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Mining results continue to be written in red as Anglo American announces loss

World Coal,

Anglo American has become the second major miner to slip into negative territory, recording a pre-tax loss of US$ 239 million and a net loss of US$ 1.49 billion in its 2012 results. It follows Rio Tinto, which announced a US$ 3 billion loss after writedowns on its aluminium and Mozambique coal businesses.

Last month, Anglo announced it would take a US$ 4 billion writedown on its Minas-Rio iron project, while its platinum business continues cause pain, posting an operating loss of Rand 6.33 billion (US$ 710 million) for 2012. The company had made a pre-tax profit of US$ 10.8 billion in 2011.

At the operating level, Anglo reported a 44% fall in underlying profits to US$ 6.2 billion and a 54% drop in underlying earnings to US$ 2.8 billion. Announcing the results, Anglo’s outgoing CEO, Cynthia Carroll, blamed “markedly weaker commodity prices, ongoing cost pressures and an operating loss in our platinum business” for the results.

As with its larger rival, however, Anglo did offer some hope in the results: “Looking ahead, recent months have brought a degree of renewed optimism to the economic prospects. While European and Japanese economic activity remains weak, recent policy changes ought to stimulate growth in 2013. Alongside a continuing recovery in the US, we expect robust growth in the major emerging economies – especially China and India – as they benefit from continuing urbanisation. Rising living standards and an expanding middle class should support demand for our products across our diversified mix.”

Metallurgical coal

Metallurgical coal recorded an underlying operating profit of US$ 405 million, 66% lower than the 2011 record of US$ 1.19 billion. This was driven by a 29% decrease in export metallurgical coal prices.

The drop in prices was partially offset by a 25% increase in metallurgical coal sales volumes, which came on the back of productivity improvements at both the opencast and underground operations and a reduction in weather-related stoppages. Export metallurgical coal production increased by 24% to 17.7 million t (2011: 14.2 million), with record production in the second half of the year.

Following the oversupply of metallurgical coal in 2012, as strong production from Australia combined with an increase in experts from the US, Anglo expects a rebalancing of market in H1 2013 as demand recovers in China and some high-cost US and Australian production is idled.

Thermal coal

Thermal coal generated an underlying operating profit of US$ 793 million, a 36% decrease, mainly driven by lower average export thermal coal prices and above-inflation cost pressures.

Although international seaborne demand grew by 14% to 910 million t, supply still dominated pricing, with record US exports, strong production growth and fewer weather-related supply disruptions exerting downward pressure through the year. The international seaborne market experienced an overall decline in prices during the year owing to oversupply, with the average API4 index price falling by 20% to US$ 93/t (2011: US$ 116/t) and closing the year at US$ 90/t (2011: US$ 105/t).

The decline in prices was partly offset by the closure of high-cost sections, a weaker South African rand and increased sales volumes from the full incorporation of Zibulo as an operating asset, supported by record production at Cerrejón.

For the South African thermal coal industry, exports into Asia continued to increase, principally driven by India. Asia accounted for 66% of South African thermal shipments (2011: 64%). South African thermal coal exports increased by 4% to 68.3 million t (2011: 65.7 million t), supported by a more stable performance by Transnet Freight Rail (TFR) and drawdown from stockpiles. TFR railed 68.5 million t to the RBCT, a 4% increase over 2011.

The company expects the international seaborne thermal coal market to remain oversupplied into 2013 with consequent lower prices: “Thermal coal production cuts are already taking effect to some extent and producers around the globe continue to review operations and growth projects, which could favourably impact prices. Global seaborne demand is expected to continue to grow in 2013, driven mainly by China and India. The Chinese domestic market price and the high US break-even price for producers should act, respectively, as a natural floor and ceiling to seaborne thermal coal prices.”

Mixed views from analysts

Anglo’s loss came as no surprise, with the company’s shares actually rising following the release of the results. But analysts are split as to what the future may hold. Analysts at Numis, an investment bank, were cautious, expecting Anglo to “remain challenged by depressed conditions in some of its key commodity divisions and the South African mining industry [which will] remain a tough working environment”.

Christopher LaFemina was more positive, however, noting “it is possible now that the worst is over for Anglo”, while also raising the possibility that the merged Glencore-Xstrata would attempt to acquire the company “at some point”.

Written by Jonathan Rowland.

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