There is no doubt that the London move was the right one from a purely business point of view. In 1999, Anglo’s market value was R128 billion. At the end of 2018 it was R458 billion. The PIC has seen its investment in Anglo grow from R23 billion in June 2013 to R56 billion as at December 2018. South Africans still own about 35% of Anglo’s shares, so much of the wealth creation has been repatriated.

Another milestone was the 2001 delisting of De Beers from the stock exchange, converting it to a private company held 45% by Anglo, 40% by the Oppenheimer family and 15% by the Botswana government. De Beers, the house that Cecil Rhodes built, would forevermore operate beyond the glare of public scrutiny. Around the same time Anglo acquired substantial coal interests in Australia and bought Exxon’s copper interests in Chile, including the world-class Los Bronces mine.

Two years later it added the Collahuasi copper mine in Chile to its portfolio, building its annual copper output to around 500 000 tons.

In 2003 it acquired a majority interest in Kumba Iron Ore, the largest iron ore producer in Africa. In 2007 it commenced construction of the Minas-Rio iron ore project in Brazil, including a 529km pipeline to transport the ore to a new port facility. This project was to Anglo what the Lake Charles chemical project is to Sasol – badly timed and mired in delays and cost overruns. Anglo first acquired a stake in Minas-Rio in 2007 and a year later took control of the project in a $5.5 billion deal with Brazil’s MMX. By 2013, Anglo had taken a US$4 billion bath on the project. It ended up seriously overpaying for what is a decent quality asset, posting a black mark against Cynthia Carroll’s tenure as CEO. 

The great culling

After Carroll came Mark Cutifani as CEO. The period from 2012 to today marks the great culling of Anglo’s less profitable assets. The notion that it has divested itself from SA does not hold up to scrutiny. It still has a massive presence in the country, generating 50% of all mining Ebitda (earnings before interest, tax, depreciation and amortisation) in SA, and it is still the largest investor in SA mining by a country mile, with R72 billion earmarked over the next five years. Part of this includes the landmark US$2 billion investment in diamonds through the Venetia underground project in Musina, Limpopo, and a US$200 million venture capital fund together with the PIC.

The reinvention of Anglo since 2012 has paid off handsomely. It has lifted its mining margin from 30% in 2012 to 42% today, despite a lower average commodity price basket. Its overall position on the margin curve (effectively a cost curve adjusted for product quality) has improved from the 49th percentile to the 37th percentile – ranking it among the best in the industry.

The share price graph tells the story of its turnaround since 2016:

Source: ShareMagic

South Africa’s relevance to the group in terms of headcount and economic contribution (figures as at December 31, 2018)

Source: Anglo American plc Tax and Economic Contribution Report 2018

And that, very briefly, is the story of the first 102 years of a very South African company despite being named Anglo American.