Doug Smailes talks about the challenges of establishing a new treasury structure and describes how he arranged funding for the group.

How has the Anglo American treasury evolved over the last five years?

In 1999, a South African-based company, Anglo American Corporation of South Africa (AAC) merged with its offshore subsidiary, Minorco based in Luxembourg. This culminated in the formation of Anglo American plc, the ultimate holding company with headquarters in London.

There were a number of areas where there needed to be some significant changes in order to position the business for the long-term. One of these areas was treasury. Prior to 1999, we had two free-standing treasury operations, one based in Johannesburg and the other in Luxembourg. I was asked to establish a plc treasury based in London to be the focal point for treasury operations in Anglo American.

We decided to close the Luxembourg operation and retain the Johannesburg operation, with it reporting into the London base. Because of foreign exchange controls, there is a fair deal of separation of activities between South Africa and the UK. We have worldwide operations, but we do not have the concentration of businesses elsewhere to justify an additional treasury centre. For example, our Australian and South American treasury activities are both managed to a large extent from London.

There was a transition period of six months from September 2000 when we took on the Luxembourg operation and established the London treasury.

The group’s central treasury is now based in two locations. The London head office services most operations outside southern Africa whilst Johannesburg is responsible for those in southern Africa.

What are you responsible for and how are you hold accountable?

I am responsible for the treasury, risk management and insurance departments within Anglo American.

There are eight treasury staff in London and eleven in Johannesburg. This excludes treasury back office staff who report to another senior finance manager (for control purposes).

In addition to the central treasury, a number of Anglo American plc subsidiaries and associates such as Anglo Platinum, Anglo Gold and De Beers have their own treasury staff and operate independently.

I report to the Anglo American plc (“AA plc”) Finance Director and sit on a number of internal company committees covering a range of activities such as finance, pensions and risk management. The treasury department acts as a service centre for business units and not as a profit centre.

Our services to businesses cover the normal range of activities such as arranging financing for acquisitions and capital expenditure, managing interest rate risk and providing risk management advice on commodity price and currency risk. Insurance is a global function with a manager and support staff in London and captives in Bermuda and Dublin.

How have you funded your business?

This has developed over time. AA plc was listed in May 1999 and had cash of $81m at the end of that year. In contrast, AA plc had net debt of $8,633m at the end of 2003.

Prior to 2002, AA plc was funded mainly by means of bank debt, a Canadian commercial paper programme (backed by a rating from the Canadian rating agency, DBRS) and some project financing. The bank debt was sourced from a large number of bilateral facilities, in addition to syndicated bank facilities. The bank facilities were substantially rationalised in late 2001 when AA plc put in place a “core” revolving $2.25 billion credit facility with seventeen relationship banks.

AA plc entered the bond capital markets for the first time in April 2002 with a $1.1 billion 5-year convertible bond. At that time, AA plc was unrated. The transaction was the largest European convertible in 2003 and carried the second highest conversion premium (this is the amount by which the price of the convertible exceeds the current market value of the share into which it can be converted) ever achieved by a UK issuer (35%). The transaction was a little unusual in that we opted for a ‘bought deal’ but the bond has performed well and now trades at a price of around 122 in the market. This deal also provided us with some term funding at a time when we were still unrated.

A major milestone was reached in October 2002 when we secured new international credit ratings from Moody’s and Standard and Poor’s. The long and short-term ratings opened the door to a range of debt capital markets, and in March 2003, AA plc set up a $2 billion Euro medium term note (“EMTN”) programme. We then implemented our strategy of refinancing bank debt by issuing a debut $1 billion 5-year bond in May 2003 and a debut £300m 7-year sterling bond in September, in addition to five short-dated EMTN’s totalling $152m. All of these issues were swapped back into US dollars. As a natural resources company our funding currency is predominantly US dollars.

In 2003 the South African treasury team put in place corporate bilateral facilities totalling Rand 12.9 billion from five key relationship banks.

As you have arranged this funding, how has this affected your banking group?

