Indian mining tycoon Anil Agarwal, the founder of Vedanta Resources Plc, is investing £2bn in Anglo American plc (LON:AAL) shares a year after a failed takeover attempt.
The investment equates to about a 13% stake in the London-based miner, making Agarwal the second-largest shareholder after South Africa’s Public Investment Corp and fuelling speculation that he might take another stab at buying Anglo.
Last year Anglo rebuffed Agarwal’s approach to combine the group with Hindustan Zinc, the Indian miner he controls through Vedanta. At the time Anglo was the best performing stock on the FTSE 100 as commodity prices recovered and the company cut costs.
The billionaire insisted that he does not intend to make another takeover offer for the miner, which is valued about £16.9bn.
However, Anglo is seen as a candidate for a potential break-up through splitting its South African assets from the global mining business.
Jefferies said from Anglo's perspective the investment may be seen as a "first step of a bigger strategic move by Agarwal, especially since he proposed a merger of Vedanta's Hindustan Zinc sUBSidiary and Anglo in early 2016". The analyst noted the attempted merger was not the only link between Vedanta and Anglo.
In 2010 Vedanta bought Anglo's zinc assets, which are separate from Hindustan, for US$1.34bn. In 2015, Vedanta hired Anglo's former chief executive, Cynthia Carroll, to help Vedanta boss Tom Albanese on "corporate strategy".
"It is possible that Mr Agarwal has been eyeing a deal with Anglo for years, and the planned Volcan investment in AAL may be part - but not all - of that plan. However, a full takeover of Anglo would be nearly impossible as VED is much smaller than AAL (£2.25bn market cap vs £15.41bn mkt cap), even before considering what would likely be a sizable required premium and a substantial cash component to get a deal done," Jefferies said.
"It is not clear to us what the end game is for Mr Agarwal, but the wheels are clearly in motion."
Agarwal plans to buy Anglo through his family trust and the stake purchase will funded by exchangeable bonds.
Dividend payments set to resume...
The move comes after Anglo last month said it plans to return to dividend payments by the end of 2017 as it posted a 25% increase in 2016 earnings.
Anglo, which is currently searching for a new chairman as John Parker plans to step down later this year, saw its group underlying earnings (EBITDA) increase to US$6.075bn for the full-year to December 31, up from US$4.854bn in 2015, despite a 3% decrease in average prices.
In late 2015, the group announced it would suspend dividends after a drop in commodity prices, and, to shore up its balance sheet, Anglo announced a major restructuring plan.
Mark Cutifani, Anglo American’s chief executive, said: "The decisive and wide-ranging operational, cost, capital and portfolio actions we set out in 2016 - to sustainably improve cash flows and strengthen the balance sheet - have enabled us to reduce net debt by 34% to US$8.5 billion, significantly below our US$10bn target.”
Anglo’s exposure to platinum...
While Cutifani made the company’s future seemingly bright, analysts have issued a cautious outlook on Anglo’s biggest commodities, platinum.
South-African focused Anglo is the world’s largest producer of platinum with about 40% of global output.
In the World Platinum Investment Council’s fourth quarter update on 9 March, it said it expects global platinum demand to fall 6% in 2017.
UBS, however, expects prices to be pulled higher by gold and average $1,060 per ounce.
“We see Anglo as a play on deleveraging/ equity accretion, with further restructuring & cost savings challenging and growth options limited,” the broker said, issuing the stock with a ‘neutral’ rating and target price of 1,250p.
“We do not see platinum group metals, diamonds or South Africa exposure as a positive near-term. Our target price is based on 0.8x net present value in line with peers.”
Liberum analyst Richard Knights cautioned that platinum is a high cost and low margin commodity that relies on a large labour force.
He also believes Anglo, which is a major producer of coal, will be hit by falling coking coal prices this year.
Anglo's shares rally...
Anglo’s shares jumped 9% to 1,309.50p in morning trading following the news. The miner’s shares plunged to about 232p in 2013 during the mining crash, which begs the question on whether Agarwal should have made his takeover attempt back then when there was more room for improvement.
However, Agarwal said in a statement he thinks it is “an attractive investment” for his family trust.
"Anglo American is a great company with excellent assets and a strong board and management team who are executing a focused strategy to drive shareholder value", he added. "I am delighted to become a shareholder in Anglo American."