Clear message for SA after AngloGold cashes in its chips
FOR INVESTORS, IT PAVES THE WAY FOR THE COMPANY TO MOVE ITS PRIMARY LISTING AWAY FROM THE JSE, POSSIBLY TO LONDON OR TORONTO
AngloGold Ashanti has just given foreign investors one more reason to feel nervous about ploughing money into SA.
On Wednesday, the company offloaded the Mponeng mine, with surface assets and the mothballed TauTona and Savuka mines, to rival Harmony Gold for $300m (about R4.4bn).
That is about half the book value of the assets, underscoring CEO Kelvin Dushnisky’s desperation to end AngloGold’s more than a century-long presence in SA, where costs, regulatory uncertainty and erratic power supply have knocked business confidence.
The assets brought in more than R8bn in revenue and delivered posttax profit of R331m in the year ended December 2019.
The value on the books of AngloGold as of last December was nearly R10bn.
Based on the financial performance of the working mine, alongside a weaker rand and elevated price of gold, which hovers at about $1,500/oz, you would think Dushnisky would have been less frantic to get out of SA and would hold out for an offer that reflects the mine’s operational appeal and favourable external environment.
Sure, the mine, which produced more than 265,000oz of gold in 2018, is not without its challenges. According to the stock brokerage arm of global banking group JPMorgan, the mine, the world’s deepest stretching more than 4km, would need a $1bn investment to dig out an estimated 22million tonnes in probable reserves and extend its life beyond the next seven years.
RISKY ASSET
But assuming the price of gold remains at elevated levels, and the mine maintains its rate of output and profitability over the next seven years, Harmony would have long recouped what it coughed up to buy the mine.
For AngloGold though, the deal removes a risky asset from its portfolio of businesses. In December, Mponeng was among many mines across SA that shut down for a day after Eskom imposed the worst power cuts in more than a decade, leading to thousands of ounces in lost output.
Bullion output in the gold industry has been in steep decline since 2008, when electricity shortages forced the closure of smaller mines.
The transaction helps Dushnisky, a Canadian who took over from Srinivasan Venkatakrishnan in September 2018, to alleviate a common corporate headache across the
SA mining industry: regulatory uncertainty. The mining industry is locked in a legal battle with minerals & energy minister Gwede Mantashe over the Mining Charter, a legal document outlining transformation in the sector.
It’s bad enough for investors, who have been pleading for predictability and certainty for years, that the charter has changed three times over the past several years.
The latest version of the charter has had the industry up in arms after the government broke its commitment on the 26% black ownership target. As it stands, mining companies have to top up their black ownership target to 30%, but 10% of that target must be granted for free to communities and qualifying employees.
Yet that could change, depending on whether the courts rule in favour of Mantashe or industry group Minerals Council SA.
AngloGold does not have to wait for any of that. The withdrawal from SA of the world’s third-largest gold producer will allow it to focus on more profitable operations in Argentina, Brazil, Australia and several other African countries, including Ghana, Mali and Guinea.
For investors, it paves the way for the company to move its primary listing away from the JSE, possibly to London or Toronto, where a larger pool of capital will most likely help it narrow a valuation gap between it and larger peers Newmont Goldcorp and Barrick Gold, which are trading at 23 times and 26.8 times the blended forward price to earnings, respectively. AngloGold’s measure of its value relative to its estimated earnings is just nine times.
For anyone contemplating an expansion in SA, AngloGold let a profitable mine go for a steal. This implies that an investment in the country may be a gamble that’s not worth taking.