AngloGold’s Venkatakrishnan dampens dividend talk

Outgoing AngloGold Ashanti CEO, Srinivasan Venkatakrishnan Pic: Martin Rhodes

AS a former director in the reorganisation services of auditing firm, Deloitte & Touche, it seems quite natural that Srinivasan Venkatakrishnan should be the person to put AngloGold Ashanti back on terra firma.

During his two years leading the gold producer, the company has not missed a single quarter’s cost or production guidance. It’s that kind of predictability that gives investors piece of mind.

His one misstep, however, was to have a $2.1bn rights issue and demerger of the South African gold mines rejected by shareholders – a proposal deemed necessary by AngloGold because it feared being swamped by net debt which was $3.2bn at the time. The South African gold mines were also struggling.

That was in mid-2014. Net debt today is at $2.19bn while the South African mines are benefiting from a meteoric rise in the rand gold price such that they receive roughly R100,000 more per kilogram of gold produced than in the December quarter.

Could Venkatakrishan be persuaded that shareholders made a correct decision about the firm’s future?

“They [shareholders] could see the merit of the demerger, but they were against the price tag attached to it,” said Venkakakrishnan in an interview with Miningmx. “I don’t agree with the assessment [that shareholders made a correct decision].

“The demerger had a logic to it and this [debt reduction and recovery in South African mines’ performance] could have happened with the demerger in place. It’s not a case of one vindicates the other as they both could easily have co-existed,” he said.

The signs today look extremely promising for AngloGold. Free cash flow totalled $160m in the fourth [December] quarter enabling the company to end the 2015 financial year free cash flow positive to the tune of $141m. This compares to an outflow in the 2014 financial year of $112m.

Predictably, now the panic over debt management is easing, attention is turning towards the likelihood of AngloGold paying dividends.

“At spot gold prices, we see AngloGold Ashanti generating $575m of free cash flow in 2016,” said Barclays Capital. It added that the group should have paid off enough debt by July to consider reinstating the dividend in its 2017 financial year.

“With net debt to EBITDA [earnings before interest, tax, depreciation and amortisation] under 1.5 x, we see a strong chance of dividend announcement this year,” said Goldman Sachs in a report.

(The net debt to EBITDA ratio is commonly used by credit ratings agencies which demonstrates the ability of a company to service the interest and capital on its debt from its earnings).

Venkatakrishnan, however, is cautious about any dividend reinstatement. “Yield can come in one of two ways: either through the share price or dividends,” he said.

“As we start to make in-roads into our interest costs, we will put dividends back on the table. But we don’t want volatilty in dividends so we’ll deleverage the balance sheet first before putting money back into shareholders’ pockets,” he said.

How mining firms pay dividends is becoming a point of discussion, however.

Anglo American and Glencore recently stopped paying out whilst Rio Tinto and BHP Billiton abandoned their progressive dividend policies in favour of a payout ratio of earnings. As it turns out, Venkatakrishnan is a fan of neither policy.

“A progressive dividend through all the cycles is very difficult to maintain. It doesn’t really work.

“I’m not a huge fan of a dividend as a percentage of earnings either. I would rather have it distributed as a portion of cash flow which we define after setting aside for capital, earnings and tax. That provides you with the cushion.

“Then you decide do you reinvest the money or give it back to shareholders,” he said.