Selling mines not the only way to cash in — AngloGold
ANGLOGOLD Ashanti enjoyed a rare moment of market appreciation this week: its shares gained 11% on Wednesday’s news that it has inked a deal to sell its Colorado mines in the US, Cripple Creek and Victor, for over R10-billion. Business Times asked CEO Srinivasan Venkatakrishnan . . .
Would it be unfair to suppose the only way a gold mining house can make money these days is to sell off its assets?
Totally unfair. For a variety of reasons: in terms of our costs, we have pulled down our cost base from more than $1 500 an ounce to less than $1 000 an ounce in the past two years and a few months. In addition, we have shown what we can do to production efficiency. We have withstood a fall in the gold price, from $1 750 an ounce to where it now trades ($1182.80 on Friday afternoon), and we’re still cashflow generative to cash-flow neutral, and we have managed to self-fund some one-off costs.
So certainly the gold price is challenging, but there are a number of levers one can pull within the cost base and the production base to enable free cash flow to be delivered. The reason we decided to do what we did with the Cripple Creek and Victor mines was we saw this as a unique opportunity in addressing our debt levels and it was in line with the strategy we flagged at the end of last year.
Was there a bidding war?
It was a competitive process, and we actually started this process in quarter one. We narrowed it down to a shortlist of parties, and then got final bids and negotiations, so yes.
But it seems that the price you got — $820-million — was less than some analysts had been expecting. Were they just greedy?
I think it’s incorrect to say it’s less than what people expected — this is about brokers’ consensus. What you also have to bear in mind is that in addition to the consideration of $820-million, you also avoid having to fund $200-million of capital, which is factored into the equation in terms of the value for the mine. And we also got a royalty of 2.5% on the underground production from the mine.
And importantly, this is well over not just the broker consensus, but also the multiple, whether you look at it in terms of enterprise value or reserves or earnings before interest, tax, depreciation and amortisation (Ebitda) multiple, and what we trade at. And in very simple terms we have forgone less than 5% of production, and we have got 25% of our market cap back in cash, and that’s why the share price has reacted the way it reacted [on Wednesday]. It was in 1999 that AngloGold first acquired the Cripple Creek mine, and then it became a full owner in 2008. How much did you pay for it back then?
I don’t know the answer here but what I do know is that the carrying value of the asset as of March 31 was $772-million.
Does it give you a pang to part with an asset in a stable political jurisdiction where the infrastructure to the mine is good?
Selling assets is never an easy decision. Ideally, every company wants to retain all of its asset base. But, like fund managers manage a bunch of investments, we manage a bunch of mines, and we have to look at what is the best value from a shareholder point of view.
Buying and selling mines is entirely part of that strategy, and in the case of Cripple Creek and Victor, yes it was in a good jurisdiction, it’s an asset that has performed well, but having said that, the all-inclusive cost base including working capital is at the higher end of our cost curve. Remember, when you’re selling an asset you’re effectively getting the present value of future cash flows upfront in your bank account, so there comes a point where [an asset sale] does make sense, and this was well above that sweet spot.
The amount of debt you’ll be able to retire will be about a third of your $3.1-billion total. Is that enough? Would you consider the debt reduction drive done?
Yes, we would. Your ability to carry debt is based on a number of factors, including how much earnings you generate and how much free cash flow you can raise, and we did say that we want to get our debt levels down to around net debt-to-Ebitda of 1.5 times, through the cycle. This basically gets us there.
The only other asset sales we are in discussion about — but that’s not driven from a balancesheet point of view, more from a portfolio clean-up point of view — are in relation to Sadiola and Yatela in Mali, and there the discussions are ongoing with Iamgold. So if you were to ask us from a balance-sheet-fix view, is this job done? Absolutely.
It seems AngloGold has been tied into some pretty expensive debt that it’s had to work to extricate itself from over the past couple of years.
No. In fact, you are referring to the 8.5% high-yield bond … A couple of points to bear in mind: we have built Tropicana [in Australia] and Kibali [in the Democratic Republic of Congo]— two new mines — without dilution to shareholders. We funded them from existing cash flows; likewise the acquisition of the second half of Serra Grande in Brazil. These three are our lowcost mines and are producing free cash flow and shareholders are not being diluted. So, when we had the opportunity to refinance one bond, we did go with the high-yield market at that time [around 2013] because we felt it was the right approach.
All this suggests that AngloGold Ashanti is not, for the foreseeable future, a buyer of assets?
I think we’ve got enough growth in our own backyard. We’ve just brought on stream two new assets in the form of Tropicana and Kibali. We are looking to develop Obuasi [in Ghana] through a partnership; Geita [in Tanzania] is growing extremely well; we are looking at improvements at Sunrise Dam [in Australia], even at our operations in Brazil … and that’s not even looking at South African reef-boring technology. So, going outside to buy assets is not a priority at the moment.
Are you still enjoying being a gold miner, with almost everything stacked against you?
It seems to be the type of job I always inherit! Jobs that put you under pressure, but somehow I seem to thrive under pressure.
Talevi is a BDTV presenter