JOHANNESBURG (miningweekly) – Two revenue-boosting gold projects are in the money for AngloGold Ashanti in the nick of time.

Just when the gold-mining industry is seeing capital-expenditure blowouts, South Africa’s biggest gold producer will be cheering in 600 000 oz of gold costing less than $700/oz from brand new projects.

At the same time, savings of $482-million are also expected to be achieved, which should reposition the company well as it enters 2014.

Current all-in sustaining costs of $1 200/oz for the year are expected to be reduced by another $200/oz from the exploration- and corporate-cost savings and the direct cost savings.

In that way the company will keep ahead of the gold price by taking the company down to an all-in sustaining cost level of $1 000/oz.

Even at the relatively low current gold price of $1 291.80/oz, the $591/oz margin that the new Tropicana project in Australia and the Kibali project in the Democratic Republic of Congo presents is solid and will come on top of the company ensuring that its normal operations meet their targets.

While net debt has increased as a result of the projects, the earnings from the projects more than cover that debt.

Executive VP Graham Ehm is hopeful of commissioning the Tropicana project and pouring gold next month.

The primary crusher has already been commissioned and commissioning of the secondary crusher, the mill and elution circuit is under way.

AngloGold Ashanti’s joint venture partner Randgold Resources has indicated an earlier-than-planned gold pour at Kibali in October.

These are green shoots, which are poised to improve cash flow, as is the expanding Cripple Creek & Victor in the US, where production will begin ramping up at the end of 2014.

At the same time, each of the company’s 21 operations is being reviewed, amid long-term gold-price optimism, which is based on the company’s belief that, irrespective of whether there is a US economic recovery or not, gold’s status will be elevated by either its safe-haven status or inflation fears.

“We’re going to see quite a lot of turbulence in the gold price and it’s best to be prepared for a low gold-price environment so that we can be better positioned to tackle an upside in the gold price because then you just cream the free cash flow,” AngloGold Ashanti CEO Srinivasan Venkatakrishnan (Venkat) comments to Mining Weekly Online.

Between now and the end of the year, COO South Africa Mike O’Hare, COO International Ron Largent and Ehm will have scrutinised every mine plan.

During that process, some of the company’s marginal assets may fail to make the cut.

In the absence of a market that is currently conducive to gold asset sales, stockpiles may be mined for a year or more at some of the assets to preserve cash flows.

If the sale of Navachab in Namibia fails to go ahead, the back-up strategy will be to mine the stockpiles there.

THE ATTACK ON COSTS

AngloGold Ashanti’s total capital bill for the year of $2.1-billion has been cut down by $150-million in the last six months.

Included in the reduced capital bill is $1-billion worth of project capital, which is expected to begin tapering off in 2014.

A review of sustaining capital is also taking place as part of the business planning process.

“Safety- and environment-related capital will not be compromised,” Venkat insists.

Largent, who has also put together a group to tackle the direct costs, is targeting a $100/oz cut using the existing Project One and other initiatives over an 18-month period.

At the corporate level, the company has taken the bull by the horns on exploration costs and corporate costs, on which $760-million was spent in 2012.

Exploration spend has been meticulously rationalised, with Tropicana, Siguiri and Colombia holding on to their capital allocations.

Overall, the 2014 exploration spend has been reduced down to $175-million, a cut of more than 60%.

CORPORATE COSTS

While the reduction of the executive team from 13 people to 10 people is a reduction of 25%, in payroll terms, the percentage reduction is 40%.

A detailed analysis of the organisation has led to a decision that 40% of the 2 000 non-mining corporate roles will be shed, eliminating 800 positions.

Some 400 of the 800 positions have already been eliminated.

Expenditure on consultants, travel, communication and information technology costs is also being reviewed.

Corporate expenditure is expected to fall to $140-million in 2014 and there is confidence that an overall saving of between $437-million and $482-million will be achieved, as compared with the spend in 2012.

“That’s over $100/oz,” says Venkat.

This comes ahead of the $100/oz targeted for the rest of the organisation and preserves the key technical skills.

It is simply removing duplication that existed during the good times in the industry.

The combined effect of revenue enhancement and cost reduction will see AngloGold Ashanti repositioned as it goes into 2014.

There are going to be two more tough quarters in 2013 as these changes are made.

But going into 2014, the full benefit of the two new projects and the cost savings will be felt.

BALANCE SHEET STRENGTH

The strategy of actively managing the balance sheet remains in place.

The company did indicate that its debt levels would increase as it brings Tropicana and Kibali on stream.

The two new projects have added close to $1.2-billion of net debt on to the balanced sheet but the earnings before interest, tax, depreciation and amortisation supports the extra debt that has been taken on.

The company has been de-concentrating balance sheet risk by diversifying its sources of funding.

It does not have any material debt maturing over the next two-to-three years and the one debt it had, namely the convertible bond, has been refinanced.

The testing period for its covenant compliance, where it is currently at 1.56 times compared with a limit of three times, is June next year.

In addition, its performance with the covenant normally provides for considerable headroom.

The company is sitting on excess cash and  the net incremental interest cost is regarded as manageable.

It has diversified its funding sources, de-risked the bank group and positioned the company to beat covenant performance.

Some $500-million in cash has been raised and between the mines and the corporate office is another $300-million worth of available free cash.

The company is thus not short in terms of liquidity or cash.