[miningmx.com] – THE response of Srinivasan Venkatakrishnan, CEO of AngloGold Ashanti, to the lower gold price has been hailed as decisive by analysts, but doubts persist especially in respect of the group’s balance sheet.
Some analysts questioned whether the company had gone far enough in issuing a $1.25bn corporate bond given the three times over-subscription, itself recognition of the mouth-watering 8.5% coupon rate.
“We didn’t want to over-gear the balance sheet,’ said AngloGold Ashanti CFO, Richard Duffy, at the group’s second quarter and interim presentation in Johannesburg earlier this month. “The coupon rate would also have gone out if we’d issue more bonds,’ he said.
On the face of it, the corporate bond seems adequate. It was issued as a backstop to a $733m bond which matures in AngloGold Ashanti’s next financial year which means that the bond also generated $500m in additional cash. Added to the $300m in cash, AngloGold Ashanti is well prepared for a nuclear winter in the gold price, although Venkat acknowledged in an interview with Miningmx that the balance sheet remained “something of a moving picture’.
Hence the announcement last week that AngloGold Ashanti had asked for a temporary relaxation of the single covenant that governs the sustainability of two revolving credit facilities.
Currently, the covenant allows for net debt to exceed no more than three times the rolling 12-month pre-tax earnings of AngloGold Ashanti. In terms of the request to its bankers, however, AngloGold Ashanti has asked for the covenant to be extended to allow net debt to be 4.5 times pretax earnings.
“This is purely a proactive step by the company providing it protection, if required, against volatile market and operating conditions,’ said AngloGold Ashanti in a statement.
“Whilst AngloGold Ashanti does not anticipate requiring this additional headroom on the financial covenant, it believes this prudent move will provide the company with greater flexibility to address any volatile market and operating conditions in the short term, as it proceeds with plans to bring its two new projects into production, reduce operating and overhead costs and improve its overall production profile,’ it added.
One of the key issues is how banks view its sustainability amid margin pressure. AngloGold Ashanti’s All-In Sustaining Costs (AISC), a cost measure that departs from the normal cash costs in that it includes development, exploration and corporate costs, is about $1,300/oz in the current quarter.
The mantra that companies should only seek to manage that which they can clearly control would seem to be relevant. AngloGold had almost no margin last quarter; this quarter it is doing better by dint of the gold price.
So the plan is to get AngloGold Ashanti’s AISC break-even to $1,000/oz during 2014. It’s an extremely tough ask.
That’s why Venkat’s response has been so radical: overheads slashed by 50%, a 40% cut in non-mining jobs and the withdrawal of exploration and drilling from all but three regions with the combined target of saving $450m a year. The dividend was also passed and there’s little likelihood of a final dividend either.
The market remains sceptical evidenced by the fact AngloGold Ashanti’s share price sank to its lowest level in 5 years in the wake of its interim results, Venkat’s cost-cutting response notwithstanding. The pressure has been released somewhat by the improvement in the gold price and weakening of the rand to 10 to the dollar.
All eyes on the next six months then, especially as AngloGold Ashanti will be hoping its two new projects, delivering between 550,000 to 600,000 ounces of relatively low-cost gold, are on schedule. This will also provide Venkat with an opportunity to offload less profitable or unprofitable ounces.
As an idea as to where Venkat may cut production, look no further than the chief culprits in the $2.4bn pretax impairment that AngloGold Ashanti also booked for the second quarter.
The popular view is that the South African mines may be vulnerable but that’s not obvious anymore, particularly considering the premium AngloGold Ashanti has placed on technological innovation to keep those deep-level mines going for a few years yet. In fact, of the write-down the South African gold mines comprised only $213m.
Rather it’s the Continental Africa mines that may be most under pressure to perform – the giant Obuasi mine in Ghana and Tanzania’s Geita mine, contributed to the $1.56bn write-down of the Continental Africa assets.
