AngloGold un­bur­dens it­self AngloGold is tak­ing steps to de-lever­age its bal­ance sheet. Aided by a more favourable gold price, things seem to be look­ing good.

Finweek English Edition - - THE WEEK - Ed­i­to­rial@fin­week.co.za

the per­plex­ing in­va­sion of hun­dreds of il­le­gal min­ers at AngloGold Ashanti’s Obuasi gold mine in Ghana is cer­tainly dis­tress­ing for the com­pany, but an­a­lysts gen­er­ally don’t price in any value for the moth­balled as­set in the R90bn gold group’s share price. In­stead, they are fol­low­ing the sure and steady self-help pro­gramme whereby AngloGold is grad­u­ally low­er­ing its av­er­age cost which, aided by a healthy in­crease in the gold price, is im­prov­ing free cash flow.

This, in turn, helps it lower debt. Noth­ing talks bet­ter to the fu­ture for AngloGold than this bal­ance sheet de-lever­ag­ing process and, once com­pleted, the prospect of the com­pany re­in­stat­ing div­i­dend pay­ments.

It’s a mea­sure of how far the com­pany has come in the past year that its ex­ec­u­tives are will­ing to talk the div­i­dend again. “The div­i­dend is a key com­po­nent of our in­vest­ment case,” said Srini­vasan Venkatakr­ish­nan, CEO of AngloGold, in a con­fer­ence call with an­a­lysts.

“Ev­ery quar­ter of pos­i­tive cash flow takes us closer to that,” he added.

One ex­pec­ta­tion is that if net debt is roughly one times EBIT (earn­ings be­fore in­ter­est and tax­a­tion), the com­pany will have a ro­bust enough bal­ance sheet to re­in­state pay­outs. Cur­rently net debt is 1.47 times EBIT, the equiv­a­lent of net debt of $2.1bn – slightly down from the $2.2bn net debt in the pre­vi­ous quar­ter – but $1bn less than a year ago fol­low­ing the sale of AngloGold’s Crip­ple Creek & Victor, a mine in the US.

It’s worth re­call­ing, in fact, just how im­per­illed AngloGold felt by its net debt that in 2014 it put to share­hold­ers the no­tion of split­ting into two halves, fol­low­ing a pro­posed $2.1bn rights is­sue. It was turned down by share­hold­ers, forc­ing the com­pany to set about in­ter­nal re­struc­tur­ing, the fruits of which are be­gin­ning to emerge to­day.

For the first quar­ter, rep­re­sent­ing midDe­cem­ber to mid-March and there­fore tak­ing in the Christ­mas and New Year pe­riod, free cash flow to­talled $70m – some $110m bet­ter off than the $40m net cash out­flow of a year ago.

Chris­tine Ra­mon, AngloGold chief fi­nan­cial of­fi­cer, said how­ever that the com­pany can’t get ahead of it­self. First stop is to redeem the re­main­der of the firm’s high yield­ing bonds to­talling $479m.

“We are fo­cus­ing on im­prov­ing fur­ther free cash flow gen­er­a­tion, and the high-yield bond is an op­por­tu­nity for us from July on­wards (the month in which it can be called). We have to set­tle the bal­ance of the high-yield bond, which will im­prove on the $40m free cash flow gen­er­a­tion. Div­i­dends are on the agenda; they are part of our cap­i­tal al­lo­ca­tion,” she said.

That’s good news for in­vestors, but what does it mean for the gold firm’s share price, which has al­ready run hard this year, a de­vel­op­ment noted by Citi an­a­lyst, Jo­hann Steyn?

“It re­mains our most favoured SA gold stock,” he said in a note to clients. “Hav­ing said that, the com­pany’s share price has ral­lied 150% over the past year and now trades fairly, in our view.”

Sim­i­larly Richard Hart, head of met­als and min­ing for Arqaam Cap­i­tal, be­lieves the gold sec­tor at large is “priced to per­fec­tion”, but he has put a sell rec­om­men­da­tion on AngloGold.

He was also watch­ful of how the group reined in cap­i­tal ex­pen­di­ture. While lower capex as­sists free cash flow, spend­ing on as­sets is con­sid­ered an es­sen­tial for fu­ture pro­duc­tion sta­bil­ity, and growth.

“There is some capex that needs to be caught up through the year, but tim­ing of spend­ing is ir­rel­e­vant at this point,” he said. AngloGold spent $128m and $105m on capex and sus­tain­ing capex re­spec­tively in the first quar­ter – well be­low its own guid­ance. “If the sec­ond quar­ter sees a sim­i­lar pull­back, we will be­come con­cerned,” Hart said.

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