ANGLOGOLD ASHANTI LTD AU S
January 11, 2019 - 9:28pm EST by
Veritas500
2019 2020
Price: 12.56 EPS 0.45 0
Shares Out. (in M): 415 P/E 27.9 0
Market Cap (in $M): 5,226 P/FCF -307.4 0
Net Debt (in $M): 1,749 EBIT 347 0
TEV ($): 6,975 TEV/EBIT 20.1 0
Borrow Cost: Available 0-15% cost

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Description

Anglogold Ashanti

AngloGold’s stock has almost doubled in the past  6 months, based on market hopes of a makeover under its new CEO, Kelvin Dushnisky. Expectations are high that the new CEO will be able to extract great value by swapping a range of assets with his ex-colleagues at Barrick, finally dispose of the last mines in South Africa, redomicile the group outside South Africa and builld a growing global gold miner with critical mass.

While one must be careful not to underestimate a gifted CEO with the ability to issue highly rated stock, we believe that the task is likely to be more challenging than the market believes. With the exception of the group’s 45% stake in Kibali, all the existing assets are either in the wrong half of the Cost Curve, or lack critical mass or have mine lives of less than 5 years. This is hard to reconcile with a premium rating.

Our Sum of the Parts values Anglogold at between $2.85 and $5.60, depending on whether one shares management’s optimism on the revival of the Obuasi mine in Ghana. We subscribe to Randgold’s view on Obuasi, that it’s worth zero. On that basis the group should be valued at $2.93bn, compared to the current TEV of $7.087bn. With the shares trading at $12.85, the premium could unravel very quickly. SELL.

Background

Anglogold is a South African registered company that used to be called Vaal Reefs. It was a blue chip gold share since the late 1940’s, paying reliable dividends and providing handsome capital growth during gold bull markets. The group eventually absorbed all Anglo American’s gold mines by way of a share swap in 1998, when it changed its name to Anglogold. All the liabilities of the Anglo gold mines dating as far back as the 1890’s such as the recent occupational lung disease class action and other environmental risks are therefore present in the listed vehicle and cannot be expunged or de-merged until the group can restructure itself.

Likewise, the group’s South African domicile means that the South African Reserve Bank has a final say over corporate restructurings, such as the blocked demerger plan of 5 years ago. It also means that exchange control provisions stand in the way of running an efficient treasury process to nett off gross cash. It further means that this increasingly international company  has to comply with South African Black Economic Empowerment and affirmative action laws and codes, that at its most benign level diverts management focus from the job of growing shareholder value.

The current portfolio

Under previous management,  Anglogold often attempted to buy cheap assets and sold quality. The result is that production fell from 7.0m ozs in 2001 to 5.5m ozs in 2007 to an estimated 3.3m ozs last year. The production acquired during the merger with Ashanti Gold fields of 1.6m ozs in 2003 should  be added to these figures.

At present Ore Reserves and production rates, the group’s portfolio looks as follows.

 

 

2017

Sep-18

 

Sep-18

Anglogold portfolio

Country

Ore Reserves

Production

Life

AISC

 

 

m ozs

k ozs

years

$ / oz

Kibali

Dem Rep Congo

3.9

345

10.3

626

Tropicana

Australia

2.9

301

8.5

804

Mponeng

South Africa

12.2

265

44.8

972

Iduapriem

Ghana

1.9

261

6.1

977

Geita

Tanzania

1.2

520

1.4

877

Mineracao

Brazil

2.1

352

4.9

924

Cerro Vanguardia

Argentina

0.9

288

2.2

627

Siguiri

Guinea

2.2

241

8.3

874

Sunrise Dam

Australia

1.2

277

3.3

1412

Rock Dumps

South Africa

0.2

65

1.9

1481

Serra Grande

Brazil

0.3

120

1.8

896

Morila

Mali

0.1

29

1.6

1294

Sadiola

Mali

1.7

59

27.9

1009

MWS

South Africa

2.2

101

21.1

908

Obuasi

Ghana

5.9

0

   
           

Qualitative cut-off

 

2.5

250

5

750

 

As can be seen, none of the assets bar Kibali are structurally first-tier assets if one sets the fairly undemanding hurdles at the bottom of the table. And even Kibali being situated in the DRC cannot be regarded as comparable to similar assets in the the US, Canada or Australia.

