SA op­er­a­tions re­main the weak spot

An­gloGold Ashanti has to make a de­ci­sion on its South African mines af­ter poor first-quar­ter re­sults.

Finweek English Edition - - THE WEEK IN THE NEWS - Amer­i­cas ed­i­to­rial@fin­week.co.za Con­ti­nen­tal Africa South Africa By David McKay Aus­tralia

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

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