We are certainly wedded to the idea of relationship banking and we only execute capital transactions through our relationship banks. Three years ago, we probably dealt with about forty banks. As mentioned, we have rationalised our relationships so that at the moment we have twenty-three banks, of which between ten and fifteen constitute a core group. I can foresee a position where we will have relationships with about twenty key banks, five of which are likely to be in South Africa, where we have very significant requirements.

We are now a significant borrower in South Africa. In many ways, our activities in South Africa are following the course of events experienced in London. At the moment, we have substantial bank facilities there. We will probably consider entering the South African capital markets at some point.

How difficult was it to arrange funding without a corporate rating? Why did you seek a rating when you did?

Anglo American is one of the world’s largest and most diverse mining companies with a market capitalisation of around $35 billion. It has for years enjoyed the support of a broad and strong banking group so bank funding was always available when needed. However, we took the view that access to the debt capital markets would give us greater diversity of funding and flexibility as well as access to longer debt maturities.

In 1999, approximately 67% of the Group’s net operating assets were in South Africa, a country with long-term ratings of Baa2 and BBB from Moody’s and Standard and Poor’s respectively. By 2003 less than 40% of the Group’s assets were in South Africa. This increased geographic diversity, coupled with a number of other very strong features in terms of credit risk, made it possible for AA plc to secure higher long-term ratings (A3/A-) than South African sovereign debt.

How do you manage your cash?

AA plc is a net borrower, so as a simple rule of thumb, we try to avoid having any positive cash balances by ensuring that operations place surplus cash with central treasury whenever possible. Cash pooling structures are in place wherever it is economic to operate them. Ensuring we are as efficient as possible with cash is an ongoing and timeconsuming task.

How do you manage currency, interest rate and commodity price risk?

All of the above pose financial risks to AA plc. We have a financial risk management policy with appropriate delegations of authority for managing such risk. In simple terms, AA plc does not hedge commodity price risk to any material extent, although Anglo Gold does hedge the gold price. The market understands that we take a conscious decision not to hedge these positions as we feel one of the reasons investors buy our stock is to gain exposure to commodity prices.

The main exposure to currency risk is that most of our revenues are in US dollars, but most of our operating costs are in currencies such as the South African rand, Chilean peso and the Australian dollar. Although we have this large currency mismatch, we have typically decided not to hedge it as we cannot predict currency movements.

As for interest rate risk, AA plc policy is biased to floating rate and fixed rate debt is used on a limited scale. This is based on the view that, in the long run, floating rates are lower than fixed rates.

In terms of risk mitigation, the geographic and product diversity of AA plc’s spread of natural resource assets provides the most effective hedge over a business cycle. Whilst all our products react to the economic cycle, their movements are not closely correlated together. We believe that this gives us a degree of stability through the cycle.

What technology do you use in the treasury?

AA plc installed SunGard’s Quantum in 2001 and its subsidiary, Anglo American Corporation of South Africa, installed it in 2003. Central treasury uses Quantum and QRisk to manage its daily operations, to generate reports for management information and to interface with the accounting systems. We use multibank internet dealing platforms to trade foreign exchange. We are now exploring how to integrate these with Quantum for the straight through processing of payments and confirmations.

How are you making the transition to reporting to IFRS? What are the main issues/difficulties?

We have appointed a project manager to take control of the IFRS implementation for the group. The project is progressing well and is on schedule to achieve IFRS compliance.

As far as IAS39 is concerned, progress is satisfactory but there are problematic issues as the standard itself evolves. Uncertainty is created as there are differing interpretations of the standard affecting the accounting treatment to be adopted. The identification of all the embedded derivatives around the group is also an issue.

What do you see as your main challenges over the next couple of years?

In the past four years, the group has made acquisitions totalling $12 billion, and disposals have exceeded $7 billion. Treasury has played an important role in assisting these business initiatives and must continue to be proactive and to fully support the group’s businesses as further opportunities emerge. Our aim is that the Anglo American treasury operations must be world-class and always add value to the group’s business operations.