[miningmx.com] – SHARES in AngloGold Ashanti took a hefty blow owing to the sheer enormity of the $2.1bn rights issue it announced today, but analysts believe that’s the price shareholders must pay to get the de-merger of its international assets away.
Analysts also believe that even without a de-merger, a $1bn recapitalisation of the business was a necessity – and one generally expected by shareholders – since AngloGold’s 2020 8.5% corporate bonds cost some $250m in interest a year (to be reduced to $100m/year post a successful rights issue).
Citi gold analyst, Johann Steyn, said the de-merger with its re-rating of the international assets, focused management approach and potential for higher cash returns may realise “our envisaged upside”.
Having, however, decided to de-merge part of the business, separate but related consequences followed when the South African Reserve Bank (SARB) insisted the local company left behind after the de-merger, carry no gross debt.
“It’s the right decision for South Africa,” said Stewart Bailey, AngloGold Ashanti’s vice-president of investor relations. The growth of the international assets had been partially financed on South African cash flow, therefore saddling the local firm with debt would have been like “an asset strip of South Africa,” he said.
The $2.1bn rights issue may be $1bn higher than investors were expecting, but it’s also the necessary school fees to put the de-merger into motion.
“Our view is the higher amount is required to make the South Africa-focused AngloGold gross debt free which is a condition for approval of the de-merger put forth by SARB – and ensure that NewCo starts with a solid capital structure,” said Eugene King, an analyst for Goldman Sachs in a report issued today.
One question is whether shareholders in AngloGold following their rights will see the $1bn returned to them through the newly created, internationally-focused Newco, to be led by Charles Carter, AngloGold’s head of strategy and new business?
Gold industry de-mergers lately don’t make for the best reading. UK-listed African Barrick was the 26% de-merger plan of Barrick Gold in 2010. Although the company is recovering under CEO, Brad Gordon, it failed to attract the enthusiasm of investors for the first three years of its life.
More recently Gold Fields unbundled its South African assets in 2012, keeping only South Deep, but has fared worse that the assets it unbundled, now in housed in Sibanye Gold.
Srinivasan Venkatakrishnan, CEO of AngloGold Ashanti, was reticent to comment on rival African gold producers, but it’s clear he thinks the NewCo is stronger than African Barrick, which has assets limited to Tanzania, and Gold Fields which kept its single largest resource, South Deep, to itself.
Apart from Kibali and Tropicana, the NewCo will continue with restructuring plans for Obuasi – long the monkey on the back of AngloGold – while its Colombian exploration and development assets have interesting promise.
What is striking, however, is how investors currently rate AngloGold which , in its current form, commands a multiple on pre-tax earnings of only 3.5x compared to the 4x rating of African Barrick, and Randgold Resources’ 12x multiple.
With annual production of 1.1 million oz, Randgold Resources has a market capitalisation of $7bn whilst the value of AngloGold, prior to today’s announcement, was only $6.3bn.
“There’s a huge discrepancy in the relative valuations,” said King. He believes under Carter’s leadership, the NewCo could consider other joint ventures with the likes of Randgold, perhaps buy out its partner in Tropicana; certainly it has the benefit of being niftier in a way the larger AngloGold cannot
“The mood across the sector is that the market values more strategically aligned portfolios and more aligned management,” said Carter in a telephonic interview. “The focus is on portfolio character and value uplift,” he said.
For his part, Venkatakrishnan, is guarded about the prospects for the South African limb of AngloGold. There’s talk of diversification in South Africa and farther afield – but not in gold – without any flesh put on the ambition.
It certainly has firepower, however. Debt free and with 65% of equity in a vehicle that could be worth $3bn to $4bn, the company is another interesting addition to the mid to large tier diversified mining story in Johannesburg which will also include BHP Billiton’s proposed NewCo.
“I’m hugely excited about South Africa and strong believer that when people are afraid we should be greedy and afraid when people are greedy,” said Venkatakrishnan.
