Anglo American – Demise or Sign of the Times?

Merger of equals? I doubt it. The biggest and hottest mining news, whilst not entirely unexpected, remains a shock too many because it signals an end to an era and the death of a South African institution that cannot be taken lightly, it is bit like imagining a world without IBM, Ford or GE. The Xstrata initiative has been rumoured for a while and the announcement of a proposed merger of equals ring hollow in light of strong rumours that the Xstrata initiative was partly at the behest of some influential and disillusioned Anglo shareholders. The discussions with shareholders are particularly interesting and are an indication of the disillusionment with Anglo management in general and Cynthia Carrol in particular.

 The deal, if successful will see probably see the name Anglo American assigned to history, much like some of their BEE offspring. Something that would have been considered inconceivable ten years ago is now imminent. In a very short time a great and proud entity were transformed into a weak and vulnerable target for predators. A mere eight years ago Anglo was the top miner in the Forbes list of top 2000 companies, at position 113 with BHP Billiton coming in second at 127 and Xstrata a lowly 764. In the 2008 list, Anglo had dropped to 266 with BHP Billiton, the number one miner, at position 183 and Xstrata at 272. Ranking miners the mining companies, Anglo has gone from number 1 in 2000 to number 5 whilst Xstrata climbed from position 16 to position 6. A truly remarkable slide in fortunes.

The embarrassing disintegration of Anglo American despite its high quality assets can be laid squarely at the door of management and an all out governmental assault on business and the mining industry in particular.

Tony Trahar during his tenure in 2005, made the fatal mistake of enraging the vindictive Thabo Mbeki with his “Anti-African” statement on South Africa’s perceived risk profile with investors. His justified criticism was however not openly supported by his peers, a common South African business leader’s disease, akin to the cowardice Trevor Manual recently referred to, and he was hanged out to dry. Anglo American’s management of BEE policy, partly prompted by their need for acceptance and perceived dependence on government goodwill, was less than successful and their focus on political issues resulted in them taking their eye of the ball, which in turn caused the company to lose direction.

At the end of 2007, with great fanfare, Trahar was replaced by Cynthia Carrol, who was to lead Anglo at astounding pace in a desperate dash to oblivion.  Her appointment as CEO was hailed by many. She was going to bring a new approach to South African mining, change our poor safety culture and turn Anglo into a mean effective super miner. She was, being American, hailed as far superior species to stereotype South African CEO’s and Chairmen, suitable for companies like BHP Billiton, Rio Tinto and the unmentionable Swiss upstart with the funny name. In reality, Cynthia Carrol was soon found wanting. The relationship with the government did not show a perceptible improvement, on the contrary, her naivety and approaches were seen as weakness and resulted in further exploitation by officials, the politically connected and “The Entitled”, more money and assets were poured into bottomless BEE pits, executives left the organization and their replacements are rumoured to feel isolated. Public spats with the likes of Davidson and Trahar, in the hallowed halls of Anglo American, were akin to mutinous behaviour and the company clearly found itself on a precipice. The inability of Anglo Management to judge the climate in South Africa, and Africa for that matter, could not be ameliorated by there high quality mineral resources.

Unfortunately, in my opinion, Carrol will not do the honourable thing and fall on her sword. The reference to a “Merger of Equals” is nothing more than an attempt to allow her to maintain some semblance of respectability as a business leader. I do not see how the retention of Carrol will add value to a merged entity. The value in Anglo lies in their mineral assets and their people, value that Anglo executive management has been unable to unlock for a long time and the real value in the merger lies in the leadership and proven ability that Xstrata brings to the party. This was born out by the sharp rise of the Anglo share price on the announcement and the drop in the Xstrata share price. 

The role played by politicians in the demise of Anglo American must not be ignored. The manner in which the government, through mindless doctrine and misguided economic policy, has set out to destroy the mining industry under the guise of corrective action, will haunt us for a long time to come.

