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Improved margins drive growth in AngloGold's free cash flow generation

19th February 2019

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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JOHANNESBURG (miningweekly.com) – Gold miner AngloGold Ashanti achieved its guidance for the sixth consecutive year, with improved margins driving significant growth in free cash flow generation, the company announced on Tuesday morning.
 
The gold miner further declared a dividend of 95c a share, equal to about $0.07.
 
During the 12 months to December 31, 2018, the miner generated free cash flow of $67-million, compared with only $1-million the year before.

Free cash flow of $118-million was generated in the second half of 2018, compared with $162-million for the same period in 2017.
 
The company generated $204-million of free cash flow, before growth capital, during the last six months of 2018, compared with $231-million during the second half of 2017.
 
Before one-time financing expenses and the costs to complete the successful restructuring of the South African business in 2018, the company generated $140-million in free cash flow.
 
“This is a strong operating performance that shows our commitment to meeting our guidance targets and improving our margins,” CEO Kelvin Dushnisky said during a conference call on Tuesday.
 
He added that the company had “a clear set of return and leverage targets” that would guide its investments as the company works to unlock value for shareholders.
 
Dushnisky has started to streamline the portfolio by initiating processes to sell the company’s interests in its Cerro Vanguardia and Sadiola assets, located in Argentina and Mali, respectively, as he aims to focus investments on those operations with longer lives and the ability to deliver higher returns.
 
The redevelopment of the Obuasi mine, in Ghana, which was started in 2018, is on track to produce its first gold at the end of this year and to build up to its full production rate during 2020.
 
This follows on the ramp-up of production from the underground mine at Kibali, in the Democratic Republic of Congo (DRC), and the commissioning of a new plant that is able to process hard rock, at the Siguiri mine, in Guinea.
 
Production for the year came in toward the top end of guidance at 3.4-million ounces, while production from retained operations in 2018 (excluding Moab Khotsong, Kopanang and TauTona), was  just over 3.3-million ounces at a total cash cost of $765/oz, compared with 3.2-million ounces at $738/oz in 2017.
 
All-in sustaining costs (AISC) for these retained operations were $968/oz for the year, compared with $1 017/oz during the same period in 2017.
 
Headline earnings for the year were $220-million, or $0.53 a share, compared with $27-million, or $0.06 a share, in 2017.
 
Adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) were $1.48-billion in 2018, similar to 2017 levels despite the sale and closure of assets in South Africa.
 
Net debt decreased by 17% to $1.6-billion as at December 31, 2018, from $2-billion at the 2017 year-end.
 
Financial flexibility was further improved in October 2018, when a new five-year $1.4-billion multicurrency revolving credit facility was agreed with the company's banking syndicate, replacing its existing $1-billion and A$500-million facilities. Strong liquidity is provided both by this new revolving credit facility, which was fully undrawn at the end of 2018, and $329-million in cash.
 
Dushnisky further highlighted that the miner places a premium on a clear and uncompromising method of allocating capital, which means that certain investments may not be made if the returns they offer rank below other available opportunities within the portfolio. The sale of Cerro Vanguardia and Sadiola forms part of this strategy and AngloGold aims to achieve both fair value for these assets, and to place them with buyers with the operational record and financial capacity to take them forward.
 
Sadiola Exploration Limited (Sadex), the subsidiary jointly held by AngloGold Ashanti and Iamgold Corporation, in February, entered into a share purchase agreement with the government of Mali, whereby Sadex agreed to sell its 80% participation in Société d’Exploitation des Mines d’Or de Yatela (Yatela) to the Mali government for $1.
 
The transaction remains subject to the fulfilment of a number of conditions precedent.

Meanwhile, the restructuring of the South African asset base was completed after a collaborative effort with key stakeholders, Dushnisky said on Tuesday, adding at a presentation of the company’s results, held in Johannesburg, that the redevelopment of the Obuasi gold mine also started during the period.

Exploration, which remains a cornerstone of the business, delivered another strong result, as the maiden reserve for the Quebradona project, in Colombia, was registered. The efforts of the exploration programme resulted in added gold ore reserves of 4.3-million ounces and mineral resource of 4.5-million ounces for the year.

STRATEGIC PRIORITIES
In terms of outlook for the year ahead, production guidance for 2019 has been set at between 3.2-million and 3.4-million ounces, which Dushnisky said reflected the impact of the reduced South African operations and a step-down in production at Cerro Vanguardia.
 
Total cash costs are estimated to be between $730/oz and $780/oz and AISC between $935/oz and $995/oz at average exchange rates against the dollar of R14.
 
