JOHANNESBURG (miningweekly.com) – South Africa’s gold major AngloGold Ashanti is set for a vigorous hedge-free liftoff into a new era that will see it generate billions of dollars of free cash flow, jack up its output well beyond the 4,5-million ounces of gold a year and bring self-discovered low-cost ounces to market at a time of bullish gold price outlook.

The company has sufficient cash flow to self-fund new growth that will add one million additional ounces to uplift output to 5,5-million ounces of gold a year in the next four years.

Cash flow generated from the company’s operating activities in the three months to December 31, excluding hedge buy-back costs, surged 60% to $679-million.

The South African business, the mines of which are endowed with “exceptionally long lives”, generated the lion’s share of this, spinning off $611-million in free cash flow in 2010, despite 10 months of hedged discounts.

If there had been no obligation to service the hedge with gold sold forward at lower prices, the South African business would have generated more than $700-million in free cash flow.

“The cash engine is starting to really demonstrate what can be done,” AngloGold Ashanti CEO Mark Cutifani tells Mining Weekly Online in a video interview.

"Now that we’re selling our gold at spot prices and entrenching business improvements across the organisation, we’re spinning off significant cash flow," Cutifani comments.

With 5% growth forecast for 2011 and gold up 20%, free cash is poised to be well north of $2-billion (R14,4-billion) this year.

The company, which on Thursday reported both December quarter and 2010 financial results, will be investing $1,5-billion to $1,6-billion into capital projects in 2011, $600-million of which will be for new growth projects.

It is forecasting gold production of between 4,55-million ounces and 4,75-million ounces in 2011, and 5,5-million ounces in less than five years.

“That’s almost 20% growth over four years. We’re looking to generate more free cash flow and the ability to invest in our businesses. We can fund that growth organically from within the business and we think we are well positioned in the next three to five years,” Cutifani adds to Mining Weekly Online.

In the last ten years, AngloGold Ashanti has made five major discoveries that have added 22-million ounces of gold to its portfolio, at a cost of $25/oz. From brownfields exploration, it has added more than 30-million ounces of gold at $13/oz.

Some of its peers, by contrast, have been buying up new gold mines or exploration projects at $300/oz to $500/oz and in some cases, at $1 000/oz.

“We’re doing it at an absolute fraction of that cost with our exploration team,” says Cutifani.

With the onerous hedge book removed, AngloGold also has full exposure to the buoyant spot price of gold.

"We were fighting with one hand tied behind our backs," says Cutifani.

“It's the last time that we'll refer to the hedge book, and I can take about 20 pages out of this lever-arched file going forward,” says relieved CFO Srinivasan Venkatakrishnan.

The company posted adjusted headline earnings of $294-million during the fourth quarter after its operations in South Africa, Argentina and Guinea posted strong production results.

The result represents strong growth in underlying profitability given that the previous quarter’s adjusted headline earnings of $303-million were boosted by a one-off credit of $84-million.

AngloGold had almost 12-million ounces committed under its legacy hedging programme.

A new strategy introduced in 2008 has resulted in those contracts being eliminated, the balance sheet strengthened and wide ranging operational improvements made across its operating portfolio.

“We have 20 operations and 19 of the operations have seen material improvement,” Cutifani tells Mining Weekly Online.

The odd one out is Obuasi in Ghana, where costs have been reduced by $70-million and a platform has been set in place for improved performance.

“The prize is 30-million ounces and a long-term operating asset,” he adds.

Some of the lessons learnt at the formerly troubled but now turned-around Geita mine will also be applied at Obuasi.

“We had positive free cash flows from Geita last year of $70-million, while two years before they were negative $120-million,” Cutifani tells Mining Weekly Online.

The company has also approved the first greenfield project development in more than a decade, at its Tropicana deposit in Western Australia.

“All the vectors are heading in the right direction for Tropicana,” he adds.

In the three months to December 31, production was above guidance at 1,148-million ounces at a total cash cost of $672/oz, compared with 1,162-million ounces at $643/oz in the previous quarter.

The South African operations delivered another good performance, maintaining production of 476 000 oz despite the sale of the Tau Lekoa mine to Simmer & Jack Mines during the September quarter.

FATALITY FREE

The 63 000-employee AngloGold experienced a fatality-free quarter for only the second time in the company’s history, “certainly our most significant achievement in safety.

“This proves that safe mining and productive mining go hand in hand,” says Cutifani.

Cerro Vanguardia in Argentina increased production 4% to 50 000 oz and improved total cash costs to $357/oz, while production from Siguiri in Guinea rose 15% to 71,000 oz from the previous quarter.

South Africa operations produced 476 000 oz at a total cash cost of $616/oz in the fourth quarter of 2010, compared with 478 000 oz at a total cash cost of $594/oz the previous quarter.

At the West Wits operations, increased tonnages at Mponeng, the company’s largest mine and the world’s deepest, output increased by 4% to 143 000 oz.

At the Vaal River operations, lower recovered grades saw production from Moab Khotsong decline by 8% to 76 000 oz, pushing up costs by 22% to $669/oz.

Following a successful effort in returning Great Noligwa to profitability, production declined 6% to 34 000 oz because of an increase in off-reef mining necessitated by the geological structure encountered during the period.

Kopanang’s output was marginally lower at 78 000 oz as lower volumes were mined.

Production from the surface operations, which replaced the Tau Lekoa feed with marginal ore, dropped 2% to 52 000 oz.

The company’s continental African operations produced 374 000oz at a total cash cost of $790/oz in the fourth quarter of 2010, compared with 373 000 oz at a total cash cost of $725/oz the previous quarter.

The Americas operations produced 196 000 oz at a total cash cost of $465/oz in the fourth quarter, compared with 218 000 oz at a total cash cost of $433/oz the previous quarter.

In the Democratic Republic of Congo, significant progress was made on the Kibali joint venture, operated by AngloGold's partner Randgold Resources, which is fast-tracking infrastructure development, including 180 km of new road.

Randgold Resources is targeting a 2013 production target.

“That is an aggressive target and we do see some risks to that target in our forecasts,” Cutifani cautions.
 

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