The message from the market is clear; get the deal over and done with, thus reducing  insecurity and uncertainty. Anglo shareholders want the deal, Xstrata shareholders do not like the “Merger of Equals” idea and who can blame them, since it may imply the animal that results from this union may have more than its fair share of Anglo genes and culture. To those who are worried and concerned, remember this, a year ago the mighty Anglo American, once referred to, as “The Evil Empire” would have been highly offended by references suggesting they were equal to the likes of Xstrata.


One Response to Anglo American – Demise or Sign of the Times?

  1. gannandale says:

    Comment by Dryblower in “”

    Dryblower sees the dead hand of government descending

    IS this the beginning of a fresh round of global mining industry consolidation, or the end? That’s a question which Dryblower and a few seasoned observers are asking as investors contemplate the possible merger of Xstrata and Anglo American.

    But, as the game heats up and new players join in with their takeover moves, it will become a lot clearer that future control of the world’s mining industry is passing from investors to governments.

    As that happens, it’s reasonable to expect the mining giants as we know them to collapse into the formless shape of a grey government agency – creating fabulous opportunities for mid-tier and junior miners.

    So far, all we have seen is a proposal from Xstrata to create what it calls a “merger of equals” which might appeal to Anglo American’s disillusioned shareholders.

    But, behind the scenes, there is a much bigger picture emerging, a glimpse of which was seen in the failed Chinalco deal with Rio Tinto.

    That proposal would have effectively seen the Chinese government emerge with a dominant stake in Rio Tinto, and the company become little more than a supplier of choice for China.

    The hand of government looms just as large in the proposed Xstrata-Anglo merger, with the South African government wanting to create a “national champion” mining giant based in Johannesburg.

    Pressure from the South African government has already been seen in the form of demands that Anglo American appoint a black chairman to better reflect the fact that much of the company’s assets remain in southern Africa, especially its platinum, diamonds, coal and iron ore.

    European investors argued that skin colour should have nothing to do with the choice of chairman, while also pointing out that Anglo American is officially London-based, a point that irks South Africa.

    Getting Anglo American back under its direct control is an aim of South Africa, and that might be achieved if Xstrata makes such a promise, which seems likely given its curious relationship with the Switzerland-based Glencore commodities group, and a South African chief executive in Mick Davis.

    Glencore, which has its own financial worries that include collapsed commodity prices and $US14.5 billion in debt, is completely disinterested in where a merged Xstrata-Anglo is based – even if a move back to South Africa ensures the company falls under the black empowerment rules of that country. This automatically means handing a 26% stake to indigenous investment groups approved by the South African government.

    Other players are yet to show their hand in the Xstrata-Anglo deal, but one name mentioned as having a potential future interest is South American iron ore giant, Vale.

    That’s when another government comes into play because sitting in the background at Vale is the Brazilian government which holds a “golden share” in the company and loves the idea of Vale as its “national mining champion”.

    Getting interesting, isn’t it? China tried to snatch control of financially stressed Rio Tinto. Xstrata, which is under as much financial pressure as Anglo American, would be quite willing to orchestrate the creation of a South Africa national champion, and Vale is already under heavy government influence.

    If there is a common link in all this it’s the worldwide scramble for control of scarce natural resources.

    The most extreme example is the way governments took control of the bulk of the world’s oil industry in the 1960s and 70s, merrily nationalising once independent businesses and then operating under the banner of the Organisation of Petroleum Exporting Countries.

    Tough economic times mean that governments are now super-keen to see mining companies focus on job creation inside their borders, or behave in a way that ensures the delivering of cheap raw materials to its factories – which is what China wants.

    For investors, the next phase of the constantly evolving mining world will present marvellous share trading opportunities as deal flow accelerates with a full-scale BHP merger with Rio Tinto possibly making a return appearance.

    But, once the dust settles, we could easily have the top end of the mining world dominated by government-controlled national champions – opening the way for the rise of second-tier miners that will fill the shoes of the giants as they make decisions that please governments, but not investors.

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