Is Anglo spurning South Africa?

The annual report said it all: contributions from its South African holdings to Anglo American's headline earnings fell sharply to just 25% of the $2.7bn reported by the company in 2004. This was significantly less than the 34% level of 2003 and a telling swing from South Africa's overriding position in the company's financial affairs just four years ago. You only have to go back to 2001 to find South Africa contributing a massive 72% of headline earnings, with the Americas trailing a long way behind at just 3%, a complete reversal of today's picture.

At the close of 2004, South America more than doubled its contribution of the previous year to romp in at 45%, a 400% improvement on 2003 at $1.042bn. Russia, China and India could be Anglo's next cornucopias.

So, what are the numbers trying to tell us? It would be tempting to assume that Anglo really has had enough of South Africa and, having moved its primary listing to the London Stock Exchange and its head office to the British capital nearly six years ago, is relocating its major operations elsewhere as well. However, the report is at pains to point out that the current shift in source of income is a result of Anglo spreading its wings in pursuit of new resources and markets.

Anglo American's chairman, Mark Moody-Stuart says in the corporation's 2004/05 annual review that Anglo American is looking for "opportunities in new geographies outside its traditional fields of activity" and these were chiefly China, Russia and India "since each has the potential to be a major growth market, as well as a significant commodities producer".

Moody-Stuart also stresses that Anglo's interest in Russia and China is nothing sudden, but part of a cautious process.

"Our approach has been to become involved, initially in a limited way, while we seek to better understand the risks of doing business in each," he says. "The board is very supportive of this and believes it is one of Anglo's strengths. This gradualist approach gives us a better feel for the operating environment in new countries."

Anglo's yen for world citizenship

It is fair to say that Anglo American's yen to become a more rounded world citizen has been evident for over a decade, and it has been stepping more confidently onto a wider global stage in the last few years. Call it coincidental, but its international interest seemed to accelerate at a time when it was having a trying time 'at home' for a number of, mainly political, reasons.

The first happened when the corporation's share capitalisation was soundly clobbered with the leaking in 2002 of an early draft of the Mining Empowerment Charter, wiping out more than half of the value of Anglo American's shares overnight. Investors were heavily spooked at the extent of black empowerment control over mining operations proposed by the draft.

The proposal was hastily withdrawn, but the damage was done and it took years for the counter to rebuild its value. Then, last year, South African President Thabo Mbeki launched an unprecedented, savage attack on Anglo American after remarks by CEO Tony Trahar to the effect that some political risk was still perceived in doing business with South Africa.

Anglo American subsequently made major efforts to repair the damage and Moody-Stuart extends the olive branch further in the annual report: "The problem was never our perception of political risk," the chairman declares, "but those of some people in the international capital markets."

Moody-Stuart continues: "To an extent I can share the frustration of the South African government. It has pursued exemplary macroeconomic policies and deserves to have been rewarded with more foreign investment."

Unwittingly or not, Moody-Stuart puts his finger on a sensitive government spot. South Africa has failed to attract direct foreign investment in any significant measure (see panel "SA footloose and FDI free").

Anglo American is also increasingly used as a political football by labour leaders and politicians looking to score points by referring to the corporation's historical rise to financial power on the back of black workers in colonial and apartheid times.

In business terms, the strong rand impacted negatively on Anglo American's South African mining operations, materially affecting the rate of expansion of its platinum operations in South Africa and hammering gold mining income. "The projects that have been earmarked for development will continue to be reviewed in light of the strong rand," says the report.

So it is fair to assume that the company's more aggressive move into the international business arena was brought about by a number of reasons. The measure they individually contributed to Anglo's decreasing activity in the land of its birth is hard to say, but the rewards of foreign diversification have been nothing short of breathtaking.

As Trahar points out: "Since our primary London listing in mid-1999, Anglo American has grown by over 70% with a present market capitalisation now approaching $38bn. Our strong cash generation has been matched by one of the largest capital expenditure programmes in the industry. Our existing $4.7bn project pipeline and more than $8bn in unapproved projects, spread across all our business units and geographies, provide an excellent platform for growth going forward."

With a projected growth rate for 2005 of 8%, China will remain the major target in Anglo American's sights, although the company will remain as cautious as ever in the light of volatile world markets and the possibility of a Chinese economic slowdown.

"During the second and again in the fourth quarter of the year, markets grew concerned that official Chinese attempts to slow down excessive investment and growth would result in a 'hard landing'," reports Trahar. In other words, the world and not just China or South Africa, is Anglo American's oyster.