AngloGold's hedge time bomb
Posted: Wed, 02 Apr 2008
[miningmx.com] -- AN intensive review of AngloGold Ashanti’s assets to prepare the group to deal with a troublesome hedge book has revealed a third of its mines are underperforming, prompting moves to sell some operations and re-plan others to boost production and lower costs as it faces a tough three years on its forward sales.The review was ordered by incoming CEO Mark Cutifani last year, and as part of the review AngloGold is putting in place a recovery plan for the perennially disappointing Obuasi mine in Ghana over the next 15 months. AngloGold needs its mines to be firing on all cylinders and increase production – something that will be particularly challenging at the power-afflicted South African operations – to deliver gold into its unfavourable hedge book of 10.4 million oz at the end of 2007. The hedge book, which is well below water in the current gold price environment, is by far the largest amongst gold producers.
“Preliminary results have highlighted the gap between the greenfields and brownfields exploration programmes, the potential to increase the intensity of production around several operations, and opportunities to make further improvements in process recoveries and cost efficiencies,” Cutifani said in AngloGold’s annual report. AngloGold anticipates the price it will receive for its gold in 2008 will be 20% less than the spot price, assuming a gold price of $900/oz, because of its forward sales. This compares to a 13% discount in the fourth quarter of 2007. “We anticipate continued support for the gold price in the year ahead but, assuming that current market conditions continue, then as a result of the current structure of the hedge book, our received price will be significantly lower than the spot price as we deliver into around 60% of our current hedge book over the next three years,” he said. Cutifani has repeatedly told the market the group is actively looking at ways of managing down its hedge book. To buy out the hedge book, AngloGold would need a massive share issue of roughly a third of its equity, one analyst said. "It's a bombshell and they're in more trouble with this hedge than anyone realises," the analyst said. Dealing with the hedge will not have been made any easier by the power crisis in South Africa that prompted Cutifani to forecast production falling by 400,000 oz in 2008, assuming power supply is maintained at 90% of normal consumption. There are other untapped mineral resources which can generate value for the company, he said. “The review has also highlighted areas of value that have not been fully appreciated until now, such as the iron ore deposits in Brazil, the potential regarding the treatment of uranium tailings in South Africa and unrealised exploration potential at Siguiri in Guinea,” he said. Late last year Cutifani has said five or six of the company’s 21 mines were demanding a “disproportionate” amount of much management effort in relation to the value they delivered. “From the initial stages of this review, it has become clear that 30% of our operations are not delivering on their potential,” he said in the annual report. AngloGold granted operational control of the short-life Morila gold mine in February to Randgold Resources, its partner at the project, with the intention of selling its 40% stake. “Our options are clear. We cannot leave these operations as they are – we must recover this potential through our new approach or look for alternate pathways to value,” Cutifani said. One of the most troublesome mines in the AngloGold stable is Obuasi in Ghana, which was acquired as part of the Ashanti Goldfields deal in 2004. The mine has never lived up to expectations and some market watchers have asked whether it shouldn’t be sold. “Following urgent reviews initiated towards the end of the year, we believe that a clearer picture of this asset and its potential is emerging,” Cutifani said. The reasons for the poor performance at the historically under-capitalised mine are inappropriate mining methods, poor grade management and a lack of mining flexibility as a result of low rates of development, the scattered geography of the operation and poor maintenance of critical equipment, he said. “A recovery plan for Obuasi is being put in place and, as we come to understand this orebody, we are more likely to be able to turn to account its potential. We have set ourselves a 15-month time horizon for this critical work.” At the opencast Geita mine in Tanzania, where a collapsed pit wall, hampered production, mineral reserves were reduced by two million oz because of higher costs, changed estimation methods and less steep mining slopes. “In addition to management restructuring, the team is being supplemented by additional expertise to assist with immediate recovery programmes, while the scope of the recovery plan is being determined. Detailed plans are expected to be completed and underway by the end of June.” The South African mines will turn in a disappointing performance for 2008, shedding 400,000 oz of gold after power utility Eskom badly managed a shortfall in electricity supplies in January that resulted in mines closing for a week. Group gold production is forecast at between 4.8 million and five million oz for 2008. Power was restored to 90% of normal consumption during February and some had their electricity allocation upped to 95% in March. In South Africa, every effort would be made to adapt the mines to 10% less power, Cutifani said. “We will do our utmost to avoid shutting down operations with the job losses this would imply,” he said. “However, we are unable at this stage to guarantee that we will succeed in this endeavour – but we are committed and we will leave no stone unturned as we work with Eskom to find a manageable and sustainable operating solution.”
It's a bombshell