Taking a peak at a possible strip show

UNTIL it become politically incorrect, asset-stripping was an art practised by some of the world’s smartest business operators. While the terminology has changed Hogsback wonders whether he has caught a whiff of asset stripping around the edges of Anglo American.

Tim Treadgold

The words used last week about AA were “break up” and can be found in an interview with the company’s chief executive, Mark Cutifani, in London’s Financial Times.

The suggestion is pure speculation on the part of the author and Cutifani himself says he is not worried about what potential predators such as Ivan Glasenberg from Glencore Xstrata might be thinking.

However, Cutifani did add that anybody with a bit of stripping in mind would: “have to pay a lot more than is on the books today, and so they should because we’ve got a lot of value”

There is no point in arguing with Cutifani about assets and what they might be worth because he has opinions that can be as forcefully put as those by The Hog.

However, it is worth pointing out to the AA boss that even if he has a high opinion of the assets on the company’s books there is only one value that counts, and that is what someone else thinks those assets are worth. Right now the assets of AA are not highly valued.

Why is this so? Why is AA seen as the poor man of the globally significant diversified miners?

The answer lies in genetics. More specifically it can be found in the South African roots of AA and its heavy dependence on earnings from that troubled country along with a management structure reflecting the hierarchical nature of South African thinking, which is along the lines of: “I’m the boss, and you’ll do what I tell you”

Anyone who has followed the decline of AA knows the story that is one of a business able to grow in a country courtesy of its isolation and lack of interest from international rivals.

A lot has happened over the past 40 years but not a lot has changed. While Cutifani might think AA’s assets are worth more than the market says they are worth he will have a hard job proving it from within the structure he has inherited.

Another owner might find it somewhat easier because of the potential to make a clean break from the past and to put the assets in places where they can lift their performance.

That point leads to the question of who wants what should Glencore Xstrata make its moves and start re-shaping AA by selling the bits that do not fit and keeping the bits it likes.

Iron ore and manganese, for example, are naturals to be kept by Glencore Xstrata because they are a glaring omission from its portfolio. Platinum is a certain sale, if anyone wants a deeply troubled business unit in the precious metals sector.

As for the rest of the portfolio here are a few suggestions, based on the assumption that a raid and break up of AA is on the cards for 2014:

  • coal (metallurgical and thermal), would probably stay with Glencore Xstrata because it is one of Glasenberg’s favoured commodities, though it would not be surprising to see government demands that some assets be sold to third parties to prevent excess control in certain markets
  • copper, probably sold because Glencore Xstrata already has extensive copper exposure and is already being forced to sell some copper assets as a result of the merger of Glencore and Xstrata
  • nickel, sold (if a buyer can be found)
  • diamonds, sold because it is an industry that requires a high degree of marketing and falls outside the skill set of a bulk-commodity specialist
  • niobium, sold (also too specialised)
  • phosphates, kept as an emerging bulk commodity asset which sits comfortably with Glencore Xstrata’s mining and food assets

For The Hog, with his special interest in Australian coal mining, the possible break-up of AA would cause immense interest in that sector because the company has a string of plum assets, including controlling stakes in the Drayton, Moranbah North, Foxleigh, Callide, Capcoal and Dawson mines.

At the risk of getting too far ahead of the possible action it is possible Australian competition regulators might find that Glencore Xstrata, with its large portfolio of coal mines in Queensland and NSW, would be too big for comfort and able to exert excess influence on the industry, especially in the area of prices paid for services.

Whether the idle chatter that lies behind the use of the term “break up” by the FT is a guide, or whether the gathering of private equity buy-out specialists is another clue, it seems certain that 2014 will be a very interesting year for AA.

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