Operations and debt first, diversify later
As miner seeks CEO, analysts say stick to gold and cut costs
● In the increasingly unpredictable world of commodity prices, mining companies with diversified portfolios may be in a more defensive position as they can ride out the low cycles of one commodity while benefiting from the up cycle of another.
But those miners that rely on a single metal, such as AngloGold Ashanti, are more vulnerable when the gold price languishes.
However, with the third-biggest gold producer in the world still searching for a new CEO to take over from Srinivasan “Venkat” Venkatakrishnan, the company could be considering diversification as part of its growth strategy.
AngloGold Ashanti is mainly a gold producer. However, similar to other miners, the company produces silver as a by-product, although silver does not contribute significantly to its portfolio.
The company also has a greenfields gold project, Quebradona in Colombia, which could produce copper as well.
But even with the possibilities and merits of diversifying into copper or other commodities, analysts say it is too early for AngloGold to consider a diversified future.
Instead, they say, the new CEO should focus on AngloGold being a low-cost gold miner rather than looking for growth through diversification.
The company has 14 assets left in its portfolio after it sold two South African underground mines this year, to Harmony Gold and to Chinese investment company Heaven-Sent.
Sibonginkosi Nyanga, an analyst at Momentum Securities, said AngloGold would have to put up a great investment case for it to diversify outside of gold, into other minerals.
Nyanga said it would muddy AngloGold’s business case because certain investors invested in companies that gave them exposure to a specific commodity.
“If you look at AngloGold, the new CEO should concentrate on sprucing up their balance sheet first, because there are concerns in the market that they still have a big chunk of debt,” Nyanga said.
Value of assets
AngloGold has a total debt of $2.2-billion (about R30-billion).
Nyanga said the problem with diversified miners, such as Anglo American, was that it was difficult to determine the full value of certain assets, as some would have a greater value than others.
The next AngloGold CEO should focus solely on improving efficiencies and be hands-on with its operations because it needed to cut debt further.
In 2014 Venkatakrishnan proposed separating AngloGold’s South African mines from its international ones. At the time, the company’s debt was at its peak, equivalent to the company’s market capitalisation.
Peter Major, an analyst at Cadiz Corporate Solutions, said it took AngloGold about four years to halve its debt from its peak in 2014, and might take the next CEO four more years to cut the debt further to a more manageable level because the gold price might remain at current levels. It is trading at $1 250 an ounce.
Major said if the company had not managed to extract one commodity efficiently, then taking on more would be a battle.
“They need a hands-on guy to slash costs and modernise their mines, someone who will grow the company and make them a lower-cost producer than all their competitors,” he said.
The company this week got the green light from Ghana’s Environmental Protection
They need a handson guy to slash costs and modernise . . . make them a lowercost producer than all their competitors Peter Major
Analyst at Cadiz Corporate Solutions
Agency, which issued an environmental permit for AngloGold’s Obuasi gold mine.
Obuasi has been the problem child of the company for years. Last year the mine was under siege by illegal miners when the Ghanaian government withdrew military protection around it.
That protection was restored earlier this year.
The permit means the company can now focus on the redevelopment of the mine, which will see it being turned from a conventional mine into a mechanised underground mine.
Obuasi is expected to start producing towards the end of 2019.
Analysts also pointed out that AngloGold still needed to focus on bringing down the all-in sustaining costs of Mponeng, its Carletonville mine. Mponeng is AngloGold’s only South African underground mine.
AngloGold said earlier in the year that it was looking for a CEO who would create a disciplined, self-sustaining gold company that would provide long-term value.
“We remain focused on value and disciplined allocation of capital,” AngloGold spokesman Chris Nthite said.
Asked about a diversification strategy, Nthite said the new CEO would be part of the continual evaluation of the best approach to realise value over the long term.