Active management has positioned Anglo American well

Active management has positioned Anglo American well

Anglo American (Anglo) is a global mining and minerals processing company, operating in 15 countries, with a diversified commodity portfolio. The company is positioning itself to produce commodities that will aid the transition to a low carbon economy, while meeting the increasing consumption demands of growing economies.

Boom to bust prompts strategy shift
Since the beginning of the 21st century, China’s rapid industrialisation has led to a surge in demand for most commodities and a consequent increase in commodity prices. This resulted in one of the greatest ever booms in the mining sector, which ended in 2015/16. The high increase in demand over this period prompted mining companies to embark on large new projects and make material acquisitions. The resultant large debt balances they built up placed balance sheets under enormous pressure when commodity prices eventually declined.

Anglo was no exception and faced deep financial trouble. They reacted by changing management and pursuing a new strategy aimed at focusing on emerging long-term trends (ie materials used in a lower emissions world) and reducing their operating footprint by selling off assets or closing operations unless they fitted a low cost, low risk format. The chart below presents the current composition of global greenhouse gas emissions.

The Anglo core commodity portfolio
The company’s portfolio of high-quality, long-life resources assets includes the following:
Iron ore is the key ingredient used to make steel, the most widely used of all metals. Anglo’s iron ore operations provide customers with a high-grade ore that is primarily used in steel-making blast furnaces. As steel producers in China and elsewhere face tougher emissions legislation and are actively seeking ways to operate their furnaces more cleanly and efficiently, the demand for higher grade (64/67% vs 62% iron content) and higher quality (lump and pellet vs fines) iron ore products – such as those produced by Anglo – increases. Iron ore is integral to infrastructure growth plans, particularly in developing nations, with China being the largest consumer at over 65% of global demand.

The company currently has two iron ore operations: JSE-listed Kumba Iron Ore in South Africa (Anglo has a 69.7% shareholding) and Minas-Rio in Brazil (owned outright by Anglo). Both facilities produce high-grade iron ore, thereby differentiating them from competitors who predominantly produce iron ore of a lower grade (less than 62% iron content). Kumba’s lump iron ore commands a premium price, owing to its excellent strength and high iron content (averaging 64% to 65%). Minas-Rio’s pellet feed product also commands a premium price due to the ultra-low contaminant levels and high iron content (67%) – particularly sought after by steel producers who seek to minimise emissions while boosting productivity. Competitors typically produce iron ore fines that need to be refined further by steelmakers through a process called sintering, which generates additional carbon emissions.

Copper has unique and varied properties (superior thermal and electrical conductivity, resistance to corrosion, durability, reliability and malleability), making it an essential resource for urban and industrial development. Importantly, it is fast becoming a prominent part of infrastructure planning in the US, China and Europe and is playing a growing role in the global renewable energy mix, centred around renewable electricity.

Copper is an essential input resource in the automotive industry. The batteries in electric vehicles contain three to four times more copper than conventional internal combustion engine batteries and it is also used on inverters, wiring and charging stations. Similarly, the electricity sector constitutes a major area of demand (60% at present) where copper is used for wiring, cabling and connection. 20% of copper is used in construction and, more recently, has been intensively deployed in the building of wind turbines, generators and transformers – all requiring extensive cabling to transfer electricity.

Anglo’s copper division is expanding with the development of the Quellaveco mine in Peru, scheduled to start production in 2022 at an expected rate of 300 000 tonnes per annum. Current total copper output is at 640 000 tonnes per annum via two of the world’s largest copper mines located in Chile – Los Bronces (a 50.1% Anglo owned and managed operation) and Collahuasi (Anglo has 44% interest in this independently managed joint operation), with reserves for 37 years and 68 years respectively.

Diamonds have long remained an iconic symbol of romance, yet changing consumer preferences and marriage trends are challenging the ongoing stability of the market for these precious stones. Strong growth in the Chinese and Indian markets should, however, continue to offset plateaus or low growth in developed markets where marriage rates are declining. Market leader, De Beers, is Anglo’s global diamond business producing around a third of the world’s rough diamonds by value – positioning it to benefit accordingly.

The precious basket
Platinum Group Metals (PGMs) are used in an extensive range of applications across the chemical, electrical, medical, glass and petroleum industries.

In the automotive industry they are used in catalytic converters and fuel cell technology. Platinum, palladium and rhodium specifically, enable catalytic converters in conventional vehicles to reduce pollutants from exhaust gases. Consequently, demand for PGMs from this industry is expected to continue to grow, further supported by stricter emissions regulations. Hydrogen fuel cell powered electric vehicles provide a zero-emissions powertrain solution, particularly well-suited to heavy-duty, long-range and fleet vehicles. With increasing focus on the environment, a growing interest in hydrogen fuel cells as an alternative energy source is evident – this technology is platinum intensive.

Platinum is also used in jewellery, the outlook for which remains positive given growing income levels in populous developing countries.

Anglo’s PGM business is held through an 80.8% interest in JSE-listed Anglo American Platinum (Amplats) who own and operate five mining assets in South Africa’s bushveld complex. This includes Mogalakwena, the world’s largest open pit PGM mine and the only operation in the Northern limb of the bushveld with a high composition of base metal content, copper and nickel along with its PGM metals (platinum, palladium, rhodium and others). The rich base metal content makes it a valuable mine – along with being a low risk and lower cost operation.

Other valuable assets
With a growing global population and increasing income levels in developing economies, the demand for fertiliser is intensifying in line with the demand for more food. Sustainable increases in crop yields across a limited amount of arable land will require a greater use of potash fertilisers as a critical element in supporting soil replenishment.

Anglo’s crop nutrient segment is represented by their recently acquired Woodsmith Project in the UK, situated at the site of the world’s largest known deposit of polyhalite1. The project will supply premium quality fertiliser certified for organic use, with a low carbon footprint. The chart below indicates the expected population and economic growth over the next decade, along with increased urbanisation. This growth will lead to an exponential rise in food demand.

Anglo is the world’s third largest producer of metallurgical coal, with operations strategically located in Australia, close to growing Asian markets. Metallurgical coal is used primarily in blast-furnace steel making. Roughly 70% of global steel is currently produced using this method and there are no viable substitutes for metallurgical coal in the steelmaking process. The Asia-Pacific region is growing strongly, with consequent high and rising demand for the the steel needed for building and transport infrastructure, housing and machinery.

1A natural mineral fertiliser product containing potassium, sulphur, magnesium and calcium.

Ditching dirty assets
Thermal coal constitutes a third of energy production globally and is responsible for a third of the world’s carbon dioxide emissions. In line with the shift towards decarbonisation, thermal coal usage will need to be significantly reduced in favour of cleaner energy sources. Anglo has focussed on meaningfully reducing its thermal coal exposure over the last five years, announcing plans to dispose of the remainder of their thermal coal assets over the near term.

Active management pays off
Anglo has been progressively positioning itself to benefit from emerging long-term trends, while creating value for shareholders. In addition, value creation results from the group’s focus on technology and operational excellence. Their P101 Programme aims to have operations achieving the highest productivity targets across all processes it undertakes, resulting in marked cost savings since its implementation in 2016. Furthermore, the use of technology such as bulk ore sorting and coarse particle recovery has meaningful cost improvements and productivity gains across its various mines. Anglo management have evidently significantly improved the company over the last five years and its portfolio of assets is poised to deliver meaningful growth and shareholder value.

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