AngloGold to keep hedge options open

[miningmx.com] — ANGLOGOLD Ashanti exceeded analysts expectations in the June quarter nearly doubling its operating margin and saying it would continue to weigh into its hedge book, especially at a gold price lower than $1,100/oz.

At 3.2 million ounces, the amount of gold sold forward in future contracts was equal to less than three quarters’ of production, and well off the 12 million ounces of gold that had been sold forward by the company two-and-half-years ago.

Since the gold sold forward is not at the going market value, AngloGold books revenue at an average of between 8% and 10% below the spot gold price.

“I should add there’s a $100m opportunity loss in terms of earnings,” said Mark Cutifani, CEO of AngloGold Ashanti who added that if the group had booked all revenue at market value the company would have enjoyed “one helluva result”.

June quarter headline earnings increased to 267c/share, some 141c/share more than in the previous quarter. Pretax earnings stood at R3bn. The operating margin increased to 20% from 13% previously.

The key factors behind the better numbers was higher production – 1.12 million ounces of gold was produced – and improved cash costs. Higher production comes at a time when SA Statistics reported a 4.9% year-on-year volume decline in South African gold industry output during May, and a further 5.3% decline in June.

“There has been a pleasing cost improvement in South Africa, but we’re not complacent about it,” said Cutifani. “There’s still alot of work to be done on costs.”

In addition to the earnings uplift, the better numbers also improved free cash flow enabling AngloGold Ashanti to cut debt to R6.1bn from R6.6bn.

Growth

Amid continued activity in gold industry merger and acquisition activity lately, most significantly the $7bn takeover proposal of Red Back Mining by Kinross Gold and, earlier, Newcrest’s bid for Lihir Gold, Cutifani said the group was focused on organic and exploration related production growth.

The group has exploration targets in the Congo, as well as the Americas (Brazil, Colombia and Argentina) and Canada, as well as an “embarrassment of projects” which were locked in “a competitive fight for capital”.

One such project involves the proposed $600m Tropicana venture in Australia which will take group output from the country to 700,000 ounces in five years time against 390,000 ounces currently.

Said Cutifani: “We are on track to make an investment decision on Tropicana by the end of the year.” Tropicana is owned 70% by AngloGold and 30% by Perth miner Independence Group.

Including Tropicana, AngloGold Ashanti expects to derive an additional 1 million ounces of gold production over the next five years from a combination of organic growth and operational improvements.

Gold price

Commenting on the gold price, Cutifani said the group believed $1,200/oz was sustainable for the year while a price of under $1100/oz represented “a real opportunity” to get cracking on the hedge book.

“We still think the economies are in trouble,” he said of the macroeconomic picture which, if further global troubles heighten, tends to help strengthen the case for continued and further investment in gold.