[miningmx.com] – ANGLOGOLD Ashanti’s September quarter figures demonstrate amply why a year ago the group attempted – but failed – to hive off its South African assets into a separate company that would be diversified by investment into other commodities.
Roughly 75% of cash flow in the quarter was generated by AngloGold’s international assets, yet the performance of the SA mines was so poor that the company burned $56m in cash. AngloGold’s position was also affected by one-off issues such as the costs associated with the early liquidation of a $773m bond.
Srinivasan Venkatakrishnan, CEO of AngloGold, and his executive team must have recognised in 2014 that as standalone entities, the South African assets would be volatile in performance and need the diversifying effects of other commodity exposure.
It’s a strategy being followed by Sibanye Gold which has bought platinum, and is considering the sense of buying coal assets, because the dividend outlook is so much better than just relying on gold.
It seems both Sibanye and AngloGold both recognise, as does Harmony above, that South African gold mines don’t cut it on their own now: the assets are old and more difficult to mine, and labour costs are high now in South Africa while restructuring is very difficult to get through the government and organised labour.
Unfortunately for AngloGold, the demerger was turned down. So for the time being, the group is faced with having to tame its local assets for the benefit of the whole group. This will prove a struggle that may only become harder.
“Our view is that South Africa does remain a problem and a turnaround needs to be demonstrated in order to drive a positive re-rating of the stock,” said Andrew Byrne, a precious metals analyst for Barclays Capital.
Generally speaking, however, AngloGold has largely addressed its net debt situation and is positioned to produce positive cash flow provided its South African assets can be optimised.
The stock is trading at a 50% discount to its peers – according to Barclays Capital – which should make it a buy depending on how you view the exposure to South African mining.