Some of the mines’ US Dollar denominated costs have recently been assisted by currency weakness, especially Cerro Vanguardia in Argentina where the Peso has halved in the past year and to a lesser extent the Australian, South African and Brazilian operations.

We derived the following SOTP valuation, using a gold price of $1300/oz and a real discount rate of 8%.

Anglogold SOTP

$m

$m

Kibali

1,133

1,133

Tropicana

683

683

Mponeng

412

412

Iduapriem

392

392

Geita

362

362

Mineracao

327

327

Cerro Vanguardia

215

215

Siguiri

197

197

Sunrise Dam

193

193

Rock Dumps

67

67

Serra Grande

56

56

Morila

23

23

Sadiola

17

17

MWS

14

14

SOTP excl. Obuasi

4,089

4,089

 

 

 

Less : G&A, Explor & C&M

-1,156

-1,156

Less : Net Debt (Sep 2018)

-1,749

-1,749

 

 

 

SOTP before Obuasi

1,184

1,184

 

 

 

Obuasi (Management  / Our Value)

1,143

0

 

 

 

SOTP

2,327

1,184

 

 

 

Issued Shares (m)

415.4

415.4

 

 

 

SOTP per AU ($)

5.60

2.85

 

While the individual mines are uninspiring, the group delivers critical mass to investors and as such has some cachet for its tradability and option value. The problem is that this optionality decays as the mines eventually shut down. The extent of this decay caused the previous CEO, Venkat, to devise a concept called the Preferred Scenario, whereby vast swathes of ore resources would miraculously be converted into Ore Reserves, prolonging the lives of the mines.. The extent of the problem and the implausibility of the Preferred Scenario can clearly be seen on the following graph.

As if the dwindling Ore Reserves are not enough, the group’s cash flows have also disappointed for the past  10 years.

 

Anglogold Free Cash Flow

 

 

 

 

 

 

 

 

 

 

                 

9m

 

 

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Total

Annual

-104

525

833

-666

-1064

-112

141

278

1

-17

-185

 

With Anglogold committing $545m to Obuasi commencing in Q4 last year, this dismal cash flow trend is unlikely to improve any time soon.

We are extremely negative on Obuasi. Having visited the mine some years ago, it was clear that an entirely new mine had to be built, while at the same time the legacy environmental liabilities were daunting. The new mine plan that is currently being rolled out contains several unrealistic assumptions that have all the makings of a classic “mission creep” . We therefore see the first $545m that is budgeted to be spent between Q4 last year and end-2020, as mere “gate money”. After that, we fully expect management to attempt to justify spending at least a further $500m merely to give the mine a fighting chance.  It would be a tragedy if the new CEO sold the stake in Kibali and spent the money on Obuasi.

So while there are clearly still gold bulls in the world who allocate funds to the sector on a top down basis, we believe that Anglogold is unlikely to outperform its peers any time soon. The recent rally therefore presents an interesting opportunity to short the stock on a pair trade.against the likes of Barrick.

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Short term catalysts :

AngloGold’s suite of Annual Reports, including the Annual Reserve and Resource Statement, will be released at the end of March. This may contain a significant reduction of the Ore Reserves to more accurately reflect reality at mines like Mponeng, Obuasi and Mine Waste Solutions.

