Miners, smelters can’t cut corners when curtailing production, former Anglo CEO says

Cynthia Carroll told Fastmarkets during a webinar interview that taking the decision to curtail output in deteriorating demand and pricing environments such as those being seen during the Covid-19 pandemic is very difficult but has to happen rapidly to eliminate unprofitable capacity.

“It’s really hard, and it’s particularly hard for the mining industry, because when you cut, it takes much longer to bring it back. You’ve got to be very, very thoughtful and prescriptive about that,” she said.

“It’s easy for business units to say, ‘Well we’re getting there’ – you don’t have time to get there over months and months. You’ve got to get there very quickly,” she added.

Looking back on the lessons learned from the 2008-09 global financial crisis – during which she was Anglo American CEO – Carroll said that the welfare of employees must come first and cutting corners with safety is non-negotiable.

“At the same time, care and maintenance of the operations is absolutely key. You cannot let it go. Deterioration of infrastructure is paramount – you have to be thinking about that,” she said.

“And what is the impact on people? When do you mobilize and when do you demobilize? These are every similar sorts of things that people are thinking about today,” she added.

The Covid-19 pandemic has led to a severe contraction in global growth that economists are warning could foreshadow a downturn similar to the decade-long Great Depression, which began in 1929. As commodities prices fall and demand is crimped, production cuts across mining assets have already started, along with project deferrals, as companies strive to conserve capital.

Carroll faced similar decisions about cuts during her tenure as Anglo American CEO across the mining company’s large portfolio of base metals, bulks, diamonds and precious metals operations.

“We cut or stopped really high-cost production, particularly in platinum and coal. Every production unit, whether it was an ounce, a tonne or a carat, we analyzed. It had to be profitable or become profitable in the very short term,” she said.

“We created visibility of our cost positions across the group so everybody knew where they were positioned on the cost curve, everybody knew that they had support to get to a better position, and we gave them the tools and support to help them to get there,” she added.

It was a tough time, but the process of trimming costs had been ongoing for some time before the effects of the 2008-09 crisis started to be felt. Carroll had arrived at Anglo at the start of January 2007, tasked with working to drive change across the organization, which had around 160,000 employees on six continents.

After a series of initiatives, the company was already reporting a record first-half-year earnings for 2008 of $3.5 billion.

“Then September 2008 happened, and it was a big wake-up call, but we were in a much better position because of what we had already been doing,” Carroll said. “I knew that we would be in a much better place because of the work that we had done over the first two years, but we couldn’t stop,” she added.

Other measures taken by Anglo in the aftermath of the global financial crisis included reducing planned growth projects, Carroll noted.

“We were thinking always about repositioning Anglo through the cycle. We reduced planned growth projects, production growth – we downsized, as painful as it was, but it was all about the long term sustainability of the business,” she said.

“It was difficult in terms of the credit market to access capital for new projects, so we had to be very prescriptive about what we wanted to support going forward and what we didn’t,” she told Fastmarkets.

Anglo American also reevaluated its portfolio and put a number of assets up for sale.

“We were embarking on divestments: Again, what was core, what was non-core and what would really substantially add value going forward,” Carroll said.

Sales included the company’s mineral sands and zinc businesses, the European aggregates and Polish concrete products businesses of its Tarmac unit, and its stake in AngloGold Ashanti.

Dividend suspended
Carroll said that as Anglo American prepared for all eventualities and planned for multiple scenarios, there was a lot of communication internally and with external stakeholders.

“We were advocating for the reasons why we were doing what we were doing and some of that was not so easy,” she said.

One of those tough decisions was what to do about the company’s dividend policy.

“We had to either cut all of our capital and retain our dividend or continue investing in select projects that would deliver substantial value on the short to medium term and suspend our dividend. After a lot of deliberation, we decided to suspend our dividend,” she said.

“We cut 50% of our capex, and we suspended our final dividend, focusing on cash preservation and safeguarding the balance sheet. I can tell you, this is a terrible thing to have to do – it was a tough choice and a decision to make,” she told Fastmarkets.

The move was unpopular with a couple of the company’s more vocal shareholders, but Carroll noted that Anglo American was not alone in cutting its dividend and did not undertake rights issues as many of its competitors did.

The company restored the dividend the following year as the balance sheet was strengthened; the projects it had been supporting delivered about $800 million in cash about two years later.

Anglo American reported profit of $2.4 billion in 2009 and $6.5 billion in 2010.

“Investors were very pleased about that performance,” she said.

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