Developments in Tanzania are “concerning” for AngloGold Ashanti because its Geita mine is a “tier one” asset in which it is currently investing $180m during the current financial year to end-December with further capital expenditure planned for next year.
That’s according to AngloGold Ashanti CEO Srinivasan (Venkat) Venkatakrishnan who added clarity was needed on the impact of Tanzania’s new legislation affecting the mine development agreements that formed the basis of future investment in mining in the country.
Speaking on a media call in Johannesburg on Monday Venkat added that, “that’s why we are seeking dialogue with the government. It’s very difficult to say why the Tanzanian government has taken these particular actions but it’s very clear there is a view the State is not getting a sufficient participation in the share of the revenues generated.
““This situation requires patience, diplomacy and the need to take a long-term view,” he commented
Changes made by the new legislation include, amongst others: the right for the government to renegotiate mine development agreements (MDAs) at its discretion; the provision to the Tanzanian government of a 16% free-carried interest in all mining projects and the right for the government to acquire up to 50% of any mining asset commensurate with the value of the tax benefits provided to the owner of that asset by the Tanzanian government.”
Venkat said AngloGold Ashanti was seeking a “constructive dialogue with the Tanzaniangovernment and its agencies to gain assurances that Geita mine will not be affected by these legal and fiscal changes.”
He added that AngloGold’s subsidiaries in Tanzania are paying the increased royalty of 6% (previously 4%) along with a new 1% clearing fee on gold exports “under protest to ensure continued processing of export shipments.”
Venkat pointed out Geita had experienced “a challenging past” with major investments required at various points in its history to keep the mine operational while Geita was now entering a programme to extend its life through underground development.
He stressed the benefits to Tanzania from the Geita operation commenting that, “this is a message we need to get through. This should count in our favour.
“This mine has delivered more than a billion dollars to the Tanzanian government so far in the form of royalties, corporate taxes and employee income tax. The government has benefitted from the start following our acquisition of Geita in 2000 but the mine only repaid the capital investment made and broke even in 2011.
“ The government’s share of the net cash distributed by Geita since 2000 has grown to 55% while AngloGold Ashanti’s share has only grown to 45% . We are the largest taxpayer in the mining industry and one of the largest taxpayers in the country.”
Venkat said Geita continued to operate normally but added that, “during this capital investment phase we are operating the mine on a self-funding basis given the higher royalties and the lock-up of VAT receivables we are starting to see at the mine.”
Quizzed on what precisely he meant by “self funding basis” Venkat commented, “the mine generates sufficient funds from its own operations to cover the capex required but we have to take a long-term view.
“Depending on how the landscape changes over the next couple of months we will go back and relook at our capital expenditure plans looking at how we have deployed the capital and at the same time taking a longer-term view on the asset.”
Dear Fellow Readers,
AGA results are in, and as customary , yours truly has reviewed the number. Here is my take :
SALIENT POINTS
1. Despite AGA’ s reassurances, the guidance of 3,6 – 3,75Moz for FY17 is now a stretch target after H1 of 1,748 Moz . Even with production volumes more weighted towards H2
