Anglo American Can’t Solve Problems With Surgery – by Helen Thomas (Wall Street Journal – May 15, 2015)

The miner could redouble efforts to find cost savings

Falling commodities prices have left Anglo American floundering. Taking an ax to a limb probably isn’t the right response.

Anglo’s shares have lagged behind mining peers. The reason is simple: Anglo has higher debt and less scope to chop investment spending. It won’t generate free cash flow this year, and possibly next, raising concerns about its dividend. Its credit rating was cut by Standard & Poor’s in April.

This has prompted debate about other ways to shore up its position. Anglo could potentially realize value by separating its diamond business, De Beers. That seems unlikely. De Beers has become a bigger contributor as other commodities have dropped. Spinning out the business wouldn’t raise cash. And, despite a solid outlook, prices for the rocks have fallen this year.

Another idea, suggested this week by Investec, is that Anglo could sell its iron ore operations. Amid mounting excess supply, iron ore has been among the sickliest of commodities. In April, it was trading at less than $50 a metric ton, down from about $100 a year ago.

The price has since rebounded to $63 a ton. But, argues Investec, Anglo’s break-even price for delivering iron ore to China is about $50 a ton. That is still higher-cost than its peers. Meanwhile, the cash raised by selling the business could bolster Anglo’s balance sheet and underpin the dividend.

With Anglo’s Minas Rio mine in Brazil up and running, a sale is more feasible than in the past. But getting a decent price seems nigh-on impossible: it is practically an article of mining faith that iron ore will remain under pressure for years to come.

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