Giving up on iron ore best option for Anglo American — Investec

Giving up on iron ore best option for Anglo American — Investec

Minas Rio mine in Brazil. (Image courtesy of Anglo American via Flickr)

Anglo American’s (LON:AAL) best business option in the current iron ore market environment would be to unload all of such assets and focus instead on diamond and platinum, international bank Investec said Tuesday.

According to Noticias de Mineracao (in Portuguese, subs. required), the FTSE 100 mining group could get close to $4.7 billion if its sells its assets in South African and Brazil. The move could be the steeping stone for Anglo to finally strengthen its balance sheet, reduce the risk profile of the group and potentially enable a substantial re-rating, Investec said in the note.

Iron ore prices have dropped more than 50% since January 2014 as the top suppliers — BHP, Rio and Vale — have ramped up production, increasing a worldwide glut of the commodity.

Investec believes Anglo could use funds from the sale for dividends and to invest in its much stronger sectors, including copper.

Kumba and Minas Rio

Anglo American exposure to the steel making material is not minor. The company is the majority owner of Kumba Iron Ore Ltd., Africa’s largest iron ore producer. It also owns a key operation in Brazil, the troubled Minas-Rio asset, which went into production last October, about five years late and almost three times over its original $2.6 billion budget.

But the company doesn’t seem to have any plans to sell. Only last week it announced it was thinking about a 10% increase in capacity at Minas-Rio, which could cut unit costs at the $13 billion project.

Production volume could rise from the 11 million tonnes projected for this year to as much as 29 million tonnes in the 2018-2020 period. The figure would be 9.4% higher than the mine's expected capacity of 26.5 million tonnes a year, said Paulo Castellari, Anglo's CEO for Brazil.

Adding new capacity without large additional investments brings down per-tonne costs for bulk commodities. This could help Anglo's Minas-Rio mine compete with low-cost producers Vale, BHP and Rio.