 

    sort by    

    Description

    Anglogold Ashanti

    AngloGold’s stock has almost doubled in the past  6 months, based on market hopes of a makeover under its new CEO, Kelvin Dushnisky. Expectations are high that the new CEO will be able to extract great value by swapping a range of assets with his ex-colleagues at Barrick, finally dispose of the last mines in South Africa, redomicile the group outside South Africa and builld a growing global gold miner with critical mass.

    While one must be careful not to underestimate a gifted CEO with the ability to issue highly rated stock, we believe that the task is likely to be more challenging than the market believes. With the exception of the group’s 45% stake in Kibali, all the existing assets are either in the wrong half of the Cost Curve, or lack critical mass or have mine lives of less than 5 years. This is hard to reconcile with a premium rating.

    Our Sum of the Parts values Anglogold at between $2.85 and $5.60, depending on whether one shares management’s optimism on the revival of the Obuasi mine in Ghana. We subscribe to Randgold’s view on Obuasi, that it’s worth zero. On that basis the group should be valued at $2.93bn, compared to the current TEV of $7.087bn. With the shares trading at $12.85, the premium could unravel very quickly. SELL.

    Background

    Anglogold is a South African registered company that used to be called Vaal Reefs. It was a blue chip gold share since the late 1940’s, paying reliable dividends and providing handsome capital growth during gold bull markets. The group eventually absorbed all Anglo American’s gold mines by way of a share swap in 1998, when it changed its name to Anglogold. All the liabilities of the Anglo gold mines dating as far back as the 1890’s such as the recent occupational lung disease class action and other environmental risks are therefore present in the listed vehicle and cannot be expunged or de-merged until the group can restructure itself.

    Likewise, the group’s South African domicile means that the South African Reserve Bank has a final say over corporate restructurings, such as the blocked demerger plan of 5 years ago. It also means that exchange control provisions stand in the way of running an efficient treasury process to nett off gross cash. It further means that this increasingly international company  has to comply with South African Black Economic Empowerment and affirmative action laws and codes, that at its most benign level diverts management focus from the job of growing shareholder value.

    The current portfolio

    Under previous management,  Anglogold often attempted to buy cheap assets and sold quality. The result is that production fell from 7.0m ozs in 2001 to 5.5m ozs in 2007 to an estimated 3.3m ozs last year. The production acquired during the merger with Ashanti Gold fields of 1.6m ozs in 2003 should  be added to these figures.

    At present Ore Reserves and production rates, the group’s portfolio looks as follows.

     

     

    2017

    Sep-18

     

    Sep-18

    Anglogold portfolio

    Country

    Ore Reserves

    Production

    Life

    AISC

     

     

    m ozs

    k ozs

    years

    $ / oz

    Kibali

    Dem Rep Congo

    3.9

    345

    10.3

    626

    Tropicana

    Australia

    2.9

    301

    8.5

    804

    Mponeng

    South Africa

    12.2

    265

    44.8

    972

    Iduapriem

    Ghana

    1.9

    261

    6.1

    977

    Geita

    Tanzania

    1.2

    520

    1.4

    877

    Mineracao

    Brazil

    2.1

    352

    4.9

    924

    Cerro Vanguardia

    Argentina

    0.9

    288

    2.2

    627

    Siguiri

    Guinea

    2.2

    241

    8.3

    874

    Sunrise Dam

    Australia

    1.2

    277

    3.3

    1412

    Rock Dumps

    South Africa

    0.2

    65

    1.9

    1481

    Serra Grande

    Brazil

    0.3

    120

    1.8

    896

    Morila

    Mali

    0.1

    29

    1.6

    1294

    Sadiola

    Mali

    1.7

    59

    27.9

    1009

    MWS

    South Africa

    2.2

    101

    21.1

    908

    Obuasi

    Ghana

    5.9

    0

       
               

    Qualitative cut-off

     

    2.5

    250

    5

    750

     

    As can be seen, none of the assets bar Kibali are structurally first-tier assets if one sets the fairly undemanding hurdles at the bottom of the table. And even Kibali being situated in the DRC cannot be regarded as comparable to similar assets in the the US, Canada or Australia.

