2015 has been a year shareholders ofAnglo American (LSE: AAL) would rather forget. Year-to-date the companys shares have fallen a staggering 69%, excluding dividends. Including dividends the companys shares have returned -66%, which is hardly any consolation.
And there could be further pain ahead for Anglos investors as its widely expected that the company will announce a dividend cut this week. Whats more, if the most pessimistic City analysts are to be believed, Anglo will require a rights issue to reduce its debt to sustainable levels.
A big mistake
Anglos troubles can be traced to the companys ill-fated expansion into the iron ore industry.
The company is the majority owner of Kumba Iron Ore Ltd., Africas 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 $2.6bn budget.
Anglos South African iron ore operation, Kumba needs to sell its iron ore at a price of $50 per tonne or more to remain profitable. Unfortunately, the spot price of iron ore slumped to an all-time low of$39.40 a tonne last week, and theres nothing to indicate that the price of iron ore will recover anytime soon. Indeed, according to investment bankMorgan Stanley, the iron ore market willpeak at 107.4 million tonnes in 2018 and persist through to 2020.
But Anglodoesnt seem to care. The company is planning to increase iron ore productionfrom 11m tonnes per annum this year, to 29mper annum in the 2018-2020 period. Dumping more iron ore on a market thats clearly oversupplied isnt the best strategy, and if iron ore prices drop further, Anglo is set to lose billions pursuing this strategy.
Debt mountain
One of the key priorities for Anglos management going forward is the reduction of the groups debt pile.Anglo has net debt of $11.9bn more than its current market capitalisation of 5.1bn. The company is seeking to raise $3bn by selling non-core assets and cutting jobs to trim costs.By offloading its tarmac business, two copper mines and three gold mines the company has been able to raise just under $2.5bn, without these sales net debt would have exceeded $14bn.
Anglo has a long-term net debt target of $10bn to $12bn and with profits falling, even after including the cash raised from asset sales, the group is running out of options to pay down its debt pile. City analysts believe that the company could save $1.1bn per annum if it suspends its dividend, which might be the most prudent action for management to take.
The market seems to believe that the company will follow this course of action. Anglos rolling dividend yield has recently surged to a staggering15%.A good rule-of-thumb is to treat any dividend yield more than twice the FTSE 100 average with a bit of scepticism. Today that means that investors should consider avoiding stocks with a dividend yield of more than 8%.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
