[miningmx.com] – THERE was a degree of irony in comments made by AngloGold Ashanti CEO, Srinivasan Venkatakrishnan, who dismissed raising funds through shares as “a dumb idea’, even though that’s exactly what was required of Newmont Mining in its $820m capture of AngloGold’s US mine.
As it turned out, the market tended to agree with Venkatakrishnan by penalising Newmont shares roughly 10% in the first two days after the transaction, unveiled on June 9.
Venkatakrishnan was also mindful of his own bitter experience trying to tap shareholders for funds. Shares in AngloGold fell 12% on September 10 as investors recoiled at a $2.1bn rights offer intended to clear out debt. They don’t favour the idea of being made to pay for past balance sheet excesses, nor of being diluted whilst the share price of their company is under pressure.
The alternative for AngloGold and Venkatakrishnan, therefore, was the sale of assets hence the divestment from Cripple Creek & Victor (CC&V) to Newmont, a deal that cuts the firm’s debt by a third to about $2bn and removes the need for further asset sales.
Analysts liked the transaction. Leon Esterhuizen, a precious metals analyst for CIBC Markets called it a “coup’ whilst Andrew Byrne, an anaylst for Barclays saying AngloGold’s 33% discount to its peer group was now unjustified. He saw a 46% upside to the share price.
“We view the announcement as positive and a significant step in the right direction to de-leveraging the company’s balance sheet,’ said James Oberholzer, an analyst for Macquarie Research in Johannesburg.
So with the analysts’ reports fairly consistent that selling CC&V makes good sense for AngloGold, it’s with fresh confidence Venkatakrishnan can look to close out debt starting with the $1.25bn bond which carries an expensive 8% coupon rate.
Pressure off the balance sheet also loosens the shirt collar in respect of approaching wage talks with South African unions.
(One minor negative consequence of selling the US mine – equal to 5% of AngloGold’s total production – is that it increases the firm’s overall exposure to the flammable nature of South Africa’s labour relations.)
Wage talks may well be a difficult affair with both the National Union of Mineworkers (NUM) and the Association of Mineworkers & Construction Union (AMCU) setting down hefty demands of between 80% and 150% for entry-level workers.
According to Goldman Sachs, however, AngloGold still has far less exposure to South Africa (20% of total production) than either Harmony (90%) or Sibanye Gold (100%) and is therefore the bank’s preferred stock through the wage talks.
“We believe the recent underperformance [of AngloGold] versus global gold peers is due to anticipation of increased costs following wage negotiations,’ it said. “However, as AngloGold has less than 20% exposure to South Africa, we believe this underperformance is unwarranted’.
Of Harmony and Sibanye, however, there was less sanguinity.
Even a 10% increase in the wage bill would see Harmony Gold’s pretax earnings in its 2016 financial year fall by 19% whilst the overall health of South Africa’s gold industry would be at question since roughly 40% of all operating gold mines were losing money, even at current wages, gold price and rand/dollar exchange rates.
“We believe that in an environment of declining gold prices, substantial increases in labour costs may result in further deterioration in the profitability of South African gold mining and impact the long-term scope and sustainability of some South African gold mining,’ said Goldman Sachs.
It also observed that the industry’s average operating profit margin in 2014 was 25% versus 45% for gold miners in other countries.
Set against this is a current of disbelief among the government and unions which has warned mining companies that it will not accept retrenchments as a direct consequence of higher wages.
“There was a threat a few years ago in the platinum sector that some 10,000 jobs would be lost and that hasn’t happened because of government intervention,’ said Advocate Mahlodi Muofhe, spokesman for the Department of Mineral Resources.
