Anglo's Carroll: A Victim of Circumstance

Anglo American (AAL) announced Friday that CEO Cynthia Carroll would step down from the post she has occupied since 2007. Carroll will remain on until a successor is appointed, with many already clamouring for Xstrata's (XTA) soon-to-be-unemployed Mick Davis.

The news of Carroll's departure comes as little surprise. There have been mumblings and grumblings about her performance since the early days of her tenure, and they have only grown louder of late.

...her failures at Anglo had more to do with the hand she was dealt than the skill with which she played her cards

While we agree that Carroll has been far from error-free in her time at the helm, we think her detractors seriously overestimate the capacity of a single individual to deliver favourable outcomes when presented with a decidedly unfortunate set of circumstances. In Carroll's case, we'd suggest her failures at Anglo had more to do with the hand she was dealt than the skill with which she played her cards.

The Carroll Complaints

Investors' complaints have typically focused on three big perceived failures:

1) constant problems and operational underperformance at the firm's South African operations, particularly at Anglo Platinum where rising costs have hammered profits and, more recently, labour unrest has boiled over to sometimes tragic effect

2) the fight with Chilean state-owned miner Codelco over the Anglo Sur copper assets, which eventually saw Anglo part with a 49.9% stake for $7.3 billion in compensation

3) seemingly perpetual cost overruns and delays at the big Minas-Rio iron ore project in Brazil.

Examining the Problems in South Africa

Any effort to blame Carroll for Anglo's troubles in South Africa is seriously misplaced. The problems besetting that country's mining sector are endemic to all producers and particularly acute in platinum, where Anglo just so happens to have an outsized presence. Carroll, while paying respect to Anglo's South African heritage, has been by no means blind to the challenge the company's outsized exposure to South Africa presents.

While fighting an uphill (and mostly losing) battle toward improved operating efficiency in the face of mounting cost inflation, geological headwinds, and social/political opposition, Carroll has been allocating capital to opportunities elsewhere in a bid to diversify Anglo's country-risk profile. Perhaps it could be argued that she should have jettisoned the company's South African assets altogether via spin-off or sales. But it's hard to make the case that this would have delivered significant value for shareholders when buyers of the asset likely would have applied just as much of a "South Africa discount" as the market has done to Anglo itself.

Legal Wranglings with Codelco

As for the legal wrangling with Codelco, it's similarly difficult to envision how Carroll could have played her hand any better than she did. Codelco had possessed the right to buy a stake in Anglo Sur decades before Carroll came to town and, following the heady ascent of copper prices in Carroll's tenure, was bound to exercise that option sooner or later. It's extremely doubtful Anglo could have, as some have suggested, bought out Codelco at a low price at any time during Carroll's tenure other than the dark days of late 2008 and early 2009 that saw copper trading below $1.50 per pound.

Few, if any, foresaw the sharp China-fueled rebound in commodity prices of 2009 and 2010. And few had the necessary liquidity to capitalise if they indeed possessed such remarkable foresight

Yet any failure to aggressively snap up the assets on the cheap at the height of the crisis (presuming Codelco would have been willing to sell) was an "error" made by virtually every mining company out there. Few, if any, foresaw the sharp China-fueled rebound in commodity prices of 2009 and 2010. And few had the necessary liquidity to capitalise if they indeed possessed such remarkable foresight. As it turned out, things ended much better for shareholders than could have been reasonably expected, thanks largely to Carroll's pre-emptive sale of a part of the 49.9% stake to Mitsubishi.

Cost Concerns

In the case of the cost overruns and delays at Minas-Rio, the first major acquisition in Carroll's tenure, the CEO probably was far too optimistic concerning the time it would take to move the massive project from the drawing board to first ore. But it's worth noting that Anglo is far from alone in suffering setbacks at the hands of Brazil's labyrinthine approval process. Consider that Brazilian national champion Vale (VALE): despite its best efforts and presumed backing from Brasilia, Vale has failed to increase iron ore production since 2007. Even the federal government's own infrastructure projects have fallen victim to the numerous permits and procedural hurdles that must be overcome to get things done.

All told, we'd argue Carroll's missteps at the helm of Anglo were far less damaging than those made by her peers

All told, we'd argue Carroll's missteps at the helm of Anglo were far less damaging than those made by her peers at BHP Billiton (BLT), Rio Tinto (RIO), Vale, and Xstrata. The ill-timed and overpriced acquisitions of Petrohawk by BHP, Alcan by Rio, Inco by Vale, and Falconbridge by Xstrata destroyed far more value than Carroll did in cases like Minas-Rio, where blame can clearly be laid at her feet rather than chalked up to unfortunate circumstances.

And yet, the CEOs of each of these other mining giants remain ensconced in their roles, with the notable exception of Roger Agnelli at Vale, whose ouster had more to do with his "insubordination" toward politicians in Brasilia than a failure to deliver value for shareholders.

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