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 is also involved in the production of silver and sulphuric acid as by-products. AGG has a portfolio of long-life and relatively low-cost assets in key gold-producing regions. The company was founded in 1998 as AngloGold Limited and was later merged with Ashanti Goldfields Company Limited in April 2004. AGG is currently listed on four stock exchanges around the world – the Johannesburg, New York, Australian, and Ghana exchanges.

AGG Details

Decent Bottom-line Growth Supported by Efficiency and Operational Improvements: AngloGold Ashanti Limited (ASX: AGG) is one of the leading gold production company with a diverse, high-quality portfolio of operations, projects, and exploration activities across several countries, including Australia, Brazil, Argentina, Tanzania, Columbia, etc. As on 30 March 2021, the company’s market capitalisation stood at ~A$10.53 billion. Despite the challenges presented by the COVID-19 pandemic in 2020, AGG was able to report decent financial performance for the full year, while also improving the quality of its portfolio, delivering the Obuasi redevelopment project on time and within budget, and supplementing the Ore Reserve in its core portfolio. Further, the company also reduced its debt and grew its dividends in 2020. From 2016 to 2020, the company’s net profit has grown at a CAGR of 97.21%.

Looking ahead, the company expects its cash flow generation across the business to benefit from prevailing market conditions as well as from efficiency and operational improvements in its business. Further, the company is focused on increasing its investment in Ore Reserve development and brownfields exploration to increase the rate of Ore Reserve conversion, extend the reserve lives of its assets, and enhance mining flexibility. Over the next two years, the company expects its gold production from continuing operations to grow at a CAGR of 2.0%, underpinned by the ramp-up of the Obuasi mine in Ghana, and incremental improvements from existing assets.

Decent Growth in FY20 Free Cash Flow: For the year ended 31 December 2020, the company reported total production of 3,047koz, well within the guidance of 3,030 - 3,100koz. The FY20 production was 7% down on FY19, mainly due to the sale of AGG’s remaining South African producing assets, the cessation of mining activities at Sadiola and Morila in Mali, and the impact of the COVID-19 pandemic. The average gold price received in 2020 was 27% higher than FY19 at US$1,768/oz, which helped the company delivering improved financial performance. The company’s free cash flow in FY20 increased 485% year-on-year to US$743 million. Profit from continuing operations grew by 160% year-on-year to US$946 million in FY20. During the year, AGG’s Ore Reserve increased by 25% year-on-year, with 6.1Moz added after accounting for depletion. For the full year, the company paid a total dividend of 48 US cents per share, 5 times higher than 9 US cents per share in 2019. As at 31 December 2020, the company had cash and cash equivalents of US$1.33 billion, up 192% on FY19.

FY20 Results (Source: Company Reports)

Key Metrics: Over the past five years, the company’s profitability margins have improved, supported by the efficiency and operational improvements in the company’s business. Gross margin for FY20 stood at 38.6% in FY20, up from 25.8% in FY19. EBITDA margin for FY20 stood at 45.5%, down from 50.4% in FY19. Current ratio for FY20 stood at 2.43x, up from 1.56x in FY19.

Past 5-year Financial Performance for Year Ending 30 December; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Focused on Debt Reduction: The company is committed to reducing its debt from cash flows and asset sale proceeds. Last year, the company used its cash proceeds from the South African asset sale to settle the remaining South African debt. Over the years, the company’s net debt level has reached its lowest level in a decade, falling to US$597 million as at 31 December 2020. The company’s adjusted net debt to adjusted EBITDA ratio from continuing operations stood at 0.24 times in FY20, lower than the targeted level of 1.0 times, demonstrating a disciplined reduction in debt and robust cash generation from the business.

 Adjusted Net Debt Trend (Source: Company Reports)

Sale of Entire Interests in the Sadiola Mine: AGG along with its joint-venture partner, AMGOLD Corporation (IMG), recently completed the sale of their entire interests (41% each) in Société d’Exploitation des Mines d’Or de Sadiola S.A. (SEMOS) to Allied Gold Corp. With this transaction, AGG has completed the phase of portfolio rationalisation and optimisation that commenced in 2014, and it now retains high-quality portfolio of 10 operating mines located in seven countries.

Key Risks: The company is exposed to the risks related to the COVID-19 pandemic and associated impacts. Further, the company’s results are also sensitive to gold price volatility and exchange rate fluctuations. The uncertain and increasingly rigorous regulatory environment is also a challenge for the company as it could result in an increase in the cost of compliance that can affect the financial position of the business.

Outlook: Looking ahead, the company is focused on enhancing its operating flexibility and extending the lives of its existing mines by converting its Mineral Resource into better defined Ore Reserve. Over the next two years, the company expects its gold production to grow at a CAGR of 2.0%. Sustaining capital expenditure for each of 2021 and 2022 is expected to range between US$720 million to US$820 million.

In FY21, the company expects its production to be in the range of 2.7Moz and 2.9Moz with AISC of between US$1,130/oz and US$1,230/oz. From 2021 to 2025, the company expects gold production to grow at a CAGR of 5.0%, underpinned by its 10 operating assets, as well as the Company potentially moving forward with investments in the Quebradona and Gramalote projects. Over the long-term, the company expects its Gramalote and Quebrdona projects in Colombia to have a positive impact on the production and cost trajectory of the business.

Production and AISC Guidance (Source: Company Reports)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

** 1 USD = ~1.31 AUD

Stock Recommendation: Over the last six months, the stock of AGG has corrected by 21.97% and is currently trading towards its 52-week low price of A$5.100, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~A$5.135 and resistance of ~A$6.486. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company might trade at a slight premium to its peer average, considering the company increased ore reserves, reduction in net debt, and favourable market conditions. For the purpose, we have taken peers like, Northern Star Resources Ltd (ASX: NST), Regis Resources Ltd (ASX: RRL), Resolute Mining Ltd (ASX: RSG), etc., which comes under Gold sector. Considering the company’s decent FY20 results, modest long-term outlook, rising cash balance, reduced net debt, current trading level and valuation, we give a “Buy” recommendation to the stock at the closing price of A$5.680, up by 3.272% as on 30 March 2021.

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

Disclaimer

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