Appendix 8: Anglo American's recovery strategy: Monday, 27 March 2017: (15:55 )

Sometimes we have to sacrifice something, like sleep and hobbies, in order to achieve the maximum result of something else, like a high degree grade. For Anglo American though is more complicated when the commodities’ prices went down and the company was heavily indebted. The common sense would suggest the firm to increase its prices to avoid financial distress, however the CEO, Mark Cutifani, decided to reduce its portfolio imposing a $3bn asset sale.

When a company’s gearing is high, its fixed costs are paid with borrowed money. The financial distress is inevitable when the returns are decreased. However, if the level of costs is reduced the company might avoid this situation. A way to reduce these costs is to reduce the production level, as Anglo American decided to do. It decided to specialise on three instead of six commodities.

It is surprising that even when the commodities’ prices raised again he did not give up of his plan. Into contradiction he stuck to it and stated: “You cannot say that two good months in coal is a new world. That is the mistake we make in the industry. You get a little of joy and you think that the world has changed.” And surprisingly he was right, the result was to reduce the company’s debt by $1.5bn lower than what was expected, he just had to change its capital structure.  This is a good example of why lenders set disposal asset limits to the issuers. If Anglo American did not have the assets to sell and balance this financial sheets would had led to bankrupcty. Probably, would not be able to pay neither shareholders and especially nor the lenders who are on priority.

But what happened to shareholders’ returns though? Companies usually have high leverage in order to pay high dividends. In one year time Anglo America reduced its debt from $15 bn to less than $9 bn. As a sequence the dividends paid to shareholders were 0.32p on 2015 and zero on 2016. The company plans to delay the dividend payments till 2018 in order the company to recover from the financial crisis.

It was preferable for the company to reduce its attractiveness to new investors till it financially recovers rather than selling more assets in depreciated prices which they not reflect those assets’ real value.