AngloGold Ashanti Limited

Company Overview: AngloGold Ashanti Limited (ASX: AGG) is a global mining company that has a high-quality portfolio of long-life assets with a track record of disciplined capital allocation and project delivery. The company is mainly involved in the exploration and production of gold. It also produces silver and sulphuric acid as by-products and will pursue value-creating opportunities in other minerals where it can leverage its existing assets, skills and experience to enhance value creation. The company is listed on four stock exchanges around the world – the Johannesburg, New York, Australian and Ghana Exchanges.

AGG Details

Making Progress in Achieving Core Strategic Objectives: 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 core strategic focus is to generate sustainable cash flow improvements and shareholder returns by focusing on the quality of portfolio; maintaining long-term optionality; ensuring financial flexibility; and optimising overhead, costs and capital expenditure. AGG’s focus areas drive its plans for inward investment, to deliver better quality production aimed at increasing margins, extending mine life and shaping the portfolio in the longer term. Further, the company is also focused on creating a competitive pipeline of long-term opportunities. In the last five years, the company has witnessed significant improvement in its bottom line as its net loss declined from US$85 million in 2015 to US$12 million in 2019. Over the years, the company has significantly improved its balance sheet by reducing its net debt.

(Source: Company Reports)

Despite COVID-19 challenges, the company was able to deliver decent production performance in the first half of 2020, demonstrating the resilience of its diverse portfolio. The company’s earnings in the first half have been benefited by gold price increases, higher foreign exchange gains and income from joint ventures. Currently, the company is making good progress in achieving its core strategic objectives – including asset sales and the redevelopment of Obuasi, namely the ongoing redevelopment of its Obuasi Gold Mine, investment in the increase of reserves and mine life of its key assets, and the process to conclude the announced sale of assets in South Africa and Mali. In parallel, the company has worked hard to ensure that it has the liquidity to withstand any potential disruptions from the COVID-19 pandemic. Looking forward, the company expects improvements in cash flows, potentially resulting in further increases in its dividend pay-outs. Further, the company intends to remain disciplined in managing costs and capital expenditure, thereby optimising current operating margins

FY19 Results Highlights: During the year ended 31 December 2019, the company met its full year guidance with production at 3.281Moz and All-in sustaining costs (AISC) of US$998/oz. The company saw record production at Kibali, Tropicana and Iduapriem, while Geita delivered the highest production in 14 years. Over the year, the company was focused on driving operational excellence and cost efficiencies across its business. As a result, the company’s AISC margin improved to 28% in 2019 from 23% in 2018.

For the full year, 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.

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. Reinvestment in its core asset base has enabled the company to optimise output and plan for the future with Ore Reserves outside of South Africa replenished. The rising cash flows from its operations led to a growth of 57% in its to 11 US cents per share.

FY19 Results (Source: Company Reports)

Key Metrics: During the March quarter, the company’s gross margin stood at 28.4%. Its net margin stood at 15%, as compared to the industry median of 0.9%, representing decent fundamentals. At the end of the quarter, the company had a current ratio of 2.1x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Sale of South African Assets:  During 2019, the company progressed to sell its assets in Mali, South Africa and Argentina. This was mainly done to streamline the portfolio and lowering the long-term cost structure of the business. On 23 December 2019, the company announced that it had reached an agreement to sell its interest in the Sadiola Mine to Allied Gold for an attributable cash consideration of US$52.5 million.

On 12 February 2020, the company announced that it had 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. On 29 April 2020, the South African Competition Tribunal gave its approval for this transaction. As per the company’s recent update, the sale of remaining South African producing assets and related liabilities will be treated as non-current assets held for sale in H1 2020 results and they will be disclosed as discontinued operations.

Sale of Securities: On 20 May 2020, the company sold 33,580 ordinary shares at $432.7084 per share via on-market sale of shares. Later, on 15 July 2020, the company sold 20,000 CHESS Depositary Interests at A$8.1241 per security via on-market sale.

