Mining: Reducing debt a hard sell

Glencore’s asset disposal strategy has moved far quicker than Anglo American’s. Within 18 months, it has completed its disposals and raised US$6.3bn, while Anglo American has raised about $4bn over three years.

Anglo has reduced the number of its assets to 42 from 68 through both sales and closures, but it seems to have stalled on exiting some of its biggest divisions, in particular SA iron ore and coal.

To be fair, the sale of assets has not been easy while commodities prices have been volatile, making valuations uncertain.

For Anglo American in particular, sales of SA assets have been delayed by government’s determination to bring more previously disadvantaged people into the mining sector. This is despite all the evidence that mining shareholders need deep pockets and long investment horizons. Both companies suspended dividends this year, but while Glencore has undertaken to resume payments next year, Anglo American has made no commitments.

Glencore realised three times its original target, announced 18 months ago, of $1bn-$2bn from asset sales. Like Anglo, Glencore’s objective was to bring down debt. Asset sales and other measures, including a $2.5bn equity raise, have reduced Glencore’s debt from $30bn to $20bn. By the end of its current financial year in December, its net debt will be $16.5bn-$17.5bn, CEO Ivan Glasenberg says.

Glencore’s two biggest disposals were of its Australian coal-haulage business, which raised $1.14bn, and $3.2bn raised from the sale of a 49.99% stake in its agricultural interests to two Canadian institutions.

Other sales include gold and silver streaming transactions.

But it has not all been plain sailing. Glencore did not manage to dispose of its Lomas Bayas copper mine in Chile or its Cobar copper mine in Australia as it could not get the right price for them, Glasenberg says.

"The assets sold have not changed the profile or earnings of the company," he says. "We believe we have sold these businesses at very good prices."

In February, Anglo American CEO Mark Cutifani said the group would target debt of $6bn within three years, from $12.9bn, through cash flows and the disposal of businesses other than diamonds, platinum and copper.

The latest guidance is that net debt should be below $10bn by the end of this year.

Since the disposals were first announced, prices of iron ore and coal have surged, raising questions about whether Anglo will pursue the sales of these assets. But Cutifani says the only difference is that Anglo will be "a lot tougher in the prices we are asking for our assets".

This year Anglo realised $1.5bn in cash from selling its niobium and phosphate business and $215m from placing its 9.7% stake in Exxaro Resources with various institutions.

It also sold some smaller assets, including a final exit from Tarmac. Last year it realised $1.9bn from disposals, including selling Rustenburg platinum mines to Sibanye Gold.

But a deal to sell the Australian coal mines, including Grosvenor and Moranbah, to a consortium headed by Apollo Capital Management, which could have raised $2bn, is said to have been voted down by Anglo’s board.

There has been no progress in exiting SA thermal coal or Kumba, but it is understood there is pressure to unbundle these assets to benefit a new "black mining champion".

An unbundling will not raise new money, but it will reduce consolidated debt.

Glencore’s shares have gained 249% to about R50 from the nadir of R14.20 touched in September last year. Anglo’s shares have gained 254% to R209 from their December low of R58.99.

But longer-term shareholders have little to celebrate: Glencore’s shares are similar to their November 2013 listing price, while Anglo shares are less than half their 2008 peak of more than R500. Of the two shares, analysts marginally prefer Glencore over Anglo. Bloomberg’s poll of analysts shows nine recommend it as a "buy", while eight recommend Anglo. In a note last month, Momentum SP Reid analyst Percy Takunda said in view of Glencore’s recent share price recovery, there is more value in switching to Anglo or South32.