Page 10 - AMANGO MODEL ANSWER 1

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Justification: Nickel as well as Nobium and Phosphates are Question Marks and Value Trap
Businesses with little scope to either develop into Stars or to become Heartland businesses.

Maintaining Coal (Dog) as well as Iron Ore and Manganese (Question Mark) will complete the range
and balance the group portfolio but also to manage PIC’s strategic concerns about disinvesting from
coal and iron ore businesses in South Africa where majority of these segments are held.

Actions:

 The Board to send communique to the markets to clarify that only two divisions will be sold off –
Nickel as well as Nobium and Phosphates.
 The Group CFO to investigate the combined value of these two divisions to determine how much
can be raised to pay down debt.
rd
4.3 3 Priority: Balance sheet de-leverage and share repurchase.

We are faced with a threat and an opportunity in our South African operations –constituting 25% of
our earnings. We do not only maintain our secondary listing in South Africa but we owe our origins to

this country, with our single largest investor –the PIC –pursuing in part, a state agenda. Their
displeasure over our disposure plans for our coal and iron businesses in South Africa has provoked
a threat to offload our shares. Next is the mooted mining regulations requiring we surrender 26% of
our South African operations to Black Economic Empowerment (BEE), return mining rights and pay

a 10% royalty/tax on our turnover. We however, have an opportunity to unbundle our property
portfolio to raise US$ 6.4 billion and in the process, structure a BEE deal to meet the foregoing
threats whilst still paying down our debt (Option 1), or execute a share repurchase (Option 2). With

detailed calculations in Appendix 5, both options are compared below:

4.3.1 Financial gearing (risk)

Appendix 5.1 and 5.2 show our market value gearing is right now at 59% with our Net Debt at
US$16,876 million (30,671 million – 13,770 – 27). Option 1 will lower it to 46% and bring our Net
Debt to US$ 10,476 million (16,876 - 6400) -just above our viability statement target of US$ 10
billion. Option 2 will worse it to 76% and leave our Net Debt unchanged!

4.3.2 Earnings (returns)
Appendix 5.3 shows operating cost savings will be US$ 4,642 (net of retrenchments and productivity

initiatives). This falls short, yet it is quite a cost saving compared to the targeted US$5.8 billion! If the
assumptions about productivity, volumes, futures prices and operating costs savings realise, Option
1 adds US$0.14 (14 cents) per share whilst Option 2 does better at 20 cents per share. Although

Option 1 increases potential earnings more -due to the after tax net effect of the interest saved as
well as the 30 basis points reduction in credit spread from the variable component of the swap, it is
not enough to justify a higher EPS impact compared to Option 2. Given that our variable rate liability
Developed by The CharterQuest Institute for 'The CFO Business Case Study Competition 2017'
www.charterquest.co.za | Email: thecfo@charterquest.co.za