AngloGold now in better position
It may have been a slip of the tongue, but AngloGold Ashanti CEO, Sr i nivasa n Venkatak r i s hnan, dismissed raising funds through shares as “a dumb idea”, even though that’s exactly what was required of Newmont Mining in its $820m (R10.2bn) capture of AngloGold’s US mine.
The market agreed with Venkatakrishnan by penalising Newmont shares roughly 10% in the first two days after the 9 June transaction.
Venkatakrishnan can call on his own experience of trying to tap shareholders for funds in the current downturn, when AngloGold shares fell 12% as investors recoiled at a $2.1bn (R26bn) rights offer intended to clear out debt.
Long-term investors don’t favour the idea of being made to pay for past balance sheet excesses, nor of being diluted while the share price is under pressure. The only alternative for AngloGold and Venkatakrishnan was the sale of assets, hence the divestment from Cripple Creek & Victor (CC&V) to Newmont – cutting the firm’s debt by a third to about $2bn, removing the need for further asset sales.
Analysts liked the transaction. Leon Esterhuizen, precious metals analyst for CIBC Markets, called it a “coup” while Andrew Byrne, analyst for Barclays, said AngloGold’s 33% discount to its peer group was now unjustified. He saw a 46% upside to the share price. “We view the announcement as positive and a significant step in the right direction to de-leveraging the company’s balance sheet,” said James Oberholzer, analyst for Macquarie Research in Johannesburg.
So with analysts agreeing t hat sel l i ng CC&V makes good sense, Venkatakrishnan can confidently look to closing out debt, starting with the $1.25bn (R15.5bn) bond that carries an expensive 8% coupon rate.
Pressure off the balance sheet also loosens the shirt collar in respect of approaching wage talks with South African unions. One of the potentially negative consequences of selling the US mine – equal to 5% of AngloGold’s total production – is that it increases the firm’s overall exposure to SA’s f lammable labour relations.
Wage talks may well be a diff icult affair with both the National Union of Mineworkers (NUM) and the Association of Mineworkers and Construction Union (Amcu) demanding an increase of between 80% and 150% for entry-level workers.
However, according to Goldman Sachs, AngloGold still has far less exposure to SA (20% of total production) than either Harmony (90%) or Sibanye Gold (100%) and is therefore the bank’s preferred stock through the wage talks.
“We believe the recent underperformance [of AngloGold] versus global gold peers i s due to anticipation of increased costs following wage negotiations,” it said. “However, as AngloGold has less than 20% exposure to SA, we believe this underperformance is unwarranted.”
Of Harmony and Sibanye, however, there was less sanguinity.
Even a 10% increase in the wage bill would see Harmony Gold’s pretax earnings fall by 19%, while the overall health of SA’s gold industry would be in question since roughly 40% of all operating gold mines were losing money.
“We believe that in an environment of declining gold prices, substantial increases in labour costs may result in further deterioration in the profitability of SA gold mining and impact its long-term scope and sustainability,” said Goldman Sachs. It also observed that the industry’s average operating profit margin in 2014 was 25% versus 45% for gold miners in other countries.
Set against this is a current of disbelief among government and unions, which have warned mining companies that they will not accept retrenchments as a direct consequence of higher wages.
“There was a threat a few years ago in the platinum sector that some 10 000 jobs would be lost and that hasn’t happened because of government intervention,” said Advocate Mahlodi Muofhe, spokesperson for the department of mineral resources.