AngloGold demerger may be revisited

[miningmx.com] – NOT even Srinivasan Venkatakrishan, AngloGold Ashanti’s enthusiastic CEO, could have been prepared for the market’s exuberant reaction to its debt-reduction plans unveiled on November 3.

Shares in the gold producer improved by 24% on the day when it published third quarter production and earnings figures the highlight of which was a proposal to cut net debt by $1bn to $1.9bn over the next three years.

The share has since been volatile. By the end of last week, it retraced all of its on quarter price gains before improving 7% today following last week’s $40 per ounce improvement in the dollar gold price. The rand gold price barely changed today.

The extent of the share price recovery on November 3, however, was perhaps a sign of just how much dismay had been caused by AngloGold’s earlier proposal in September to raise $2.1bn through a rights issue. Tapping shareholders for such a quantum, especially at a time when the gold market was so depressed, was a naivety that cost the group 40% of its share price.

“The proposal is off the table,’ said Venkatakrishnan during a press and analysts presentation, although one suspects that the other part of the September proposal – a demerger of the company along geographic lines – may be on the backburner. “Never say never,’ said Venkatakrishnan.

For now, however, shareholders much prefer that AngloGold remedy its own balance sheet rather than having them do it. Hence the plan to engineer a fresh round of operational savings and then supplement whatever incremental improvements it can make with partial or full sales of certain assets.

Patrick Mann, an analyst for Deutsche Bank, said in a note to clients that asset sales at net present value, and when the share price was so heavily oversold, would be immediately accretive to the share price. Paying down debt would also help the share re-rate. So it proved.

The question now is just how far AngloGold will have to venture in its asset sale strategy to bring the balance sheet down to comfortable levels. After all, there’s only so much that can be achieved by cost-cutting.

Even after last year’s heavy round of retrenchments, and with the operations “firing on all quarters’, the company only achieved free cash flow of $30m in the third quarter while net debt is down only $150m this year – an improvement that Venkatakrishnan acknowledged was “marginal’.

One of the “self-help’ measures is the rationalisation of services between AngloGold’s South African corporate and regional offices. It will almost certainly result in another shrivening round of retenchments at AngloGold with discussions already opened on job saving strategies, including voluntary retrenchments.

According to Venkatakrishnan, mining inflation from higher electricity and labour costs, is running so high that savings of 8% a year are required in order to just keep up with the escalator – as he describes it.

Much rests, therefore, on selling assets at a decent premium with the Obuasi mine in Ghana and La Colosa in Colombia identified as the most likely either in a full or partial sale. If partners “earn-in’ to AngloGold assets, says AngloGold investor relations head, Stewart Bailey, the group could save up to $200m a year which is the cost of the interest on its debt.

This would free up cash to pay down the debt which would accelerate over time provided the gold price is supportive. Yet selling these assets, in a difficult gold market, will be no easy task.

“The shop is closed to bargain hunters,’ said Venkatakrishnan bravely, suggesting the group doesn’t feel pressured into a firesale.

Certaintly, AngloGold’s $2.9bn in net debt is largely long-dated which means the company has time, but according to Adrian Hammond, an analyst for Standard Bank Group Securities, the South African assets become less attractive in 12 to 18 months.

“These plans [selling La Colosa and Obuasi] would yield a cost reduction of about $30 per ounce and generate about $280m,’ said Hammond. “At current low gold prices, this could marginally improve net debt, but all-in costs are likely to remain at about $1,290/oz,’ he said.

He believes that further restructuring will be needed at AngloGold especially as the South African gold assets deteriorate further in the coming years. A demerger may well be re-attempted in the medium-term.