    Some of the mines’ US Dollar denominated costs have recently been assisted by currency weakness, especially Cerro Vanguardia in Argentina where the Peso has halved in the past year and to a lesser extent the Australian, South African and Brazilian operations.

    We derived the following SOTP valuation, using a gold price of $1300/oz and a real discount rate of 8%.

    Anglogold SOTP

    $m

    $m

    Kibali

    1,133

    1,133

    Tropicana

    683

    683

    Mponeng

    412

    412

    Iduapriem

    392

    392

    Geita

    362

    362

    Mineracao

    327

    327

    Cerro Vanguardia

    215

    215

    Siguiri

    197

    197

    Sunrise Dam

    193

    193

    Rock Dumps

    67

    67

    Serra Grande

    56

    56

    Morila

    23

    23

    Sadiola

    17

    17

    MWS

    14

    14

    SOTP excl. Obuasi

    4,089

    4,089

     

     

     

    Less : G&A, Explor & C&M

    -1,156

    -1,156

    Less : Net Debt (Sep 2018)

    -1,749

    -1,749

     

     

     

    SOTP before Obuasi

    1,184

    1,184

     

     

     

    Obuasi (Management  / Our Value)

    1,143

    0

     

     

     

    SOTP

    2,327

    1,184

     

     

     

    Issued Shares (m)

    415.4

    415.4

     

     

     

    SOTP per AU ($)

    5.60

    2.85

     

    While the individual mines are uninspiring, the group delivers critical mass to investors and as such has some cachet for its tradability and option value. The problem is that this optionality decays as the mines eventually shut down. The extent of this decay caused the previous CEO, Venkat, to devise a concept called the Preferred Scenario, whereby vast swathes of ore resources would miraculously be converted into Ore Reserves, prolonging the lives of the mines.. The extent of the problem and the implausibility of the Preferred Scenario can clearly be seen on the following graph.

    As if the dwindling Ore Reserves are not enough, the group’s cash flows have also disappointed for the past  10 years.

     

    Anglogold Free Cash Flow

     

     

     

     

     

     

     

     

     

     

                     

    9m

     

     

    2009

    2010

    2011

    2012

    2013

    2014

    2015

    2016

    2017

    2018

    Total

    Annual

    -104

    525

    833

    -666

    -1064

    -112

    141

    278

    1

    -17

    -185

     

    With Anglogold committing $545m to Obuasi commencing in Q4 last year, this dismal cash flow trend is unlikely to improve any time soon.

    We are extremely negative on Obuasi. Having visited the mine some years ago, it was clear that an entirely new mine had to be built, while at the same time the legacy environmental liabilities were daunting. The new mine plan that is currently being rolled out contains several unrealistic assumptions that have all the makings of a classic “mission creep” . We therefore see the first $545m that is budgeted to be spent between Q4 last year and end-2020, as mere “gate money”. After that, we fully expect management to attempt to justify spending at least a further $500m merely to give the mine a fighting chance.  It would be a tragedy if the new CEO sold the stake in Kibali and spent the money on Obuasi.

    So while there are clearly still gold bulls in the world who allocate funds to the sector on a top down basis, we believe that Anglogold is unlikely to outperform its peers any time soon. The recent rally therefore presents an interesting opportunity to short the stock on a pair trade.against the likes of Barrick.

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Short term catalysts :

    AngloGold’s suite of Annual Reports, including the Annual Reserve and Resource Statement, will be released at the end of March. This may contain a significant reduction of the Ore Reserves to more accurately reflect reality at mines like Mponeng, Obuasi and Mine Waste Solutions.

     

    Messages


    SubjectObuasi
    Entry01/31/2019 11:15 AM
    Memberbafana901

    Why are you so negative on Obuasi? Surely the company wouldn't spend $500m if they didn't expect to earn an attractive ROI?

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