Anglo American CEO Mark Cutifani. Picture: REUTERS
Anglo American CEO Mark Cutifani. Picture: REUTERS

INTERNATIONAL investors have wasted no time putting pressure on new Anglo American CEO Mark Cutifani to cut the multinational miner's exposure to South Africa.

Anglo will this week announce its long-awaited platinum review, which could indicate what the group plans for its South African business. The results of a larger review of the entire group will be made public in June.

Anglo trades at a significant discount to the sum of its parts.

Many analysts believe the company could be worth 20% more if it broke off the South African side of the business.

Cutifani is said to have good relations with the government, nurtured during his five years as head of AngloGold Ashanti.

While the government and unions would have preferred a local CEO for Anglo, they praised Australian-born Cutifani's ability as a mining leader.

Cutifani is also president of the SA Chamber of Mines.

As AngloGold CEO, Cutifani indicated his willingness to consider all options to unlock value for shareholders. He said recently that the option for AngloGold to spin off its South African options remained open.

About 37% of Anglo's assets are based in SA, and generate roughly 50% of the group's operating profit. Any asset closures or cuts from Anglo in SA would almost certainly see Cutifani lose favour with South African stakeholders, including its biggest shareholder, the Public Investment Corporation.

About 15% of Anglo American Platinum (Amplats) mines are unprofitable. All its mines in Rustenburg and some in Limpopo were hit by illegal, violent strikes in recent months. Anglo owns 77.3% of Amplats, which has about 55,000 workers.

Global bank HSBC said that due to political and social tension in SA Anglo shares traded at a discount greater than the value of its platinum holdings. The bank suggested a spin-out of Amplats to existing shareholders.

London-based Bernstein Research told investors: "We would like to see Anglo's Achilles heel, platinum, divested either on its own or as part of a total divestment of South Africa.

"This would improve the group's overall country risk exposure, and allow it to focus on more profitable metals and regions. The resultant 'core' Anglo American would be an attractive merger target for either Rio Tinto or 'Glenstrata' [a reference to the proposed merger between Glencore and Xstrata]."

Bernstein suggested Anglo cut at least 25% of its platinum supply portfolio to provide support for prices of platinum-group metals.

Bank of America Merrill Lynch said: "We think a break-up of Anglo American into a South African and non-South African vehicle could release value by removing the South African overhang from the group's international assets."

However, given Cutifani's turnaround track record and his operational experience in SA, he seems more likely to opt to "right-size" and fix the platinum business while working to get the most from investments in Kumba Iron Ore and De Beers in coming years. Total divestment from SA would halve group free cash flow.

JP Morgan does not expect Cutifani to accept the likely political and labour fall-out from deep production cuts at Amplats before first trying to deliver operational improvement.

Cutifani said his focus would be on returns and margins, capital allocation and delivery.

"He is not a radical deal maker," said UBS, noting that a South African divestment is unlikely in the near term.

It is not only Anglo's South African assets that will keep Cutifani awake at night - there is also Minas-Rio to worry about.

According to Anglo, the estimated cost for the iron-ore project in Brazil has been raised at least five times from an initial $5.8bn to $8bn, owing to licensing delays and high cost inflation across the construction industry in Brazil. The group is busy with a detailed cost review of the Minas-Rio project.

Bank of America Merrill Lynch analyst Jason Fairclough has said that selling part of the project could unlock value for Anglo shareholders.

HSBC disagrees, noting that the market places very little value on this asset.

"Mining assets do tend to rise in value once uncertainties are removed," the bank said.

"This operation has always held some promising aspects (low operating cost due to slurry pipeline for transport and relatively easy expandability once land access issues are resolved). Whilst it might be tempting to cut and run, fixing Minas-Rio is probably much easier than fixing Angloplats," said HSBC.

Cutifani is also expected to deliver value from the De Beers, Los Bronces and Barro Alto investments.

Deutsche Bank said it expects a reshuffle of management early in Cutifani's tenure.

"Anglo generally has a group and board strategy session in June; we would anticipate that this session and the interim results will be the timing for new announcements."

HSBC recommended that Cutifani hold on to Amplats CEO Chris Griffith even if Amplats is cut from the larger Anglo fold.

* This article was first published in Sunday Times: Business Times