AngloGold Ashanti Limited

Company Overview: AngloGold Ashanti Limited (ASX: AGG) is a global mining company, primarily involved in the exploration and production of gold. The company also produces silver and sulphuric acid as by-products and it intends to pursue value-creating opportunities in other minerals where it can leverage its existing assets, skills and experience to enhance value creation. The company’s vision is to be a leading mining company, and its mission is to create value for its shareholders, employees and its business and social partners through safely and responsibly exploring, mining and marketing its products. The company is listed on four stock exchanges around the world – the Johannesburg, New York, Australian and Ghana exchanges.

AGG Details

Maintaining Tight Cost and Capital Management: AngloGold Ashanti Limited (ASX: AGG) is an independent, global mining company with a diverse, high-quality portfolio of operations, projects and exploration activities across several countries including Australia, Brazil, Argentina, Tanzania, Columbia, etc. The company’s main product is gold; however, it also produces silver and sulphuric acid as by-products. Being listed on four stock exchanges around the world, AGG enjoys a diverse investor base. The company’s strategy is to generate sustainable cash flow improvements and shareholder returns by improving the quality of portfolio; maintaining long-term optionality; ensuring financial flexibility; and optimising overhead, costs and capital expenditure. Over the last few years, the company has substantially strengthened its balance sheet by reducing its net debt and by generating decent cash flows. Notably, in the last one year (June 2019 to June 2020), the company’s adjusted net debt reduced by 18%.

Adjusted Net Debt Trend (Source: Company Reports)

During the COVID-19 pandemic period, the company was benefitted from its diversified global portfolio and proactive steps taken to protect its employees, host communities and business. This helped AGG in reporting decent production numbers in the first half of FY20. Earlier, AGG had withdrawn its full-year guidance due to increasing uncertainty amid COVID-19, however, the company has recently reintroduced its guidance, reflecting greater certainty in relation to full-year operating performance. Looking ahead, the company is focused on maintaining tight cost and capital management in order to improve its margins. To further streamline its portfolio and lower the long-term cost structure of the business, the company is progressing the sale of its assets in South Africa and Mali. With an improving portfolio, robust cash flows and ongoing debt reduction, the company seems well-placed to deliver on its strategic objectives.

FY19 Performance Highlights: For the year ended 31 December 2019 or FY19, the company reported total production of 3.281Moz and All-in sustaining costs (AISC) of US$998/oz. Over the year, the company’s free cash flow, before growth capital, increased by 106% to US$448 million, while cash flow from operating activities increased by 22% to US$1,047 million in FY19. For FY20, the company reported a basic loss of US$12 million, compared with a basic profit of US$133 million in 2018, impacted by the impairment of the South African assets associated with their held for sale accounting treatment, higher rehabilitation provisions in Brazil and higher care and maintenance costs in South Africa and Ghana.

FY19 Results (Source: Company Reports)

H1FY20 Results Highlights: For six months ended 30 June 2020 or H1FY20, the company reported total production of 1.47Moz, supported by the decent performance from Geita and a strong recovery from Serra Grande from the first quarter of the year, as well as steady production from Kibali, Iduapriem, Tropicana and AGA Mineração. Due to improved gold price and weaker local currency impacts, the Adjusted EBITDA grew by 59% to US$1.096 billion in H1FY20, as compared to pcp. The stronger cash flows helped the company in reducing the net debt to US$1.428 billion, down by 18% on pcp. During the half-year period, the company introduced a range of initiatives on its mine sites and in surrounding communities to stop the spreading of COVID-19.

Adjusted net debt to adjusted EBITDA ratio stood at 0.67x at the end of June 2020, well below the targeted level of 1.0 times through the cycle. Free cash flow before growth capital increased significantly to US$324 million in the first half of 2020, compared to US$68 million in pcp. At the end of H1FY20, the company had liquidity of US$2.47 billion available, including cash and cash equivalents of US$1.29 billion.

