Anglo American shares drop on South Africa challenges, production cut

Anglo American (LSE: AAL) shares plunged the most since March 2020 on Friday after its South African unit, Kumba Iron Ore, announced a production cut over the next three years.

According to the company, the decision aims to align output with constrained capacity for transporting minerals via rail to the port.

Transnet, South Africa’s state-owned freight rail and port operator, faces challenges in transporting minerals and other commodities to export markets due to shortages of locomotives, cable theft, and vandalism of its infrastructure.

By September, stockpiles of iron ore had surged to 9 million tons, a consequence of rail bottlenecks. The company anticipates concluding 2023 with a production range of 35-36 million tons, adjusting from the initial forecast of 35–37 million tons.

Additionally, Kumba has revised its production projections for the next three years to a range of 35–37 million tons annually, down from the earlier targets of 37–39 million tons in 2024 and 39–41 million tons in 2025.

“There is no escaping the fact that ongoing logistics constraints have continued to place significant pressure on our value chain, resulting in stock levels at the mines increasing to unsustainable levels. We have therefore slowed down production,” Kumba CEO Mpumi Zikalala said.

The persistent logistics problems have resulted in a 15% decrease in iron ore railed to port since 2019.

“As soon as we get the transport capacity, we would be able to ramp the production back up,” said Anglo American CEO Duncan Wanblad.

According to Reuters, the miner is gearing up to freeze spending on growth and cut more jobs in South Africa, including the mothballing of some higher-cost platinum mines.

At Kumba, the restructuring had already resulted in a 30% reduction in head office staff by September.

On Friday, Anglo American announced its intention to reduce capital expenditures by US$1.8 billion by 2026, grappling with a decline in demand for most of the metals it mines.

Anglo lowered its 2024 output target for copper to between 730,000 tons and 790,000 tons, from as much as 1 million tons.

The company said its PGM output could fall to as low as 3.3 million oz. next year, from 3.8 million oz. this year. 

Overall, Anglo’s production will be about 4% lower next year, before falling another 3% in 2025, it said.

“Whilst it is clearly not positive that Anglo has come to this situation where it needs to shrink its footprint, we think this new streamlined Anglo American should allow it to shed some of the recently more challenging aspects of the business,” RBC Capital Markets analyst Tyler Broda told Bloomberg.

Shares of Anglo American fell 17% to £18.22 at mid-day in Toronto on Friday to, valuing the company at £25.4 billion (US$31.8 billion).

(With files from Reuters and Bloomberg)