GUEST COLUMN

It’s been a horrible few months for AngloGold, but it looks like a plan may be on the boil

Paul Liquorish

ANG isn’t an abbreviation for angst — it’s the JSE code for AngloGold — but for the past eight months, anxiety has been the prevailing emotion of the company’s shareholders.

On July 10 2014, the share price topped out at R200 and, propelled by a series of self-inflicted bungles and market-related misfortunes, tumbled to a low of R89 by November 6. At this point the share was at its most oversold position in more than 30 years.

The list of events creating this helter-skelter ride began in August.

Shortly after the publication of the half-year results (2014) it was announced that AngloGold was to drop its London listing. Heavy selling from dedicated index funds ensued. Three weeks later the company announced there was to be a restructuring accompanied by a hefty $2,1bn rights issue to pay off debt. Considering the market capitalisation was only $5bn at the time, shareholders were not amused. In response to their displeasure, AngloGold revoked the announcement just five days later, a move that did little to evoke confidence. Not assisting was the gold price, which fell from over $1 300/oz in August to under $1 150/oz by November.

After a short period of consolidation, the weight of logic and an improved gold price powered the share price back to R150 in less than three months. Today, in the wake of a lower gold price and slightly disappointing annual results, the price is again nearing R100 — in just six weeks!

So, why should you even think of getting involved in AngloGold? Because, unless you think using gold as a store of value is going to be scrapped and women prefer to be adorned with copper, there is a lot of unrecognised value in this company, which the recently refreshed management team appears determined to exploit.

Yes, it was a rough year for the world’s largest emerging markets gold company and SA’s cheapest major producer. Yet in 2014 it still produced 4,44m oz of gold (up 8%), of which 28% was mined in SA at an all-in sustaining cost of $1 026/oz (down 13%). Corporate costs were slashed by 54% to $92m and exploration and evaluation cut back by 44% to $144m. Free cash outflow shrank from $1 058m to $112m despite paying $145m in retrenchment costs and $44m to prop up the Rand Refinery.

The ship has not only been trimmed to meet the changed climate of the bullion market, it has also seen some interesting alterations to the crew.

Srinivasan Venkatakrishnan was elevated from CFO to CEO in April 2013. Christine Ramos (ex CFO of Sasol) joined the team as CFO in July 2014; and Albert Garner, a senior banker at Lazards who has acted as lead adviser to over 50 companies on transformative transactions, joined the board as a nonexecutive this year.

The most recent appointment, as chief operating officer: SA, is Chris Sheppard. This gentleman has 30 years’ experience of ultra-deep underground mining.

These moves look like the start of a new reconstruction plan.

The first plan failed because the South African authorities insisted a break-up of the group would involve the repayment of its South African debt, but there are other ways to carry out the scheme without asking shareholders to pay. Plan B could perhaps see AngloGold merge its local mines with the likes of Sibanye and hold the merged unit as an investment or spin it off to shareholders. Plan C would probably entail the disposal of its South African assets, but not before they have been polished and primed for sale.

Whatever the plan, it does smell as though one is cooking.

A valuation of AngloGold’s share price is difficult as it has no dividend. But shareholders have made it clear they prefer two companies to one, and any move in this direction would be positive. If you simply value AngloGold’s proven gold reserves at $100/oz you arrive at a price of R203. Using this method, only Harmony, of the big four, is cheaper. But can it finance the extraction of its reserves? The share looks like a bargain when you consider that at the beginning of 2013 one ounce of gold bought 540 AngloGold shares and when the restructuring was revealed it bought 757, yet today it buys 1 370. Is it now underpriced or has it always been overvalued?

South African investors are facing an expensive market, a weaker rand and a volatile world environment. In such a scenario this high-quality rand hedge stock holds a lot of appeal for me.

These moves look like the start of a new reconstruction plan