Tom Bawden: Rivals will keep outperforming Anglo American

Investment View: Cynthia Carroll didn't do such a bad job in an extremely difficult situation
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Anglo American

Our view Hold

Price 1936.5p (+33.5p)

Anglo American shareholders got their wish last Friday, sending the FTSE 100 miner's shares up by 4 per cent after Cynthia Carroll finally bowed to their pressure and quit as chief executive.

But they may yet come to reflect that you should be careful what you wish for. Because although Ms Carroll clearly made mistakes during a reign which saw Anglo American's shares massively lag behind key rivals BHP Billiton and Rio Tinto, she didn't do such a bad job in an extremely difficult situation and there's no guarantee her replacement will fare any better.

Inheriting a highly bureaucratic, unfocused, sprawl of a company in March 2007, she set about tidying things up through a series of asset sales, 40,000 redundancies and by increasing the group's 45 per cent stake in the De Beers diamond miner into a controlling 85 per cent holding.

She significantly improved the difficult relations with the South African government, reduced the group's heavy reliance on the country by diversifying geographically and greatly improved its poor safety record. And she significantly increased Anglo American's low exposure to iron ore and copper – the building blocks of China's phenomenal economic growth that the group had failed to anticipate.

It was these efforts to belatedly tap the Chinese boom that led to Ms Carroll's undoing, in particular her $6bn (£4bn) purchase of the Minas Rio iron ore mine in Brazil, for which she is generally considered to have overpaid. The project is now billions of dollars over budget, with first production currently scheduled for late 2014, five years behind schedule.

The clear frontrunner to replace Ms Carroll is Alex Vanselow, the Brazilian former finance director of Anglo's rival, BHP Billiton, with Chris Griffith, chief executive of the group's Amplats platinum division, also thought to be in with a chance.

Whoever gets what the City is dubbing "the toughest job in mining" will have four big challenges. Top of the list will be the future of Amplats. About 15 per cent of Amplats mines are unprofitable, while the company is mired in, often violent, strikes over pay and conditions that have yet to be fully resolved and show signs of lingering on for weeks, if not months. Anglo American owns 77.3 per cent of Amplats and must decide whether to shrink the business, for example by selling some unprofitable mines, whether to sell or reduce its stake, or simply hand its shares to its investors and let them decide whether to sell or keep them.

The new boss, who is expected to start in the first few months of next year, will also need to continue to diversify away from South Africa – which still accounts for about half Anglo American's operating profit. And they will need to keep a tight rein on cost overruns at Minas Rio and costs in general, in a mining industry where spiralling wages and equipment prices are pushing expenses up far more than general inflation.

Most contentiously of all, they must decide whether to break-up the company. Anglo, like many of its peers, trades at a discount to the sum of its parts, with analysts calculating it could be worth about 20 per cent more if it was broken up.

The most dramatic split scenario could separate the South African and Botswanan parts of the group, comprising the big thermal coal business and stakes in the platinum, iron ore and diamond company De Beers, from the international side, which includes copper, coking coal and nickel.

A break-up of Anglo American along these lines, however, would be fraught with difficulties, not least because the South African government sees the group as a flag carrier and might not take too kindly to the implied loss of power attached to such a dramatic split. A smaller-scale restructuring, such as spinning off De Beers into a separate listing, or reducing its exposure to Amplats, is seen as far more likely.

Since Ms Carroll arrived, investors have lost nearly a quarter of their money, while any cash invested at Rio Tinto and BHP Billiton would have soared by 40 per cent and 100 per cent, respectively.

But the issues facing Anglo American are so deep-rooted – and Rio and BHP's portfolios are so much better diversified by geography and resource – we expect them to continue outperforming their rival.