Crunch time for Cutifani

[] — YOU could say the next 12 to 18 months are something of crunch time for Mark Cutifani, CEO of AngloGold Ashanti. The hedge book is gone and net debt on the company’s books, which peaked at $2.4bn, has been restructured; the operations are in far better nick than when Cutifani arrived three years ago; and the exploration portfolio has been repositioned, with exposure now to prospects in Colombia and Congo.

The first major benefit of having removed the hedge book is that at the current gold price, again hitting fresh record highs, some $650m in extra revenue will flow annually into the company. But will this, and the other improvements listed above, convert into the kind of share price performance Cutifani would expect to see? That will be crunch moment; the acid test.

A year ago, AngloGold Ashanti was trading at R334,03 per share on the JSE whereas it last traded on Friday at R321,73/share. In those twelve months, the share price has oscillated. Given the gold price has gained just short of 20% since January, already off elevated levels suggesting a massive secular uplift in the metal price, AngloGold’s stasis is nothing short of extraordinarily disappointing.

It’s not alone, of course. Research house RCR observed how US gold stocks had gained 49% in the last twelve months whereas the JSE’s Gold Index was a paltry 7% higher. It called the performance “a shocker’. Closer to home, however, even the most hard-nosed, jingoist South African would have to concede the underperformance of the country’s gold stocks is hardly a surprise.

They call it the South African discount: the high fixed cost of labour, and the vaulting expectations unions have now in wage talks, as well as uncertainty over security of tenure and the threat, of course, posed by nationalisation. There’s also the rand.

Whether it be investors seeking yield or a reflection of authentic business confidence, suggested by Walmart’s interest in retailer Massmart, and the HSBC bid for Nedbank, the rand squats on the fortunes of South African exporters. It’s worse for the country’s moribund textile industry which for years has been in need of external, government-backed subsidy protection.

Clearly, no South African government we know is going to actively support the gold mines. (In fact, it could be argued the government, in hopping from one legislative and political leg to another, has only worked against the gold firms.) And barring exogenous changes, such as a suddenly weaker rand/dollar exchange rate, the only real hope for South African gold mines is going to come from their own decisive action.

Restructuring in the form of asset mix has been a long-held feature of South African gold stocks. AngloGold has not been the only company seeking gold ounces in other districts. Harmony Gold, for instance, is quite clearly throwing its lot in with Papua New Guinea; Gold Fields is seeking a million ounces a year each from Asia and Australia. DRDGold has turned to Zimbabwe.

But the restructuring of which AngloGold Ashanti might turn is that hinted at by Cutifani earlier this year when he referred to the strategic option of floating AngloGold’s South African assets separately.

Barrick Gold, the Canadian gold firm, embarked on a similar kind of strategy earlier this year when it hived off its African assets and, in so doing, has shown gold assets based in the African continent could attract a different investor to its assets listed elsewhere.

Is this then where Cutifani realistically turns next if his team’s recent efforts don’t get the response from investors they deserve? May AngloGold hive off its local assets?

Well, possibly. That’s not on the agenda now so much as a backlight thought. In fact, Cutifani speaks of the great work of AngloGold along with Exxaro Resources and African Rainbow Minerals which have all chosen Johannesburg as HQ and championed South Africa. Cutifani is really proud of this and thinks it regrettable that other companies, such as Anglo American which once controlled AngloGold Ashanti, shifted to London.

Equally encouraging for Cutifani has been the look of the company’s share register which has attracted some heavy hitters, such as Paulson & Co, AngloGold’s largest single shareholder.

And then there’s the hedge book. The monkey off AngloGold’s back.

Commenting on its removal, Cutifani says shareholders have already enjoyed some returns. The book’s mark-to-market would be about -$10bn at today’s gold prices, pretty much the size of AngloGold when Cutifani took over. The market capitalisation today, however, is $18bn (R122bn) even after dealing with the $10bn problem.

The company issued stock to help remove the hedge book, which diluted shareholders, but the particiaption price was about $37 to $38/share against $40/share at which AngloGold trades today. “That’s a 20% return,’ says Cutifani.

And what if the gold price heads higher; cruises through $1500/oz towards $2000/oz which some economists think is a matter of time? Recession is on the lips of everyone again and that could have positive consequences for South African golds.