SA operations remain the weak spot
AngloGold Ashanti has to make a decision on its South African mines after poor first-quarter results.
with the close of the second quarter upon us, AngloGold Ashanti has some decisions to make regarding its South African mines which turned in a poor first quarter – an outcome that moved Goldman Sachs to argue the merits of a spin-off of the local mines.
“AngloGold remains stuck in a difficult position, in our view,” the bank said in May. “While the international operations continue to perform strongly, the SA operations continue to be a drag.”
They didn’t perform at all: average all-in sustaining costs (AISC) were $963 per ounce against its South African mines’ AISC of $1 327/oz. “One option for the company, in our view, could be spinning off its SA operations as it had proposed in September 2014,” said Goldman Sachs.
“It’s a romantic notion but it’s not really on the cards,” said Stewart Bailey, senior vice-president of investor relations at the Johannesburg gold company. “If you ask Venkat, he’ll say ‘never say never’, but many of the same impediments that stopped the spinoff in 2014 are still there,” he said.
Venkat, or Srinivasan Venkatakrishan, kicked off his first year as CEO for AngloGold in relatively ignominious manner by floating the spin-off of the SA mines along with a $2bn rights issue shareholders thought was too expensive a price to pay.
The rights issue was to lower debt so AngloGold could cut free a company in a lifeboat rather than its feet in cement. At its worst, net debt to earnings before ebitda (pretax earnings) was 2.5 times against covenants with banks of 3 times. Net debt is now closer to 1.4 times – around $2bn – but it’s still too high.
In any event, AngloGold owes shareholders a debt of thanks for turning down the rights issue: of the world’s major gold producers, it and Randgold Resources are the only ones not to have issued equity to pay down debt. Unlike Barrick, Newmont and Gold Fields, AngloGold has preferred to chip away at the debt.
What’s more likely for AngloGold is the surgical restructuring of its SA assets, notably Kopanang and Tau Tona, rather than a trade sale, which would be especially hard to get away. Who in their right mind would invest in SA mining at this current time?
To be fair, Goldman Sachs sees similar problems with spinning out the SA mines, but it also recognises that trying substantial restructuring while the political weather is 23% of Q1 2017 production 38% Of Q1 2017 production 24% of Q1 2017 production inclement in SA might be equally challenging. Or would it really? AngloGold can be comforted by the fact that its SA mines – while important contributors to its business case – are not the business case. It is not like a Sibanye Gold or Harmony Gold where safety-related stoppages, strikes, and community violence can destroy profits from all gold under their sway.
In a recent research note, Moody’s analyst Douglas Rowlings said the agency’s affirmation of AngloGold’s Baa3 rating was based on its geographic diversification; production from SA represents only 17% of group pretax earnings adjusting for their share of corporate costs.
“At the same time, cash flows generated from its very free cash flow generative international operations are held predominantly offshore in US dollars in the Isle of Man (Aa1 negative) by AngloGold Ashanti Holdings plc which is incorporated there,” he said.
In fact, of its 17 mines across nine different countries, no one geography produces more than 13% of total gold production, a stratification – as Moody’s terms it – removes the risk of any material production disruption.
Expect then AngloGold to announce cuts to sections of its troubled mines; and a relatively minor slice out of total production. “We said we would review some assets, but we haven’t announced anything yet,” said Bailey. “They had a poor quarter so we have to do something fundamental. We will look dispassionately at it.” 15% of Q1 2017 production