Final Exam Essay Question
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Background
In June 2021, Anglo American plc, one of the worlds largest mining companies, announced a
“demerger” of its thermal coal operations in South Africa. In the company’s press release, the
CEO said this move was “a responsible transition from thermal coal.”
As you know, a merger is when one company buys out the shareholders of another company and
takes over its assets and liabilities. A demerger is when a subset of Company A’s assets and
liabilities are transferred to a newly created Company B, and the shares of Company B are
distributed proportionally to the shareholders of Company A.
Anglo American transferred all the assets and liabilities related to its South African thermal coal
operations, to a new company called Thungela Resources Limited. The shares of Thungela were
given to the shareholders of Anglo American, who received one share in Thungela for every 10
Anglo American shares they owned.
Anglo American held onto all its other mining operations, including its metallurgical coal
operations. Thermal coal is primarily burned in electrical power plants to produce steam which is
then converted into electricity. Metallurgical coal is primarily used to heat blast furnaces in the
steelmaking industry.
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Scenario
You work for an “green” investment firm with significant holdings in Anglo American. Because
your firm tries to invest in environmentally friendly companies, senior management is excited
about Anglo American’s move away from thermal coal. At an upcoming board meeting, the
directors will be discussing the implications of Anglo American’s demerger. You have been
asked to provide a briefing note to help the directors prepare properly for the meeting.
While the board is interested in knowing what the financial impact of the demerger will be on
Anglo American, they also want to assess the quality of Anglo American’s financial
disclosures. You have therefore been asked to base your note entirely on the most recent annual
report of Anglo American, dating from six months before the demerger.
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Requirements
You have been instructed to address the following points in your briefing note. (The column of
percentages indicates the weight of each section for grading purposes.)
1. Impact on Balance Sheet
Discuss what Anglo American’s 2020 balance sheet would have looked like without the
South African thermal coal operations. If you can quantify the impact, do so, and
assume that any difference between the assets and liabilities to be removed in the
demerger is applied to retained earnings. Discuss whether the loss of these assets and
liabilities is material, and whether the financial position of the company is better or
worse without them.
2. Impact on Income Statement
Discuss what Anglo American’s 2020 income statement would have looked like
without the South African thermal coal operations. If you can quantify the impact, do
so. Discuss whether the loss of these revenues and expenses is material, and whether
the financial performance of the company is better or worse without them.
3. Quality of Disclosures
Discuss the appropriateness and usefulness of Anglo American’s disclosures regarding
its thermal coal operations. Specify what information is missing, if any, that would
have made more accurate answers possible for points 1 and 2 above.
4. Environmental Goals
Discuss, in general terms, the overall impact of this demerger on Anglo American’s
environmental goal of making “a responsible transition from thermal coal.”
5. Overall Evaluation
Evaluate the demerger decision overall, taking into account the above financial and
environmental impacts. How does Anglo American benefit from this demerger? Was
this a good decision? Justify your answer.
1200
25%
300
25%
300
20%
240
10%
120
20%
240
100%
Guidance
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No introduction is required for this essay. Just address the points indicated above.
A condensed copy of the 2020 Anglo American annual report is available for download
below. Large sections of the original report have been deleted to make your task
manageable. The copy you have includes:
o The overview of the company (pages 1-3)
o The MD&A discussion of thermal coal (pages 86-87)
o The complete financial statements and notes (pages 149-231)
o Summary data, performance indicators, a glossary of terms, and alternative
performance measures, in case you find them useful (pages 235 onwards)
The easiest way to find Anglo American’s specific disclosures about thermal coal is to
search the report for the word “thermal.”
No further research about Anglo American or this particular demerger is needed, nor
would it be helpful because the company has not yet released any post-demerger financial
results. You are free, of course, to use the internet to learn more about demergers or any
other topic if you feel you need to.