A better Anglo American defence: sell the good bit, keep the bad bits

I read the news today. Oh boy.

Anglo American accelerates delivery of strategy

Four thousand holes in Sneatonthorpe.

Integral to Anglo American’s growth trajectory is the Woodsmith crop nutrients project. Anglo American will continue to work towards the completion of the feasibility study in the first half of 2025, as an essential building block for syndication to a strategic partner. In the meantime, we will slow the investment — which we now expect to be reduced to $0.2 billion in 2025 and no capex in 2026, to support balance sheet deleveraging.

And though the holes are rather small
They have to count them all:

Anglo American continues to recognise the asset’s unique resource and long term value potential and will complete critical technical studies in 2025 to then enable syndication for value with one or more strategic partners.

Woodsmith, the UK potash mining project formerly known as Sirius Minerals, has a rare gift for irritating absolutely everyone. Anglo’s £504mn buyout of Sirius 2020 was hated by shareholders on both sides. The need for a new owner was because its previous rescue attempt was scuppered first by an indifferent government, then by spooked bond investors. A Sirius shareholder pressure group first argued that the takeover price was a steal, then conceded last year that a threefold increase in project costs under Anglo’s ownership meant it probably wasn’t.

It hasn’t helped that Sirius floated on wildly wrong forecasts, nor that its offtake agreement announcements were weird. The addressable market for its particular type of fertiliser was never proved. Financing was never fully secured. Environmental concerns were never resolved. The justification of creating jobs in a depressed area no longer holds. For a recap of these and more themes, Dan’s 2018 post on Sirius has aged very well.

Even now, with Anglo being stalked by BHP, Woodsmith continues to irritate analysts simply by existing. Here’s Liberum’s Ben Davis on Anglo’s decision to zero project capex in 2026:

This is a bizarrely negative signal to send to the market, given that it will be one [of] the three legs to the Anglo American business, and the company’s seeking a strategic partner. It implies that the value case is not yet certain enough, in respect to Anglo American’s new balance sheet capacity. [ . . . ] The valuation will hurt from both care and maintenance expenses and pushing out cashflows even further.

The other two legs of a restructured Anglo are copper and iron ore. If all goes to plan, these will be its only two commodities of scale, but retaining Woodsmith optionality makes it two legs and a shrivelled appendage. The discount Anglo stock carries versus pure-play copper miners like Anglo is likely to remain, absent a takeover, and the only offer on the table right now is BHP’s.

Liberum’s Davis also highlights how fast mining fashions change. As recently as 2015, diamonds, platinum group metals and copper were Anglo’s core businesses under previous CEO Mark Cutifani. His successor Duncan Wanblad has a plan to spin off platinum and sell or demerge De Beers at what might be the bottom of the diamond price cycle, dependent on whether Russian marketing money is ever allowed back.

Fashion’s focus right now is on copper. So, rather than pursue a complicated break-up that’s based on the world looking the same next decade as it does in 2024, why not sell copper?

That’s JPMorgan’s argument. Of Anglo’s assets only copper has universal appeal, so a formal auction of the division would turn “a one horse race into a crowded field”, the broker tells clients;

We believe that a scenario under which a sale of Anglo’s Copper assets are contemplated would maximise competitive tension by unlocking a wider, likely global spectrum of strategically interested parties. We also believe that such a defence scenario could preserve Anglo American plc’s corporate independence, albeit potentially without copper exposure & materially smaller scale.

JPMorgan says Anglo management will probably keep quiet about the idea of selling copper, at least until canvassing shareholders. But it’s too valuable an option not to contemplate:

Our analysis concludes that Anglo’s Board retains substantial leverage to unlock value creation to >£30/sh simply by seeking to extract a meaningful change of control premium on Anglo’s Copper assets. Under a valuation scenario in which Anglo’s Copper division is valued at 10x 2025E EV/EBITDA at current metal price forward curves, we estimate Anglo’s Copper division could be valued at $27bn (£17.49/sh) equity value, with Anglo American plc group value implied at £29.59/sh. Under an upside scenario for base metal prices, JPM Commodities Research forecasts ($11,000/t in 2025/26E), we estimate Anglo’s Copper division could be valued at $31bn (£20.36/sh) equity value, with Anglo American plc group value implied at £32.67/sh. With Anglo American’s share price closing yesterday at £27.07/sh, we believe Anglo’s Board retains defence options that are still materially undervalued by the market.

Woodsmith is a small part of Anglo but is symptomatic of the problem. It’s a long-dated cash-consuming greenfield project that management wanted more than shareholders. Bringing in a partner to share the burden won’t happen before late 2025, once the scoping survey is complete, and maybe not even then. The South African spin-offs have similar timelines.

But Woodsmith is also a “Tier 1 resource” that’s “on plan and on budget,” says Anglo in today’s update. Yorkshire salt is “ideally suited to the long term demand trend caused by threats to food security and the increasing challenges around access to arable land and the need to increase crop yield and support improved soil health,” it says.

Implicitly, the problem remains that most Anglo shareholders only like it in parts. They like the functional copper and iron ore mines, but not the unfashionable South African subsidiaries and the theoretical fertiliser mine.

The conventional solution, to sell or starve the bits of the company shareholders don’t like, is the one Anglo has put forward today. The more radical solution, and arguably the one that makes more sense, is to sell the bits the shareholders do like and encourage them to go away.

Further reading:
— BHP-Anglo American: a quick Q&A (FTAV)