By Alex MacDonald And Scott Patterson
Anglo American PLC said Thursday that it would shave up to $4
billion off the value of its mining assets, in another sign of the
U.K. resources giant's struggle to execute a turnaround plan
launched by Chief Executive Mark Cutifani.
Most of the write-down will come from the Minas-Rio project in
Brazil, a person familiar with the matter said, an $8.8 billion bet
on iron ore launched last year as prices for the steelmaking
ingredient spiraled toward historic lows. The company cited weak,
volatile prices for iron ore and metallurgical coal for the
post-tax, noncash impairment charges.
The write-off comes about a week before Anglo is due to release
financial results for the first half of 2015 that analysts expect
to be weaker than last year, when it posted a net profit of $1.46
billion. Mr. Cutifani is likely to face pointed questions next
Friday about the storied miner's long and painful fall from grace
that has accelerated since he took over in April 2013.
"We will certainly engage [management] on the company's poor
performance and their proposed turnaround strategy," said Sekgoela
Sekgoela, a spokesman for Anglo's largest shareholder, South
Africa's Public Investment Corp., the country's state-owned
investment fund.
Mr. Cutifani had gained a reputation as a turnaround expert in
his five years leading AngloGold Ashanti Ltd., a company that Anglo
American created in 1998, began selling out of in 2006 and
completely exited in 2009.
Investors had looked to the 57-year-old to fix things when he
took over what the British press has long called "the toughest job
in mining" because of the company's sprawling empire and its large
operations in South Africa, whose government happens to be its
largest shareholder.
Mr. Cutifani's job was made even more difficult by a commodities
price slide that has smacked the entire industry. From copper to
nickel to coal, prices have fallen sharply in the past year, hurt
by a slowdown in Chinese demand. Top competitors like BHP Billiton
Ltd., Rio Tinto PLC, and Glencore PLC have also taken large
write-downs and watched their share prices dive.
But none of the big, independent miners has been hit quite as
hard as Anglo. Halfway into Mr. Cutifani's three-year turnaround
plan, the company hasn't been successful by its CEO's own
measures.
Mr. Cutifani said he would turbocharge profit by boosting the
operational efficiency of its mines and cutting costs. Instead,
profit has declined as commodity prices collapsed. He said he would
shed poor-performing assets, such as the miner's struggling South
African platinum mines, but he has struggled to strike any major
deals.
The company has lost $16.5 billion in market value since he took
over--a 46% drop--continuing a slide that began years before. Its
London-listed shares are hovering near a 13-year low.
Now, investors and analysts are predicting that Anglo's cash
flow will be so crimped that it may have to cut its dividend--a
drastic move in an industry where shareholders have been clamoring
for long-term investment yields.
"Management has little choice but to focus on balance sheet
preservation in order to navigate a sustained downturn," said Marc
Elliott, mining analyst at Investec Securities.
Anglo declined an interview request for Mr. Cutifani, who has
remained upbeat in past public statements. He has said he has been
successful in making several of Anglo's mines more efficient,
reducing headcount and cutting operating costs.
"We are exactly half way through a three-year turnaround program
that is fundamentally repositioning Anglo American--operationally,
structurally and culturally--with progress on all fronts despite
the sharply weaker price environment," said James Wyatt-Tilby,
spokesman for Anglo American.
Mr. Cutifani's critics acknowledge he inherited a host of
problems following six years of underperformance during the tenure
of his predecessor, Cynthia Carroll. Among the biggest:
overspending at Minas-Rio.
Anglo American acquired Minas-Rio in 2007 to capitalize on
China's once-insatiable demand for iron ore. But the project fell
more than five years behind schedule and costs ballooned to $8.8
billion from an initial $2.7 billion estimate, prompting the
company to write down the value of the project on two separate
occasions--to the tune of $7.5 billion after iron-ore prices
fell.
The company started shipping iron ore from Minas-Rio in October,
but Barclays says the mine may be running at a loss. Its break-even
price for iron ore was $63.50 a metric ton during the ramp-up phase
and $50 a ton at normal production, according to the bank. The
comparable spot price was $50 a ton on Thursday. Meanwhile,
competitors like BHP and Rio are producing a glut of iron ore at a
lower cost, further hurting prices.
Mr. Cutifani, who can't do much more about Minas-Rio, has had
limited success containing the fallout from that and other
problems.
He has also struggled to reduce head count quickly in part due
to tricky labor relations in South Africa, where it had to step
back from proposed job cuts at Anglo Platinum, its majority-owned
unit, following government-brokered negotiations with unions. Anglo
is one of the largest employers in a country where unemployment is
at an 11-year high of 26%.
The company got some good news with the closure of the Holcim SA
and Lafarge Ltd. merger. That would help Anglo unload a
construction venture with Lafarge that the miner wants out of and
net the company $1.37 billion, possibly staving off concerns about
its dividend.
Some experts say Mr. Cutifani remains the best-qualified person
to shepherd the company's turnaround.
"I can't pinpoint anything bad that he has done apart from being
overly ambitious," said Ben Davis of Liberum Capital, a London
broker. "Also, who else would want the job in the current market
environment?"
Write to Alex MacDonald at alex.macdonald@wsj.com and Scott
Patterson at scott.patterson@wsj.com
Access Investor Kit for Rio Tinto Ltd.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=AU000000RIO1
Access Investor Kit for Anglo American Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=GB00B1XZS820
Access Investor Kit for Anglo American Plc
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US03485P2011
Subscribe to WSJ: http://online.wsj.com?mod=djnwires