Anglo American confirms turnaround plan, warns 2014 will continue to be tough

Anglo American (LON:AAL) Chief Executive Mark Cutifani said Thursday the company has made significant progress in terms of bolstering its profitability, but said it expects to face headwinds next year as it continues to implement his turnaround plan.

The executive, who has been implementing drastic measures since he assumed in April, said he still is expecting to boost Anglo’s return on equity employed to more than 15% by 2016 from 11% in the first half of this year, by generating an additional $3.9 billion in annual earnings before interest and taxes, or Ebit, through cost cuts, a smaller project pipeline, better operational performance and extracting more value from the sale of its products. This compares with Ebit of $3.3 billion in 2012.

Cutifani, who five months ago described the company’s performance as “unacceptably poor”, also outlined fresh plans to further cut costs and drive better returns from its remaining mines.

Eyes on South America

The Australian, the second non-South African to head Anglo American after taking over Cynthia Carroll on April 3, said he was no longer so interested in selling a stake in the company’s iron ore mine in Brazil, Minas Rios, as it represents one of Anglo’s flagship growth projects. However, massive cost overruns and a $4.9bn writedown have become a symbol of the mining giant’s management failings, Cutifani admitted.

The company is also looking at expanding its Quellaveco copper project in Peru by 20%, to increase its annual production to 270,000 tonnes a year. The mine, however, will be approved not before 2015.

Three buckets

Anglo American said it has identified three "buckets" from which it plans to extract extra profitability.

The first one is expected to bring about $900 million in additional annual profits if the company meets performance metrics at four assets—Minas Rio, the Brazilian Barro Alto nickel plant, its Niobium phosphates operations and the Colombian Cerrejón coal mine—on time and on budget.

The second bucket is the firm’s Chilean copper assets, which will be subject to operational improvements seen as delivering about $1.2 billion annually.

The last source of extra earnings for Anglo will be continuing cost-cutting measures, reducing the company's project pipeline and generating more value from product sales.

The diversified miner's share price has suffered in part due to labour strikes in South Africa, cost overruns at Minas Rios and hiccups at its Chilean copper mines. Since 2007, the company has more than doubled its total capital employed, but its rate of return has fallen more than 50%.