Anglo sells Amapa, poor purchase in the first place

Anglo American announced that they had completed the sale of Amapa to Zamin on Monday. Amapa? What is that? well, it is an iron ore project in Brazil that came with the Minas Rio purchase back in 2008. For the full release and to read about it back then, check this out from the Anglo American website: MMX Minas-Rio and MMX Amapa. Back then Anglo stated that Amapa would would be 6.5 million tons at full production, so it was always going to be a smaller part of their production. For the 2012 year they managed to squeeze out 6.1 million tons of iron ore from the operation, you might well argue that is short, but relative to some of the other production, that is fabulous.


The sale price is as follows: An initial total cash consideration of $134 million, net of certain completion adjustments and then Zamin will also pay Anglo American conditional deferred consideration of up to a maximum of $130 million in total, payable over a five year period and calculated on the basis of the market price for iron ore. 260 million Dollars in total, let us call it. So what did they, Anglo pay for it? Well, first things first, it came with the bigger Minas Rio project, and there you saw that the price was 5.5 billion Dollars above. And secondly, in 2009, Anglo wrote down 1.667 billion Dollars. Wow. Anglo held 70 percent, a US iron ore miner Cliffs owned 30 percent before Anglo recently bought it back to sell it as a whole to Zamin.


A recent WSJ/Dow Jones newswires story in September, when the sale announcement first came through (Anglo American Revises Amapa Iron Ore Sale After Accident) had this key and critical line: According to investment bank SP Angel, the Amapa asset was valued at $1.9 billion in 2008 and Anglo took an impairment charge of $1.5 billion on its holding in 2009, citing operational difficulties and delays in ramping up production. Now I had checked the footnotes before and that 1.667 billion Dollars is the right number and not the 1.5 billion Dollars. So it was worth 1.9 billion inside of the total 5.5 billion paid to Eike Batista (who then leveraged up to the max and like Icarus plunged into the sea) and the final sale price was 260 million. Yech. Another chapter in mining (and specifically this project) project write downs and purchases at the top of the market. Sis.

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And on that score, the Rand price of BHP Billiton almost reached and touched their all time high, reaching levels last seen on the 22nd of May 2008, this morning those levels have been breached. BHP Billiton was 323.50 ZAR on that day when the market was flying back in 2008 (around 33 and half thousand points back then, 46 thousand points on the all share today), Anglo American nearly touched 550 ZAR, 549.90 in fact was their high on that day. During the course of today BHP Billiton touched 326 ZAR and some more. Anglo, today, the high? 253 ZAR. Nearly 300 ZAR away from their Rand highs. The weaker local currency masks the picture in their comparable markets. What am I talking about? The Great British Pound price and the London listing of both companies. Here -> Anglo American in London (LON:AAL) versus BHP Billiton in London (LON:BLT) And a compressed Google finance graph shows where the divergence starts to happen, it is a bit blurry, so follow the link above, but essentially the Red line is BHP Billiton and the blue line is Anglo American. And now you feel like Neo who felt that he had to choose between one and the other pill from Morpheus:



But that is history. It basically does not matter, what the stock price has done in the past is of no consequence to us today, right now. If you had to decide between the two, not knowing the history (because that most times skews the argument more towards sentiment), which company would you have to pick as an investment today. The short and long answer remains BHP Billiton. They have scale, geographical diversification and quality on their side. The reliance on specific commodities, both iron ore and petroleum (gas included) is always going to see volatility in earnings, but their spread is better. Even if Anglo continue to refer to late stage cycle commodities, platinum and diamonds. Labour tensions are perhaps the biggest talked about story this year in the South African mining sector. We continue to stay long BHP Billiton as the only investment in diversified mining.