Company Overview: AngloGold Ashanti Limited (ASX: AGG) is an independent, global mining company with a diverse, high-quality portfolio of operations, projects and exploration activities across several countries including Australia, Brazil, Argentina, Tanzania, Columbia, etc. In Australia, the company has two operations - Sunrise Dam and Tropicana, both of which are in the north-eastern goldfields of Western Australia. Currently, the company enjoys a geographically diverse shareholder base as it is listed on four stock exchanges – the Johannesburg, New York, Australian and Ghana exchanges.

AGG Details

Improving Bottom line: AngloGold Ashanti Limited (ASX: AGG) is an independent, global mining company mainly focused on the exploration and production of gold. The company owns and operates assets across several countries including Australia, Brazil, Argentina, Tanzania, Columbia, etc. AGG is also interested in pursuing value creating opportunities in other minerals where it can leverage its existing assets, skills, and experience to enhance the delivery of value. The company’s strategy is to generate sustainable cash flows and shareholder returns by focusing on improving the quality of portfolio, maintaining a robust balance sheet and through disciplined capital allocation. Over the last five years, the company has improved its bottom line with net loss declining from US$85 million in 2015 to US$12 million in 2019.  Over the same period, the company has also strengthened its balance sheet by reducing its net debt and by generating decent cash flows.

Adjusted Net Debt Trend (Source: Company Reports)

In March 2020, AGG had withdrawn its full-year guidance due to increasing uncertainty amid COVID-19, however, the company has recently reintroduced its FY20 guidance, reflecting greater certainty about the full-year operating performance. As per the guidance, the company expects its total production to be in the range of 3,030koz - 3,100koz with All-in sustaining costs (AISC) to be between US$1,060/oz- US$1,120/oz. AGG has recently completed the sale of its South African assets. In the long-run, AGG is focused on improving its margins, extending mine lives, creating an organic pipeline, and enhancing its license to operate.

FY19 Results Highlights: For the year ended 31 December 2019, the company reported total production of 3.281Moz, down by 4% on FY18. During the year, the company saw decent performances at its operations at Geita, Kibali, Tropicana, and Iduapriem. One of the key milestone achieved during FY19 was the pouring of the first gold at the Obuasi Mine in Ghana. For FY19, the company reported a basic loss of US$12 million, compared with a basic profit of US$133 million in 2018, 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.

FY19 Results (Source: Company Reports)

H1FY20 Results Highlights: For the six months ended 30 June 2020, the company reported total gold production of 1.469Moz at a total cash cost per ounce of US$810/oz, versus production of 1.554Moz at US$792/oz for H1FY19. Notably, in the second quarter, the production was 5% higher than previous year, due to decent production from Sunrise Dam, Serra Grande, Iduapriem, Obuasi, Geita, Siguiri and Cerro Vanguardia. For H1FY20, the company posted Adjusted EBITDA of US$1.096 billion, up by 59% on pcp, driven by a 26% year-on-year increase in the gold price received and weaker local currency impacts. Over the half year period, the company’s free cash flow before growth capital increased significantly to US$324 million, as compared to US$68 million in pcp. During H1FY20, the company strengthened its balance sheet by reducing its adjusted net debt to US$1.428 billion, down by 18% on pcp. At the end of June 2020 quarter, the company has available liquidity of ~US$2.47 billion, including cash and cash equivalents of US$1.29 billion.

H1FY20 Results (Source: Company Reports)

Key Ratio Metrics: For June 2020 quarter, the company reported a net margin of 23.9%, higher than the industry median of 13.5%. The company’s current ratio stood at 2.65x in June quarter, higher than 1.48x, demonstrating that the company is well-equipped to pay its short-term debts. The company’s debt to equity multiple stood at 0.96x in June quarter, lower than the 1.38x reported in March 2020 quarter. 

Key Metrics (Source: Refinitiv, Thomson Reuters)

Completed the Sale of SA Assets: The company has recently confirmed that the sale of its remaining mines in South Africa to Harmony Gold Mining Company Limited has been completed and it has received an initial cash payment of US$200 million. The company intends to use the proceeds for further debt reduction. The sale is expected to improve the company’s portfolio and supports its disciplined approach to the allocation of capital and other resources to ensure maximum value generation for all shareholders. The South African assets are expected to have produced around 240,000oz during the first 9 months to September 2020, at an AISC of ~US$1,300/oz.

Sale of Morila Mine Stake to Mali Lithium: On 31^st August 2020, the company announced that it has agreed to sell its effective 80% stake in the Morila Gold Mine in Mali, to Mali Lithium, in line with AGG’s strategy of rationalising its portfolio. The company is expected to receive a net consideration of around US$10 million for the transaction.

Boston Shaker Achieves Commercial Production: On 17^th September 2020, the company along with its joint venture partner IGO Ltd, confirmed that Boston Shaker underground mine at Tropicana has achieved commercial production. Over a seven-year mine life, the mine is expected to deliver around 1.1 million tonnes of ore per annum at an estimated grade of 3.5 grams/tonne. This will improve the company’s gold production profile and will enhance cash flow during the years 2021-2023.

What to Expect: Looking forward, the company is focused on maintaining tight cost and capital management to improve its margins. The sale of the company’s assets in South Africa and Mali is expected to improve its portfolio and will enable the company to focus more on increasing its free cash flow and shareholder dividends while investing in the next generation of opportunities. In order to increase its operating flexibility and reserves, the company is investing in the redevelopment of its Obuasi Gold Mine, as well as exploration and ore reserve development.  At its international operations, the company is focused on driving additional efficiency improvements through Operational Excellence initiatives. Further, it intends to improve the flexibility of assets through increased drilling.  For its African operations, the company intends to maintain solid performances at Geita, Kibali and Iduapriem and will continue to manage supply chains, and work with host communities to slow the spread of COVID-19.

As per the recently reinstated FY20 guidance, the company expects its total production (including contribution from SA assets to end of September 2020) to be between 3,030koz - 3,100koz. Further, the company expects AISC to be in between US$1,060/oz- US$1,120/oz. For the year, the company expects its total capital expenditure to be in between US$890 million - US$950 million. Considering AGG's improving portfolio, robust cash flows, and ongoing debt reduction, the company seems well positioned to navigate through the COVID-19 pandemic.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: Over the last six months, the stock of AGG has provided a return of 24.18% and is inclined towards its 52-weeks low price, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~A$6.939 and a resistance of ~A$8.49. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with low double-digit upside (in % terms). For the purpose, we have taken peers like Resolute Mining Ltd (ASX: RSG), Regis Resources Ltd (ASX: RRL), Dacian Gold Ltd (ASX: DCN), etc. Considering the company’s decent H1FY20 results, improving portfolio, ongoing debt reduction, current trading levels and valuation, we give a “Buy” recommendation on the stock at the current market price of A$7.67, up by 1.589% on 13 October 2020.

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

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