At its   Annual Investor Day held yesterday, Anglo American plc  announced what it called “an accelerated and more radical restructuring programme”. This, the Company said, was being done in order “to redefine the focus of its asset portfolio to transform the Company’s competitive position and create a more resilient business to deliver sustainable shareholder returns.”

The plan referred to three key pillars: radical portfolio restructuring; driving operational discipline; and protecting the balance sheet.

Under the first, focus is to be on what the Company calls Priority 1 assets, to help it deliver “free cash flow and greater returns through the cycle”. The number of assets will be reduced by about 60%. Corporate structures and the overhead costs will also be put in alignment with the new portfolio. The portfolio restructuring programme will see Anglo American consolidating its businesses from six to three: De Beers, Industrial Metals, Bulk Commodities.  Plans are also afoot for “co-locating” the London office with De Beers in 2017.

“Together with the additional material capital, cost saving and productivity measures announced today, we are setting out an accelerated and more aggressive strategic restructuring of the portfolio to focus it around our ‘Priority 1’ assets, being those assets that are best placed to deliver free cash flow through the cycle and that constitute the core long term value proposition of Anglo American,” declared Mark Cutifani, Chief Executive of Anglo American. 

In order to drive operational discipline, Anglo American said that $ 3.7 billion of cost and productivity improvements are being implemented from 2013 to 2017. It has also initiated Care & Maintenance / closure of cash negative assets – for example Snap Lake (C&M) and Thabazimbi (closure).

“Our work to drive out costs and increase productivity will have delivered $ 1.6 billion of benefit by the end of 2015, following our volume reductions in De Beers and Kumba. By the end of 2017, we expect to have delivered a total of $3.7 billion of such efficiency improvements, made up of productivity, operating costs and indirect costs,” elaborated Cutifani.

Anglo American seeks to “protect” its balance sheet through Capex reductions.  “We are taking further steps to protect the balance sheet and reduce leverage,” said Cutifani. “We are reducing 2015 and 2016 capex by an additional ~$1 billion and have reduced our 2017 capex to $2.5 billion, a ~55% reduction versus our 2014 expenditure. SIB and capitalised stripping capex is also reduced substantially to reflect the prioritised allocation of capital, while ensuring the ongoing integrity of our assets. We are increasing our targeted disposal proceeds to $4 billion and will be progressing the sale process for the Phosphates and Niobium businesses during 2016. The Board has also taken the decision to suspend dividend payments in respect of the balance of 2015 and 2016. Upon their resumption, the dividend policy will reflect a pay-out ratio to provide flexibility through the cycle and clarity for shareholders.”

The Anglo American team at the presentation included Mark Cutifani Chief Executive; René Médori, Finance Director; Tony O’Neill, Technical Director; and Philippe Mellier,  CEO, De Beers.

In his presentation, Mellier said that while global diamond jewellery demand hit a highpoint of US$ 81 billion in 2014; demand for 2015 is expected to be slightly lower. 

In 2014, the US accounted for a 42% market share; China for 14%; India for 8% and Japan for 5%.

Mellier pinpointed the problems of the industry as lying mainly in the midstream – the manufacturing centres. This he said stemmed from issues of bank financing for the industry -- including financing of sights – and an overhang of rough and polished  inventory due to various factors including low inventory stocking by retailers at the beginning of the year; backlog from grading labs released adding to the inventory; and lower manufacturing. He was however optimistic that these problems will be “steadily resolved in time”.

Mellier explained that De Beers had formulated an integrated response across the value chain to the challenges facing the diamond industry. In the downstream, Mellier said, De Beers had significantly increased its advertising spend and had taken several initiatives to stimulate consumer demand. For the amelioration of midstream difficulties it had lowered rough prices as well as provided sightholders greater buying flexibility. At the upstream, the Company had lowered production as well as undertaken cost reduction programmes.

In what is seen as a significant shift towards greater transparency, Mellier said during the presentation that De Beers will announce the volumes sold after each sight, so that  the market does not have to rely on “rumours”