2. Tropicana Mine performance is impressive
3. Geita Mine : Kazi Nzuri Sana!
4. South Africa Region has problems and they have been coming for a while with little and tepid management reaction/interventions
5. AGA growth projects pipeline looks bare/empty and needs to be bolstered ( Buy B2Gold or muscle yourself into Randgold’s project portfolio)
DETAIL ANALYSIS
As with this big boys , you need to look at regional performance , and then narrow in on the assets. AGA production has steadily become high costs with increasing AISC , which is now at $1071/oz. But AISC at group level is meaningless, its when we look into the assets that we will find were the issues reside. So i will delve into the regions to get to the rub on this distrurbing costs trend:
1. South Africa : One of my favourite tools in analysing the continued performance of an u/g gold mine is its reserve grade vs break-even grade. Given the vast reserves , i change this analysis to reported yield grade vs break-even grade. For continued profitable operation, the yield grade>break-even grade by >2 g/t for big mines ( i.e Mponeng , Kopanang , Driefontein , Kloof etc) and for “rats and mices” like Harmony’s mines its > 1g/t. This is so because the big mine costs are rather substantial at R1,5 -2 Billion /quarter. So when you running at an operating loss in these mines, your bank balance is bound to feel it including for the likes of AGA. Kopanang mine has been in a spot of bother since 4Q FY13 , it ran in-and-out of operating losses up to date, with AGA management doing nothing decisive to remedy the situation. Tautona Mine suffers from poor mine discipline. The “canary in a gold mine” is the fluctuations in their tonnage volume and yield grades ( 6-9 g/t). From the aforesaid break-even/yield grade ongoing profitability forecast analysis, Moab and Mponeng have entered the danger zone. THE UNIT COSTS OF THESE MINES ARE JUST TOO HIGH. AGA’s SAR mines average R3900/t compared with Sibanyes’s R2100/t. As of this H1 FY17 report, the SAR Mines OCF have been cumulative -ve CF = $433M since FY13, excluding Surface Sources. THAT IS STAGGERING. For AGA with OCF = ±$600- 1000M/yr , that is a serious drag on performance. SAR REGION NEEDS SOME SERIOUS ATTENTION AND RESTRUCTURE AND AGA ANNOUNCED MEASURE ARE NOT SUFFICIENT.
2. Continental Africa : Over the period FY12 – 1HFY17, this region has send $1131M to Head Office , despite building Kibali in the process ( Attr. CAPEX = ±1200M). The star performer has been Geita mine, with Siguiri and Iduapriem providing commendable supporting roles. Geita Mine story really makes me teary-eyed. This is a Mine which brought Ashanti GoldFields to its knees trying to build it using debt, gold hedges and gold-lease rates contracts etc. For the said period, Geita has contributed a stupendous $1064M. This type of money washes away many of its sins. So the Tanzanian Government actions are unwarranted and folly. But as Geita Mine embarks on its last journey in the twilight of its LoM ( 2P Reserves = 2Moz at FY16 end) , i say ” KARIBU SANA, YOU HAVE BEEN A GREAT ASSET!”
Overall, nothing wrong with the region and it must look for more opportunities and it awaits the next Cash Flow generation machine that it Kibali Mine to achieve full production.
3. Australia Region: This is a mixed region regarding performance. Sunrise Dam Mine is performance is disappointing. Its u/g is not going well and the operation needs tough-love. Tropicana Mine has truly come to the party and the Independence Group guys are singing its praises too, not just AGA. It increased its reserves by 1,1Moz last year , and production volumes are above Feasibility Study levels ±400koz/yr ( FS est: 330 – 400koz/yr).
4. Americas : The perennial performers of the AGA portfolio. These 3 x mines deliver avg Net Mine CF = $220M/yr on a production base of 800Koz/yr. Better than any mid-tier Gold Mining Company of than that scale. They are on course for >$200M OCF for FY17 with NET Mine CF = $90M for 1H FY17. Nothing to worry about here as AGA seeks to extend LoM and increase production in a region of world renowned for generally low input production costs.
CONCLUSION
When a company’s gold production is above 3,5Moz/yr, it tends to chew-up its Reserves quickly despite the vastness of its gold R+R. AGA is in such a situation and needs to recognise that and start filling-up its project pipeline. It is for this very reason that its AISC have escalated. The production now is just not as profitable as before, because the mining assets are ageing. Furthermore, project execution seems to be Ok given that Tropicana mine was delivered within reasonable capex and schedule expectations and its delivering on its FS estimates. I am disappointed in the management that they don’t seem to act decisively on poor performing assets and let them deteriorate badly. Question is: Venkat, Are you confident that the management people surrounding you are top-cals?