Anglo’s profit slumps

2012-07-28 10:51

Company’s Brazilian iron ore project set back further by a year

Anglo American posted a steeper-than-expected drop in profit as faltering global economic growth hit prices.

The miner sparked further disappointment with a delay of at least 12 months for its trouble-prone Brazilian iron ore project.

Weaker prices for key commodities and stubbornly high costs that have squeezed margins have battered the major miners that have reported results so far. Brazil’s Vale posted its worst earnings in two years earlier this week.

Anglo, the first UK-listed mining major to report interim earnings, came in below market forecasts with a 38% drop in operating profit to £2.35 billion (R30.2 billion), a miss analysts attributed to still-rising costs and a poor performance in coal.

The commodity price drop alone, though, was a £1.15 billion hit.

New delays at its flagship Brazilian project, Minas Rio, also dealt a blow, overshadowing progress at Anglo’s Grosvenor asset in Australia and prompting some analysts to question its ability to develop a newly acquired coal deposit in Mozambique, where it could also face challenges from lack of infrastructure.

Minas Rio, which has seen costs spiral since the project’s purchase in 2008 in one of Anglo’s most controversial deals, is now expected to ship its first ore in the second half of 2014, a year later than planned.

“Until these hurdles are cleared, we cannot determine with confidence the date of first production,” Anglo chief executive Cynthia Carroll said, adding that Anglo had boosted its team of lawyers to deal with the legal and licensing challenges.

Anglo has already secured 200 licences for Minas Rio.

Anglo last year raised the estimated cost of the iron ore mine, warning it could be as much as £3.69 billion, and it said on Friday that it was assessing the impact of the fresh delays on costs and would inform the market later this year.

“The bigger disappointment was around Minas Rio, where there’s been an announcement of a further 12-month delay, which is conditional upon getting all of the necessary regulatory, environmental approvals and clearing the legal hurdles by the end of 2012,” said Nomura analyst Patrick Jones.

“That roughly five-month time frame to overcome those hurdles is possibly overoptimistic.”

Anglo is not alone in facing licensing woes in Brazil, where rival Vale and others have also been hit by delays, and Carroll said she had met Brazilian President Dilma Rousseff in London for the Olympic Games to press for improvements.

Anglo shares fell on Friday’s news, dragging the mining firm to the top of the FTSE loser table as it traded down 4.3% at £18.8 in morning trade, underperforming a 0.5% rise in the index.

Anglo had been expected to post a lacklustre start to the year after core South African units Kumba Iron Ore, Anglo American Platinum and De Beers reported a weak first half. Kumba, which Anglo regards as one of its most promising assets, saw profit drop 18%, while earnings at the platinum unit were down almost 80%.

But analysts said costs had remained high across the group, and both copper and coal, particularly an almost 70% drop in metallurgical coal profit, were worse than expected.

Operating profit from the copper business, the second-largest contributor to earnings, fell 30% as the ramp-up of its Los Bronces expansion project failed to offset problems elsewhere, including bad weather, stoppages and operational trouble at its Collahuasi mine in Chile.

Anglo, locked in a dispute with state copper miner Codelco over its Anglo American Sur assets in Chile, declined to give an update on talks, but said it was still open to a “commercial solution”.

The two have until August 24 to reach a deal.

The group provided light at the end of the tunnel for the battered and oversupplied thermal coal industry, though, predicting that production cuts from US producers should help rebalance the market in the final quarter of 2012.

Anglo has pulled its Brazilian iron ore mine, Amapa, out of its iron ore division and into the “other mining and industrial” division, reviving talk the mine could be sold.

Anglo is cutting back planned spending for 2012 to £3.5 billion from £4.45 billion.

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