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.
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.