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Cash pressure to ease on SA gold firms
David McKay
Posted: Fri, 09 Dec 2005
[miningmx.com] -- HARMONY Gold’s cash flow problems are widely known but margin pressure has been felt throughout the industry, including AngloGold Ashanti, South Africa’s most geographically diversified miner and, therefore, less exposed to the strength of the rand.
According to a report by David Hall, a gold analyst at Merrill Lynch, AngloGold Ashanti has net debt approaching R10bn. Of this, about R4.8bn has been used for three years of dividend payments.
“AngloGold has seen net debt double to around R10bn and what is worrying is that dividends have been funded by increased debt,” he said. At a net:debt ratio of about 53%, AngloGold Ashanti is South Africa’s most highly geared gold
producer.
A major contributor to the escalating debt has been the purchase of Ashanti Goldfields whose capital starved mines, such as Geita and Obuasi, have sucked up AngloGold’s free cash, possibly for longer than AngloGold’s management anticipated.
What’s interesting, however, is that the high debt in AngloGold Ashanti makes it more sensitive to movements in its revenue line.
“AngloGold in effect has the most gearing of the lot and it really means that if you look on a net margin basis – in other words which gold company is the most sensitive to moves in the top line – funnily enough it’s AngloGold because of the debt that they’ve got, said Hugo Nelson, a fund manager for Coronation Asset Managers.
“The to tend to be a bit more geared at this point while having a more defensive operating structure. I remain fairly positive on AngloGold,” he said.
The cash pressure issue is obviously not restricted to just AngloGold Ashanti. Harmony
has been loss-making for 10 of the last 12 quarters and sold assets totalling R4bn to keep itself liquid. Gold Fields, while the most profitable of all of South Africa’s gold producers, has also slipped into the red from time to time.
“Only Gold Fields is cash positive and it needed the Mvelaphanda R4.1bn cash injection,” said Hall.
According to research by Nick Goodwin, an analyst at T-Sec, a South African stockbroking firm, South Africa’s gold industry burned R744m after capital expenditure in the September quarter.
Margin pressure is expected to improve with gold miners producing a dividend yield of about 2% or 3%. This is still below industrial stocks on Johannesburg’s JSE Securities Exchange. As a result, gold mining shares remain over-bought, said Goodwin.
Cash earnings for 2005 are forecast to be –R2bn, but a major turnaround of positive R4bn is expected for 2006.
There has been a 32% improvement in the rand gold price since
January when it was about R79,000/kg, is expected to see significant improvements in margins for Harmony Gold and Gold Fields. AngloGold Ashanti is expected to keep its costs to about R60,000/kg or less.
Harmony will still have net debt of between R200m to R300m in the December quarter but better cost management for it and Gold Fields, which reported a relatively poor performance in the September quarter, means improved cash margins for both.
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