Triple-A Recovery Opportunities: Anglo American

In this short series of articles, I'm profiling three good recovery candidates for 2013: insurer Aviva, drugs firm AstraZeneca and miner Anglo American  (LSE: AAL  ) . They all start the year with a new chief executive, and a good chance that new management and a new strategy will rehabilitate them in investors' eyes.

Last week I looked at Aviva and AstraZeneca. Today it's the turn of Anglo American, the diversified mining group that has a somewhat idiosyncratic mix of businesses. As well as iron ore and copper, its major activities are in platinum and diamonds, through its 85% shareholding in De Beers.

The change of guard at Anglo has been more recent and of a different character from the other two. The bosses at both Aviva and Astra were abruptly ousted in last year's shareholder spring as punishment for lavish remuneration and corporate underperformance. The demise of Anglo's CEO Cynthia Carroll has been a long drawn-out affair, with disgruntled shareholders finally forcing the chairman's hand this month.

But that meant the board had time to identify a replacement. So in a smooth transition, new CEO Mark Cutifani takes over in April.

Will he be able to turn around the performance of Anglo? The South African miner has become the Cinderella of the sector. Even over the last 12 months, its shares have lost 30% while rivals Rio Tinto and BHP have drifted just a few percent.

Cutifani will have two major issues to deal with, which will determine whether the company's reputation is restored.

First is Anglo's 80%-owned South African platinum business, Amplats, which provides 40% of global supply of the metal. Depressed demand -- it's mainly used in auto engines and jewellery -- coupled with overcapacity and rising labor and energy costs, have trashed profitability. Along with Lonmin, Amplats has suffered from strikes and labor unrest.

This month Amplats produced a turnaround plan. It's a sensible strategy, combining closing or selling fewer economic mines to reduce production by about 15%, while consolidating other mines and introducing efficiency measures that will shed 14,000 jobs and save $430 million a year. But implementing it is another matter.

It is perhaps not surprising it was met with strong criticism from the government and unions. The mineral resources minister claimed not to have been consulted and threatened intense regulatory scrutiny.

That's one area where the appointment of Cutifani should reap rewards. Currently CEO of AngloGold Ashanti, he is also president of the South African Chamber of Mines and has a track record of shrewdly negotiating that country's political and labor relations minefields. With the threat of nationalization just around the corner, being able to implement Amplat's restructuring plan effectively and uncontentiously will be vital.

Secondly, Cutifani inherits massive cost overruns at Anglo's Brazilian Minas-Rio development. Subject to delays and ever-escalating costs, the project would increase Anglo's iron ore production by 50%. Much of the delay has been down to litigation and regulatory issues in Brazil, but the scale of the project is technologically challenging.

Cutifani brings hands-on operational mine experience, and a CV that includes a stint as chief operating officer of Brazilian Vale's nickel business. He could be just the right man for the job.

Watch for write-offs
Of my three triple-A recovery stocks, Anglo is the most risky. But there's a good chance the new incumbent will be keen to clean out the stables, to create a lower base from which his future performance will be judged. That could well see the company making big write-offs, most likely on Minas-Rio, following Rio Tinto's recent example.

If that happens, the stock could drop before the company starts to recover. So Anglo is definitely on My Watchlist, and I shall be quick to pounce if all the bad news is rushed out over the next couple of months.

Identifying companies that are able to turn around their operational performance, and investor sentiment, can be a powerful way of growing the value of your share portfolio. Many pundits ascribe the recent rise in the stock market to investors shunning low return bonds in favor of shares. If that trend continues, it will power the markets throughout the year.

Picking the right stocks can supercharge your returns. If you looking to profit as a long-term investor, then I recommend "10 Steps to Making a Million in the Market." Full of tips from the Motley Fool, it's free, and you can download it to your inbox immediately just by clicking here.


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9/29/2016 11:05 AM
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