Company Overview: AngloGold Ashanti Limited (ASX: AGG) is a global mining company, primarily involved in the exploration and production of gold. The company is also involved in the production of silver and sulphuric acid as by-products. AGG has a portfolio of long-life and relatively low-cost assets in key gold producing regions. The company was founded in June 1998 as AngloGold Limited and was later merged with Ashanti Goldfields Company Limited in April 2004. AGG is currently listed on four stock exchanges around the world – the Johannesburg, New York, Australian and Ghana exchanges.

AGG Details

Maintaining Tight Cost and Capital Management: 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. As on 17 November 2020, the company’s market capitalisation stood at ~$12.71 billion. To streamline its portfolio and lower the long-term cost structure of the business, the company recently completed the sale of its operating assets in South Africa and is currently progressing the sale processes in Mali. The company continues to strengthen its balance sheet by reducing its net debt and generating consistent cashflow. Over the past few years, the company has significantly reduced its adjusted net debt and has improved its Adjusted net debt to Adjusted EBITDA ratio, as demonstrated in the below graph.

Adjusted Net Debt to Adjusted EBITDA Trend (Source: Company Reports)

As on 30 September 2020, the company’s Adjusted net debt to Adjusted EBITDA ratio stood at 0.36x, lowest since 2011, reflecting disciplined reduction in debt and robust cash generation from the business. Looking ahead, the company is focused on maintaining tight cost and capital management to deliver decent cash flows in elevated gold price environment. Further, the company is focused on reinvesting in its portfolio to increase reserves, extend mine lives and improve operating flexibility. Supported by decent cashflows and reduction in net debt, AGG recently decided to double its dividend payout ratio, demonstrating its ability to both improve direct returns to shareholders and to self-fund its growth projects and sustaining capital requirements.

H1FY20 Result Highlights: For the six months ended 30 June 2020, the company reported total production of 1.47Moz with decent performances from Geita, Iduapriem and Serra Grande. The company’s Adjusted EBITDA for H1FY20 stood at US$1.096 billion, up 59% on pcp, underpinned by a 26% year-on-year increase in the gold price received and weaker local currency impacts. The Obuasi Redevelopment Project delivered 50koz in H1FY20, despite delays in receiving equipment and the arrival of certain critical skills to the site due to lockdown in various jurisdictions.  As on 30 June 2020, the company’s adjusted net debt stood at US$1.428 billion, down by 18% on pcp. Further, the company’s liquidity stood at ~US$2.47 billion, including cash and cash equivalents of US$1.29 billion.

H1FY20 Results (Source: Company Reports)

Key Operating Metrics: For Q2FY20, 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, higher than the industry median of 1.48x as of June 2020, demonstrating that the company is well-placed to pay its short-term debts. The company’s debt to equity multiple stood at 0.96x in June 2020 quarter, lower than the 1.38x reported in March 2020 quarter. 

Key Metrics (Source: Refinitiv, Thomson Reuters)

September 2020 Quarter Highlights: During the quarter ending 30th September 2020, the company produced a total of 837,000oz of gold, up 1% on pcp, underpinned by decent performances across sites, and standout performances at Sunrise Dam and AGA Mineração. During the quarter, the company witnessed 290% YoY growth in its free cash flow to US$339 million, driven by lower costs from continuing operations, lower capital expenditure and a 30% higher gold price received. The company’s cash inflow from operating activities stood at US$551 million, up 56% on pcp. The company’s adjusted EBITDA stood at US$803 million, up 72% on pcp. On 30 September 2020, the company completed the sale of its South Africa mines to Harmony Gold Mining Company and has received an initial cash payment of US$200 million. Over the quarter, the company reduced its ratio of Adjusted net debt to Adjusted EBITDA to 0.36 times, compared with 1.06 times as on 30 September 2019, reflecting disciplined reduction in debt and robust cash generation from the business.

Q3FY20 Results (Source: Company Reports)

Increased Dividend Payout Ratio: AGG has decided to pay shareholders 20% of its free cash flow before accounting for capital expenditure in growth projects, up from 10% previously, demonstrating confidence in its ability to both improve direct returns to shareholders, to self-fund its growth projects and sustain its capital requirements. Further, the company has also decided to double the frequency of payouts from the current annual dividend declaration, to semi-annual payments.

Sale of Morila Limited: Recently, the company along with Barrick Gold Corporation company completed the sale of their interest in the Morila Limited to Firefinch Limited for a total cash consideration of US$28.8 million. It is worth noting that since October 2000, Morila has produced 6.9 million ounces of gold and paid over US$2.5 billion to stakeholders in the form of dividends and taxes. The sale of Morila will help AGG in streamlining its portfolio and allocating capital on assets with longer life and lower costs.

Sale of Securities: The company recently informed that a prescribed officer, Graham Ehm, has sold 10,620 securities (CHESS Depositary Interests) of the company for a total consideration of A$81,108.75. Further, the company’s Interim Chief Financial Officer, Ian Kramer, has also sold 1,500 ordinary shares of the company for a total value of R580,800 via on-market sale. Both these sales were conducted after receiving an approval as per Johannesburg Stock Exchange (JSE) Listings Requirement 3.66.

Argentina Operations Update: On 11^th November 2020, the company informed that it is going to suspend operations at its Cerro Vanguardia mine for 10 days, as COVID-19 cases have been detected in its workforce. The company will continue its essential services during the duration of the voluntary suspension. The company is expected to resume its operations at Cerro Vanguardia mine on 20 November 2020.

Key Risks: The company is exposed to the risks related to the COVID-19 pandemic and associated impact. Further, the company’s results are also sensitive to gold price volatility and exchange rate fluctuations. 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.

Outlook: Looking ahead, the company intends to maintain its capital and cost discipline to deliver strong cash flows in the current elevated gold price environment. With an improved portfolio, robust cash flows and ongoing debt reduction, the company seems well placed for long term growth.

For FY20, the company expects its total production to be in between 3.030Moz and 3.100Moz, including nine months of production from the South African producing assets. The AISC is expected to be between US$1,060/oz and US$1,120/oz. The total capital expenditure for FY20 is expected to be between US$890m and US$950m. In the long run, the company is focused on improving its margins, extending mine lives, creating an organic pipeline, and enhancing its license to operate.

FY20 Guidance (Source: Company Reports)

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 the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Month

Stock Recommendation: Over the last three months, the stock of AGG has corrected by 24.50% and is currently inclined towards its 52-weeks low price of A$4.8, offering a decent opportunity for accumulation. On the technical analysis front, the stock of AGG has a support level of ~A$5.159 and resistance of ~A$7.864. We have valued the stock using 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 Regis Resources Ltd (ASX: RRL), Resolute Mining Ltd (ASX: RSG), St Barbara Ltd (ASX: SBM), etc. Considering the company’s decent performance in Q3FY20, strong balance sheet, improving cashflows, current trading levels, and potential upside we give a “Buy” recommendation for the stock at the current market price of A$6.500, down by 2.109% on 17 November 2020.

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

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