London – Glencore’s [JSE:GLN] billionaire chief executive caved this week to shareholder demands that the commodity-trader bolster its balance sheet. Now attention is turning to whether rival Anglo American [JSE:AGL] will follow.
The two companies have been among the hardest hit by China’s cooling demand for commodities on concern they’ll be unable to withstand raw-material prices at a 16-year low and pay off a combined $43.5bn in debt. Measures might include cutting its dividend, which is yielding a record 9%, higher than the level in 2009, when the company last scrapped the payout.
The collapse in commodity prices is undermining Anglo’s CEO Mark Cutifani’s efforts to turn around the fortunes of a business that mines platinum and diamonds in Africa and iron ore in Brazil. Glencore shares rallied the most in almost three years on Monday after the company outlined a $10bn debt-reduction plan, including selling $2.5bn in shares and suspending its dividend.
“If you’re going to have a problem, it’s better to rip the band-aid off than not,” said Rob Clifford, an analyst at Deutsche Bank in London. “Glencore just did it and the stock went up. So any companies who are thinking about strengthening their balance sheet might look at Glencore’s outcome and consider it as well.”
Anglo shares slumped 42% this year, a decline second only to Glencore in the UK’s FTSE 100 Index.
The company is seeking to raise $3bn by selling assets and is cutting jobs to trim costs. It already raised almost $2bn this year by offloading its tarmac business and two copper mines in Chile. Anglo’s platinum unit will make an announcement on Wednesday on selling higher-cost mines in South Africa to Sibanye Gold [JSE:SGL].
“Anglo’s first priority will be trying to deliver the turnaround programme, including the asset-sale process,” said Marc Elliott, an analyst at Investec in London. “They will be trying their damnedest to get that done.”
If it falls short, the company may have to follow Glencore’s lead, Elliott said. Anglo reported a $3.02bn loss in the first half of 2015 and the company said in July that it has net debt of $11.9bn after the tarmac business disposal. It has a long-term borrowing target of $10bn to $12bn. The dividend costs the company more than $1bn.
Anglo surprised investors in July by maintaining its 32- cents a share dividend. Cutifani said at the time that it’s always under review. “In these sorts of environments, you take each six months as it comes,” he said on Bloomberg Television.
Glencore’s decision to halt its dividend came less than three weeks after the commodity trader and miner said it was confident it could continue to make the payment to shareholders and preserve its credit rating.
CEO Ivan Glasenberg made the U- turn after two weeks of discussions with shareholders from North America to Europe. The fresh approach was triggered by the almost-universal bearishness on commodity prices that investors expressed in talks, surprising Glencore’s management, a person familiar with the matter said, asking not to be identified because the meetings were private.
“Glencore has set a precedent,” said Elliott. “It makes it easier for Anglo to cut the dividend, and to some extent a lot of people are already pricing it in. It will still hurt nevertheless if they do it.”
Cutifani’s predecessor, Cynthia Carroll, stopped Anglo’s dividend in 2009 for the first time since World War II as the global financial crisis roiled markets. That sent the shares tumbling 17% that day and came to define her stewardship of the blue-chip mining company.
“Unlike other management teams in the sector, Glencore has acknowledged its debt problem and is taking steps to address it,” wrote Bank of America analyst Jason Fairclough. “Anglo has a geared balance sheet and will be cash flow negative after dividends for the next few years. While the company has ample liquidity, we don’t think the equity market will reward this approach.”