Company Overview: AngloGold Ashanti Limited (ASX: AGG) is an independent, global mining company primarily involved in the exploration and production of gold. The company also produces silver and sulphuric acid as by-products. AGG owns a high-quality portfolio of long-life assets with a track record of disciplined capital allocation and project delivery. The company’s vision is to be a leading mining company, and its mission is to create value for its shareholders, employees and its business and social partners through safely and responsibly exploring, mining and marketing its products. 

AGG Details

Despite the challenges created by the COVID-19 pandemic, the company was able to report decent production numbers in the first half of FY20, demonstrating the resilience of the company’s portfolio of operations. In order to further streamline its portfolio and lower the long-term cost structure of the business, the company is progressing the sale of its assets in South Africa and Mali with final conditions precedent to be fulfilled. Looking forward, the company intends to achieve improvements in its cash flows and leverage. To achieve this, the company plans to remain disciplined in managing costs and capital expenditure, thereby optimising current operating margins. With an improving portfolio, robust cash flows and ongoing debt reduction, the company seems well placed to deliver on its strategic objectives.

FY19 Result Highlights: For the year ended 31 December 2019 or FY19, the company reported a total production of 3.281Moz and All-in sustaining costs (AISC) of US$998/oz with record production achieved at Kibali, Tropicana and Iduapriem, while Geita delivered the highest production in 14 years. During the year, the company’s free cash flow, before growth capital, grew by 106% to US$448 million, while cash flow from operating activities rose 22% to US$1,047 million. For the full year, the company incurred a basic loss of US$12 million, compared with a basic profit of US$133 million in FY19, impacted by the impairment of the South African assets associated with their held for sale accounting treatment, higher rehabilitation provisions in Brazil and higher care and maintenance costs in South Africa and Ghana. The total FY20 dividend stood at 11 US cents per share, up 57% on the previous year, driven by the rising cash flows from operations.

Over the year, the company was focused on driving operational excellence and cost efficiencies across its business. As a result, the company’s AISC margin improved to 28% in 2019 from 23% in 2018. Adjusted net debt to adjusted EBITDA improved to 0.91 times in FY20, with cash and cash equivalents at US$463 million as at 31 December 2019.

FY19 Results (Source: Company Reports)

H1FY20 Results Highlights: Recently on 7 August 2020, the company announced its H1FY20 results, wherein, it reported total production of 1.47Moz with solid performances from Geita, Iduapriem and Serra Grand. All-in sustaining costs (AISC) stood at US$1,031/oz in H1FY20, compared to an AISC of US$1,002/oz for the previous corresponding period (pcp). During the June quarter, the company’s production increased by 5% 753,000oz, driven by production improvements at Sunrise Dam, Serra Grande, Iduapriem, Obuasi, Geita, Siguiri and Cerro Vanguardia.

Adjusted EBITDA for H1FY20 stood at US$1.096 billion, up by 59% on pcp, driven by the improved gold price and weaker local currency impacts. The Obuasi Redevelopment Project delivered 50,000oz in H1FY20, despite delays in receiving equipment and the arrival of certain critical skills to the site as a result of lockdowns in various jurisdictions.

The stronger cash flows helped the company in reducing the net debt to US$1.428 billion, down by 18% on pcp. The Adjusted net debt to Adjusted EBITDA ratio stood at 0.67x at the end of June 2020, well below the targeted level of 1.0 times through the cycle.

Key Metrics: For March 2020 quarter, the company’s net margin stood at 15.0%, higher than the industry median of 3.5%. The company has a ROE of 5.1%, higher than the industry median of 0.4%. The asset turnover ratio of the company stood at 0.12x, higher than the industry median of 0.07x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Sale of South African Assets:  To streamline its portfolio and lower the long-term cost structure of the business, the company has been progressing the sale of its assets in South Africa and Mali.

On 23 December 2019, the company announced that it has reached an agreement to sell its interest in the Sadiola Mine to Allied Gold for an attributable cash consideration of US$52.5 million. On 12 February 2020, the company announced that it has reached an agreement with Harmony Gold to sell all its remaining South African producing assets and related liabilities with expected proceeds of around US$300 million. On 29 April 2020, the South African Competition Tribunal gave its approval for this transaction.

CEO Resignation: On 31 July 2020, the company announced that its Chief Executive Officer (CEO) Kelvin Dushnisky has resigned from his post, effective 1 September 2020. Recently on 17 August 2020, Kelvin Dushnisky sold its 10,000 shares in the company at US$29.75 per share via on-market sale on the New York Stock Exchange. The company has appointed chief financial officer (CFO), Christine Ramon, as the interim CEO of the company.

Key Risks: The company is exposed to the risks related to the COVID-19 pandemic as it could impact its operations and production performance. Further, the company’s results are also sensitive to gold price volatility and exchange rate volatility. The uncertain and increasingly rigorous regulatory environment is also a challenge for the company as it could result in an increase in the cost of compliance that can affect the financial position of the business and its sustainability as well as affect relationships with government and regulators.

What to Expect: Before Covid-19 outbreak, the company was expecting its total 2020 production to be between 3,050 - 3,300koz with AISC in the range of US$1,040-1,100. However, due to the severity and scope of the Covid-19 pandemic and the necessary government responses to limiting its spread, the company has withdrawn its guidance.

The company is currently investing in the redevelopment of its Obuasi Gold Mine, as well as exploration and ore reserve development to increase its operating flexibility and increase reserves. Further, the company is progressing with the sale of its assets in assets in South Africa and Mali to streamline its portfolio and lower the long-term cost structure.

Looking forward, the company intends to achieve improvements in its cash flows and leverage. To achieve this, the company plans to remain disciplined in managing costs and capital expenditure, thereby optimising current operating margins. With robust cash flows aiding ongoing debt reduction, improved operational performance and rigorous approach to capital allocation, the company seems well placed to achieve its objectives.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (illustrative)

EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: On a YTD basis, the stock of AGG has provided a return of 22.31% and in the last six months it has provided a return of 16.91%. The stock is currently inclined towards its 52-week low, offering investors a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~A$5.4 and a resistance level of ~A$9.7. As at 30 June 2020, the company’s liquidity remained strong with around US$2.47 billion available, including cash and cash equivalents of US$1.29 billion. We have valued the stock using the EV/EBITDA multiple based illustrative valuation method and have arrived at a target price of lower double-digit upside (in % terms). Considering the company’s robust cash flows, improved operational performance, decent H1FY20 results, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of A$7.880, down by 0.881% on 25 August 2020.

AGG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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