March Quarter Update: For the March 2020 quarter, the company reported total production of 716,000oz, supported by strong performances from Kibali, Geita and Iduapriem. During the quarter the company made good progress on achieving its strategic objectives, namely the ongoing redevelopment of its Obuasi Gold Mine, investment in the increase of reserves and mine life of its key assets, and the process to conclude the announced sales of assets in South Africa and Mali. The company reported profit before taxation of US$231 million for Q1 2020, up 182% year-on-year from US$82m in Q1 2019. Further, the company’s adjusted EBITDA increased by 51% to US$434 million in Q1 2020.

COVID-19 Update: Due to the pandemic, the company had to suspend its operations at different sites for few weeks. However, with the easing of Government restrictions, the company restarted production in Argentina, Brazil and South Africa.  In response to COVID-19, the company has been building inventories of critical spares and ore stockpiles to improve the ability to respond to operational disruptions. The Company has also implemented innovative relief interventions across all host countries, working closely with governments, peers, and communities to help slow the spread of the pandemic.

H1 2020 Results Update: In an update provided on 28 July 2020, the company announced that it will release its results for the six months ended 30 June 2020 on the Johannesburg Stock Exchange News Service on 7 August 2020. The company has advised that its headline earnings for the period are expected to be in the range of US$392 million and US$416 million, with headline earnings per share of between US 94 cents and US 99 cents. The company’s headline earnings are believed to benefit from the improvement in gold prices, weaker local currencies; higher foreign exchange gains and gains from joint venture. The total basic earnings from continuing and discontinued operations for the period are expected to be in between US$410 million and US$432 million, resulting in total basic earnings per share from continuing and discontinued operations (EPS) of between US 97 cents and US 102 cents.

The company’s production for the six months ended 30 June 2020 is expected to be 1.469Moz, compared to 1.554Moz in pcp, supported by strong second-quarter performances from Geita, Iduapriem and Serra Grande, as well as steady production from Kibali and AGA Mineração.

Key Risks: The company is exposed to the risks and threats of COVID-19 pandemic, as it could impact its operations and its production performance. The business environment in which AGG operates is dynamic and complex, with influence from several external factors, which are beyond its control. This can potentially affect its performance, ability to deliver on its strategy and its objectives, and thus to create value. Further, the company’s business activities are focused on the production of gold, and thus, it is heavily exposed to the gold price.

What to Expect: The favourable geographic diversification of the company’s portfolio offers a de-risked production profile that links it to multiple streams of free cash flow generation. The company’s diverse portfolio and proactive management of its balance sheet have given it flexibility to withstand potential disruptions from the COVID-19 pandemic. In line with its strategy of streamlining its portfolio and lowering the long-term cost structure of the business, the company is on the verge of completing the sale of its South African assets.

Before the COVID-19 Outbreak, the company was expecting its total 2020 production to be in between 3,050 - 3,300koz with AISC in the range of US$1,040-1,100. However, due to the severity and scope of the COVID-19 pandemic and the necessary government responses to limiting its spread, the company has withdrawn its guidance. As per the latest trading update, the company expects its H1 2020 headline earnings to be in the range of US$392 million and US$416 million, on the back of improvement in gold prices, weaker local currencies, higher foreign exchange gains and gains from joint venture. The company has scheduled to release its H12020 results on 7 August 2020.

Looking ahead, the company expects improvements in cash flows, potentially resulting in further increases in its dividend pay-outs. Further, the company intends to remain disciplined in managing costs and capital expenditure, thereby optimising current operating margins.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

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

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

Stock Recommendation: The stock of AGG has increased by 21.09% in the past three months and is inclined towards its 52 weeks high price. The company is currently in a decent cash position of US$1.1 billion after it redeemed the 10-year US$700 million bond and the coupon. Further, it has also secured additional credit facilities of US$1 billion, providing further liquidity in the event of operational disruptions. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double digit-upside (in % terms). For the purpose, we have taken peers like Alacer Gold Corp (ASX: AQG), Kirkland Lake Gold Ltd (ASX: KLA), Newcrest Mining Ltd (ASX: NCM), etc. Considering the company’s diverse portfolio, its proactive management of balance sheet, its solid production performance in 2019 and H1 2020, and the strategy of streamlining its portfolio and lowering the long-term cost structure of the business, we give a “Buy” recommendation on the stock at the current market price of $10.750, up by 7.608% on 28 July 2020, owing to its latest H1 2020 results update.  

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

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