Anglo American posts net loss of $2.5 billion in 2014

Feb 13, 2015, 11:37 AM EST
Workers stand, bottom right, as iron ore is transported and dropped into stockpiles in the Ferroport yard at the Acu Port in Sao Joao da Barra, Brazil, on Thursday, Dec. 4, 2014. Ferroport is a joint venture between Anglo American Plc and Prumo Logistica SA. The port, which has received 6.2 billion reais in investments since 2007, started operations in October when Anglo American Plc loaded a first iron-ore shipment from the Minas-Rio project.
Bloomberg/Bloomberg via Getty Images

On Friday mining giant Anglo American posted a $2.5 billion loss for 2014, largely due to slumping commodity prices. Bloomberg reports that Anglo lowered by $3.5 billion the value of its Minas Rio iron-ore unit, which began output in October after delays and cost overruns. It also recorded a charge of almost $500 million at its coal units. Prices of iron ore slid 47 percent last year as a wave of new supplies from Australia compounded a glut of the steel-making raw material.

The company’s return on capital dropped to 8 percent in 2014 from 11 percent a year earlier, mainly because of declining commodity prices, Chief Executive Officer Mark Cutifani said in a phone interview Friday. That figure would be 14 percent to 15 percent last year under 2013 prices and with the reduced capital value after the impairment charges, he said. Cutifani set a target in 2013 to increase the return on capital to 15 percent by the end of 2016 and sell assets that are dragging down the average. Anglo is seeking to sell some of its coal interests in South Africa and Australia, along with four platinum mines in South Africa and three copper mines and a smelter in Chile.

Anglo’s biggest competitors, Rio Tinto PLC and BHP Billiton PLC, have also said they would keep digging up iron ore, a key component for making steel, even as prices have dipped to 5 ½ year lows, according to the Wall Street Journal. Anglo’s financial results highlight how miners with large iron-ore and coal assets have struggled to adapt to a vicious cycle of slumping demand and increased volume as mines started amid China’s booming growth in the last decade come on line. Miners such as Anglo American piled into iron ore projects over the last decade as it surged in value. Now, with China pulling back, Anglo has been among the biggest victims. The miner previously slashed the value of Minas Rio in 2012 by $4 billion after the project fell three years behind schedule and costs shot up to more than $8 billion from earlier estimates of $2.7 billion. As for its plans to boost iron ore, Anglo American said it plans to boost production from operations in South Africa by about five million tons in the next three to five years, while production in Brazil is forecast to rise to between 24 million and 26.5 million tons in 2016 from between 11 million and 14 million tons in 2015 as Minas Rio ramps up.

Business Insider asks: so, why are the shares rising in the market open? Well, despite the top line figures, Anglo American said it aims to complete the iron ore Minas Rio project at $400m under budget and will stick to a range of cost cutting measures. It also believes that the group will be able to ride out the storm of volatile commodity prices and has a diversified enough portfolio to protect it.