H1FY20 Results (Source: Company Reports)

Key Ratio Metrics: For June 2020 quarter, the company reported a net margin of 23.9%, higher than the industry median of 3.1%. The company’s debt to equity multiple stood at 0.96x in June quarter, lower than the 1.38x reported in March 20202 quarter. The company’s current ratio stood at 2.65x in June quarter, higher than 2.10x reported in March 2020 quarter, demonstrating that the company has improved its ability to pay its short-term debts.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Boston Shaker Achieves Commercial Production: On 17 September 2020, the company announced that its Boston Shaker underground mine at Tropicana has achieved commercial production and over a seven-year mine life it is expected to deliver around 1.1 million tonnes of ore per annum at an estimated grade of 3.5 grams/tonne. This will improve the company’s gold production profile and will enhance cash flow during the calendar 2021-2023. The Underground diamond drilling at the mine is scheduled for the December 2020 quarter with a decision to mine expected during 2021.

Sale of South African Assets:  On 12 February 2020, the company announced that it has reached an agreement with Harmony Gold to sell all its remaining South African producing assets and related liabilities with expected proceeds of around US$300 million. The sale will improve the company’s portfolio and supports its disciplined approach to the allocation of capital and other resources to ensure maximum value generation for all shareholders. The company recently confirmed that all conditions with respect to the sale of its remaining mines in South Africa have been met. This includes the unconditional approval by the Department of Mineral Resources and Energy (DMRE) for the transfer of the West Wits mineral rights from AngloGold Ashanti to Harmony. It is expected that the sale will be completed on 30 September 2020, upon which Harmony will assume full ownership and operation of all assets and liabilities that form part of the transaction. This sale will allow AGG to focus more on growing free cash flow and shareholder dividends, while investing in its next generation of opportunities.

Sale of Morila Mine Stake to Mali Lithium: On 31 August 2020, the company announced that it has agreed to sell their effective 80% stake in the Morila Gold Mine in Mali, to Mali Lithium, in line with AGG’s strategy rationalising its portfolio to focus its capital and other resources to maximise returns to its shareholders and other stakeholders. AGG is expected to receive net consideration of around US$10 million for the transaction.

Key Risks: The company is exposed to the risks associated with the impacts of COVID-19 pandemic on communities, economies and on AGG’s business. Further, the company’s results are also sensitive to gold price volatility and exchange rate volatility. The uncertain and increasingly rigorous regulatory environment poses a challenge for the company as it might impact the cost of compliance, thereby, affecting the financial position of the business.

What to Expect: With the sale of South African assets now nearing to completion, AGG has now sharpened its focus to pursue high-return projects at several of its key assets, and deliver new ounces from the world-class Obuasi mine in Ghana. Looking ahead, the company is focused on maintaining tight cost and capital management in order to improve its margins. At its African operations, the company is focused on increasing ORD and increasing Reserve Conversion over the next two to three years.

The growing certainty and anticipated conclusion of South African assets sale have allowed the company to reinstated annual guidance. As per the updated 2020 Group Guidance (including the contribution from SA assets to the end of September 2020), the company expects its production to be around 3,030koz - 3,100koz with AISC costs expected to be between US$1,060/oz – US$1,120/oz. The company expects its total capital expenditure to be in the range of US$890-US$950 million.

2020 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (illustrative)

EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: Over the last six months, the stock of AGG has provided a return of 43.08% and is currently inclined towards its 52-weeks low price, offering a decent opportunity for accumulation. On the technical analysis front, the stock has s support level of ~$7.07 and a resistance level of ~$9.3. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with lower double digit-upside (in % terms). For the purpose, we have taken peers like Alacer Gold Corp (ASX: AQQ), Newcrest Mining Ltd (ASX: NCM), and Northern Star Resources Ltd (ASX: NST). Considering the anticipated conclusion of South African assets sale, growing certainty in the company’s operations, resilient production performance in H1FY20, and FY20 annual guidance, we give a “Buy” recommendation on the stock at the current market price of $7.450, up by 0.134% on 22 September 2020.

AGG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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