Anglo chief change unlikely to solve all its problems

Anglo American shares jumped almost 4% Friday on the news that Cynthia Carroll is stepping down as CEO.

But, the bounce will, most likely, be short lived.

As one analyst pointed out to Mineweb on Friday: "The problems haven't gone away and anyone who thinks they have is dreaming. There are some really big problems they have to resolve, particularly in their platinum business."

Indeed, even the departing CEO isn't actually expected to leave much before the middle of next year.

But, for most commentators spoken to today, the fact that Carroll is to remain in the chair for a while yet, is a good thing.

Irrespective of the market's view of her performance over recent months, her immediate departure and the leadership hole that it would have created might have been bad for the group and its operations.

Solidarity general secretary, Gideon du Plessis, echoed this is sentiment, saying in a written statement that Carroll's resignation is a major setback for the South African mining industry and for the country's image as an investment destination.

And, it is in South Africa, and especially within its platinum district, that Carroll's successor is going to have their hands full.

Carroll is well respected within South African mining and political circles and her role over the next few months is likely to remain important to the group's plans, especially in light of the platinum review that is currently underway.

But, it is unlikely that any real resolution to these issues will be reached before she departs.

The spiral

After falling sharply in 2008 and 2009 years, the group has rebuilt up its operating profit line at its platinum operations, but recent events have provided a great deal of cause for concern.

For the third quarter, the group reported a six percent drop in equivalent refined platinum production as a result of lower output at the Union North and South, Mogalakwena, Tumela and Siphumelele mines.

But, more importantly than that, the group is losing roughly 4,500 ounces of platinum production a day because of illegal strike action at its mines.

"As a result, and dependent on the resolution of the illegal strike action, the expected refined platinum production for 2012 is reduced to between 2.2 and 2.4 million ounces," the group wrote in its Q3 production report published yesterday.

"Given the retained fixed cost base, and as result of the reduction in production, the 2012 unit cost is expected to be R15,500 to R16,000 per equivalent refined platinum ounce," it added.

Platinum is not, however, the group's only problem. As South Africa's Public Investment Corporation noted, "Poor capital allocation has eroded value in the company over the last few years…We also see this poor capital allocation as limiting dividend paying potential for the group, resulting in unattractive dividend yield versus its peers."

It added, "that the group has produced a disappointing operational performance, particularly in copper, coal and PGMs and has had difficulty in delivering growth projects on time and to budget."

Of particular concern here has been the group's Minas Rio iron ore project in Brazil. Carroll is on record saying, "Minas-Rio is one of the largest and most complex projects in the world, and certainly in Brazil.

And the group wrote in its production report out yesterday, "If all the current impediments are cleared by the end of 2012 and there are no major unexpected interventions, it is anticipated that first ore on ship will be delivered in the second half of 2014. Capital expenditure for the completion of this project was expected to be approximately $5.8 billion, however the quantum of a further increase is currently under review."

Over and above that, the group is having issues with grade at its new Los Bronces copper project while dealing with declining production at its massive Collahuasi copper mine.

And, more generally the group faces a flat market for many of its products in the wake of tepid global economic growth.

As one analyst told Mineweb, it looks very much like Anglo American has lost its way. "There have been cost overruns and delays on a number of projects. There was the whole debacle with Codelco that caught them napping and finally, there is the deal with De Beers, which until now, seems to have been a very sideways move."

But why now?

Breaking the camel's back

All of these issues have been a worry to those concerned for some time and there doesn't seem to have been a single so-called final straw.

So, why announce Carroll's departure seemingly so suddenly, without a clear successor already in place?

Some speculate while the group considered first looking for a successor before announcing the change, the decision was taken to announce that Carroll is stepping down and then begin the search.

The thinking goes had they done so 'in secret', knowledge of the head hunting effort would most likely have leaked out anyway.

Given the issues above and  the current uncertainty about metal prices, especially iron ore, coal and copper one begins to believe Anglo American chairman, Sir John Parker when he said [who is parker? first reference to him is here], "today's decision is very much based on Cynthia's decision which the board has accepted that she feels the right time has come to step down from what is a very challenging role."

And, while share prices across the diversified sector have languished of late and many analysts remain hopeful that metal prices will pick up over the course of the next 12 months as the global economy picks up slightly, whoever steps into the position is going to have an equally challenging time.

 

Image: Bloomberg

This article originally appeared on Mineweb. To read more international mining and finance news go to Mineweb.net.

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