GUEST COL­UMN

It’s been a hor­ri­ble few months for An­gloGold, but it looks like a plan may be on the boil

Financial Mail - Investors Monthly - - Contents - PAUL LIQUOR­ISH Paul Liquor­ish is an in­de­pen­dent an­a­lyst: liquor­ish­paul@gmail.com.

Paul Liquor­ish

ANG isn’t an ab­bre­vi­a­tion for angst — it’s the JSE code for An­gloGold — but for the past eight months, anx­i­ety has been the pre­vail­ing emo­tion of the com­pany’s share­hold­ers.

On July 10 2014, the share price topped out at R200 and, pro­pelled by a se­ries of self-in­flicted bungles and mar­ket-re­lated mis­for­tunes, tum­bled to a low of R89 by Novem­ber 6. At this point the share was at its most over­sold po­si­tion in more than 30 years.

The list of events cre­at­ing this hel­ter-skel­ter ride be­gan in Au­gust.

Shortly af­ter the pub­li­ca­tion of the half-year re­sults (2014) it was an­nounced that An­gloGold was to drop its Lon­don list­ing. Heavy sell­ing from ded­i­cated in­dex funds en­sued. Three weeks later the com­pany an­nounced there was to be a re­struc­tur­ing ac­com­pa­nied by a hefty $2,1bn rights is­sue to pay off debt. Con­sid­er­ing the mar­ket cap­i­tal­i­sa­tion was only $5bn at the time, share­hold­ers were not amused. In re­sponse to their dis­plea­sure, An­gloGold re­voked the an­nounce­ment just five days later, a move that did lit­tle to evoke con­fi­dence. Not as­sist­ing was the gold price, which fell from over $1 300/oz in Au­gust to un­der $1 150/oz by Novem­ber.

Af­ter a short pe­riod of con­sol­i­da­tion, the weight of logic and an im­proved gold price pow­ered the share price back to R150 in less than three months. To­day, in the wake of a lower gold price and slightly dis­ap­point­ing an­nual re­sults, the price is again near­ing R100 — in just six weeks!

So, why should you even think of get­ting in­volved in An­gloGold? Be­cause, un­less you think us­ing gold as a store of value is go­ing to be scrapped and women pre­fer to be adorned with cop­per, there is a lot of un­recog­nised value in this com­pany, which the re­cently re­freshed man­age­ment team ap­pears determined to ex­ploit.

Yes, it was a rough year for the world’s largest emerg­ing mar­kets gold com­pany and SA’s cheap­est ma­jor pro­ducer. Yet in 2014 it still pro­duced 4,44m oz of gold (up 8%), of which 28% was mined in SA at an all-in sus­tain­ing cost of $1 026/oz (down 13%). Cor­po­rate costs were slashed by 54% to $92m and ex­plo­ration and eval­u­a­tion cut back by 44% to $144m. Free cash out­flow shrank from $1 058m to $112m de­spite pay­ing $145m in re­trench­ment costs and $44m to prop up the Rand Re­fin­ery.

The ship has not only been trimmed to meet the changed cli­mate of the bul­lion mar­ket, it has also seen some in­ter­est­ing al­ter­ations to the crew.

Srini­vasan Venkatakr­ish­nan was el­e­vated from CFO to CEO in April 2013. Christine Ramos (ex CFO of Sa­sol) joined the team as CFO in July 2014; and Al­bert Gar­ner, a se­nior banker at Lazards who has acted as lead ad­viser to over 50 com­pa­nies on trans­for­ma­tive trans­ac­tions, joined the board as a nonex­ec­u­tive this year.

The most re­cent ap­point­ment, as chief op­er­at­ing of­fi­cer: SA, is Chris Shep­pard. This gen­tle­man has 30 years’ ex­pe­ri­ence of ul­tra-deep un­der­ground min­ing.

Th­ese moves look like the start of a new re­con­struc­tion plan.

The first plan failed be­cause the South African au­thor­i­ties in­sisted a break-up of the group would in­volve the re­pay­ment of its South African debt, but there are other ways to carry out the scheme with­out ask­ing share­hold­ers to pay. Plan B could per­haps see An­gloGold merge its lo­cal mines with the likes of Sibanye and hold the merged unit as an in­vest­ment or spin it off to share­hold­ers. Plan C would prob­a­bly en­tail the dis­posal of its South African as­sets, but not be­fore they have been pol­ished and primed for sale.

What­ever the plan, it does smell as though one is cooking.

A val­u­a­tion of An­gloGold’s share price is dif­fi­cult as it has no div­i­dend. But share­hold­ers have made it clear they pre­fer two com­pa­nies to one, and any move in this di­rec­tion would be pos­i­tive. If you sim­ply value An­gloGold’s proven gold re­serves at $100/oz you ar­rive at a price of R203. Us­ing this method, only Har­mony, of the big four, is cheaper. But can it fi­nance the ex­trac­tion of its re­serves? The share looks like a bar­gain when you con­sider that at the be­gin­ning of 2013 one ounce of gold bought 540 An­gloGold shares and when the re­struc­tur­ing was re­vealed it bought 757, yet to­day it buys 1 370. Is it now un­der­priced or has it al­ways been over­val­ued?

South African in­vestors are fac­ing an ex­pen­sive mar­ket, a weaker rand and a volatile world en­vi­ron­ment. In such a sce­nario this high-qual­ity rand hedge stock holds a lot of ap­peal for me.

Th­ese moves look like the start of a new re­con­struc­tion plan

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