An­gloGold now in bet­ter po­si­tion

Finweek English Edition - - IN THE NEWS - BY DAVID MCKAY

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.

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