In the global mining sector, capitulation is finally happening.
The massive restructuring of Anglo American PLC, announced on Tuesday, shows that the sector recognizes the commodity downturn could last a long time and companies need to do whatever it takes to survive.
“In this sort of environment, nothing can be considered business as usual,” Anglo chief executive Mark Cutifani said in a presentation to investors.
Metal prices began their steep decline more than four years ago, but the sector was relatively slow to adapt. Companies got complacent after enjoying a decade-long bull market, and simply never imagined prices would fall this far so fast. As a result, they were not proactive in cutting costs and reducing debt. Companies such as Barrick Gold Corp. and Glencore PLC were finally forced into action over the past couple of years, and have taken numerous measures to improve their balance sheets.
But those moves paled in comparison to what Anglo announced on Tuesday. This is a total dismantling of a once-proud company that can only be described as a capitulation.
London-based Anglo plans to get rid of 60 per cent of its assets and shed a staggering 85,000 jobs, meaning it will go from about 135,000 employees to just 50,000. Money-losing assets will be sold or shuttered and the dividend has been suspended. The company will also consolidate from six businesses to just three.
These moves were seen as necessary — indeed, some analysts didn’t think the company went far enough. They show just how severe this commodity downturn is, and how unprepared Anglo American was for it.
“This is a move to protect the company, to make sure it’s still there for the next cycle,” said George Topping, a former analyst and current CEO of Wolfden Resources Corp.
Commodity markets are in oversupply, and the problem is getting worse. When prices soared between 2001 and 2011, Anglo and other companies spent hundreds of billions of dollars to expand output, betting that demand from China would keep rising for the foreseeable future. Today, China is slowing while new mines, which were approved years ago, are coming onstream. Metals like copper, aluminum and iron ore have fallen to levels not seen since the Great Recession or earlier.
What the sector needs most is a wave of production cuts and outright mine closures to bring commodity markets back into balance. However, there have been far too few of them. Since commodities are priced in U.S. dollars and most currencies have fallen sharply against the greenback, companies working outside the United States are getting a currency benefit that offsets much of the weakness in metal prices. That is keeping plenty of them in business.
If the commodity slump does last for years, other companies are certain to follow Anglo’s lead and announce more drastic restructuring measures. How far they go will depend on the state of their balance sheets. While some large miners are in good financial position, others are still carrying too much debt due to overpriced acquisitions they made at the top of the market.
“The higher the debt ratio, the more drastic the surgery is going to be,” said John Turner, head of the global mining group at Fasken Martineau DuMoulin LLP.
Of course, the very fact that Anglo is taking these extreme measures is a positive signal for many onlookers. During the last commodity bear market in the 1990s, prices didn’t turn around until most mining companies gave up all hope of a recovery. That day may be closer than it appeared last week.
“This is a good thing,” Topping said. “When all hope is lost, that’s when it turns.”