Gold still losing its lustre
angloGoldAshanti’s September quarter figures demonstrate amply why a year ago the group attempted – but failed – to hive off its SA assets into a separate company that would be diversified by investment into other commodities.
That’s because roughly 75% of cash flow in the company was generated by AngloGold’s international assets, yet the performance of the SA mines was so poor that the company burnt $56m in cash; that and the costs associated with liquidating a $773m bond early.
Srinivasan Venkatakrishnan, CEO of AngloGold, must have recognised in 2014 that as standalone entities, the SA assets would be volatile in performance and need the diversifying effects of other commodity exposure. It’s a strategy being followed by Sibanye Gold, which has bought platinum, and is considering the sense of buying coal assets, because the dividend outlook is so much better than just relying on gold.
It seems both Sibanye and AngloGold recognise – as does Harmony – that SA gold mines don’t cut it on their own now: the assets are old and more difficult to mine. Furthermore, labour costs are now high in SA, while restructuring is very difficult to get through government and organised labour.
Unfortunately for AngloGold, the demerger was turned down, so for the time being, the group is faced with having to tame its local assets for the benefit of the whole group. This could prove problematic.
“Our view is that SA does remain a problem and a turnaround needs to be demonstrated in order to drive a positive rerating of the stock,” said Andrew Byrne, a precious metals analyst for Barclays Capital.
Generally speaking, however, AngloGold has largely addressed its net debt situation and is positioned to produce positive cash flow provided its SA assets can be optimised. The stock is trading at a 50% discount to its peers – according to Barclays Capital – which should make it a buy depending on how you view the exposure to SA mining. firstname.lastname@example.org
Geita, in northwestern Tanzania, is the largest single gold mining operation within the AngloGold group.