Capital expenditure (capex) is anticipated to be between $910-million and $990-million, reflecting the ramp-up of the Obuasi redevelopment expenditure.

Dushniksy noted during his presentation that maintaining a reliable record of “predictable and rational behaviour as custodians of shareholder capital” remained central to AngloGold’s approach.

In this regard, capital allocation would remain disciplined and focus on improving value creation without placing a financial or operating risk on the business, he added.

“This model does not prioritise scale for its own sake, but rather focuses on patient and disciplined work to widen margins, lift returns, increase cash flow and improve direct returns to shareholders over time”.

AngloGold will also target returns of at least 15% through the cycle, using conservative discount rates that account for specific jurisdictional and operating risks.

Related to this, Dushniksy explained that preserving the integrity of the balance sheet was fundamental to the long-term health of the business and enforced disciplined decision-making in allocating capital.

“This means that the company will rank and prioritise its investments, assessing them not only on their returns but also on their affordability with respect to maintaining leverage ratios at or around targeted levels, as well as improving returns to its shareholders.”

In effect, this means that AngloGold will weigh these competing priorities and consider the full suite of financing opportunities available when determining whether to proceed with an investment, notably partnerships, asset sales and project financing.

AngloGold is now targeting a lower net debt to adjusted Ebitda ratio of one time through the cycle, down from the previous target of 1.5 times.

“We believe this new target is achievable, even as we invest inward, pay dividends to shareholders subject to approval by the board of directors and service debt obligations.”

The company’s dividend policy remains to pay out 10% of free cash flow, before growth capital and is subject to the board’s approval.

Turning it eyes to the local environment, the restructuring of AngloGold’s loss-making portfolio in South Africa into a smaller business was completed, with these assets having returned to generating free cash flow.

To protect the cash flows of the South African region from the rand gold price risk for 2019, a short-term rand gold hedge was entered into on a zero cost collar basis at a floor of R545 000/kg and an average cap of R725 000/kg for 300 000 oz of AngloGold’s South African gold production.

Key areas of focus for 2019 remain bringing Obuasi into production, while also executing on a series of affordable, high-return brownfield improvements and progressing two key projects in Colombia up the value curve, Dushnisky said, adding that “operational excellence initiatives remain at the heart of our efforts to counter inflation and improve margins”.

FULL-YEAR REVIEW

Production for 2018 came in toward the top end of guidance at 3.4-million ounces.

Production was 9% lower year-on-year, mainly owing to the sale and closure of assets in South Africa. Production from retained operations for 2018, excluding Moab Khotsong, Kopanang and TauTona, was 3.3-million ounces at a total cash cost of $765/oz, compared with 3.2-million ounces at a total cash cost of $738/oz in 2017.

AISC for these retained operations were $968/oz, compared with $1 017/oz in the same period last year. AISC for the international operations was $920/oz for 2018 compared

with $972/oz for 2017.

AISC for the South African operations, including Moab Khotsong, Kopanang and TauTona, was $1 178/oz compared with $1 245/oz in 2017.

At Mponeng, full-year production in 2018 was 265 000 oz at a total cash cost of $977/oz, compared with 224 000 oz at a total cash cost of $1 014/ oz in 2017. Accessing higher-value reef and improving mining practices delivered an increase of 18% in production year-on-year.

At Mine Waste Solutions (MWS), production for 2018 was 103 000 oz at a total cash cost of $812/oz, compared with 109 000 oz at a total cash cost of $780/oz for 2017. MWS remained cash positive despite the 5% year-on-year decline in production, which was mainly owing to lower recoveries as a result of carbon management challenges experienced during the

third quarter of 2018, which improved toward the end of 2018.

Total capex decreased by 24% to $721-million in 2018, compared with $953-million in 2017 and below the bottom end of the market guidance of between $800-million and $920-million.

This included project capex of $148-million invested in growth projects at Obuasi, Siguiri and Kibali in Continental Africa and Mponeng in South Africa.

Capex was lower in South Africa owing to the sale of assets in the region early in the year.

INTERNATIONAL OPERATIONS

Meanwhile, the Continental Africa region produced 1.5-million ounces at a total cash cost of $773/oz in 2018, compared with 1.4-million ounces at a total cash cost of $720/oz in 2017.

AISC was $904/oz for 2018, compared with $953/oz for 2017.

According to AngloGold, the region delivered a solid performance with production boosted by higher tonnes treated particularly from underground mining at Kibali and Geita, in Tanzania, and improved underground grade from Geita.

In the DRC, Kibali's production was 363 000 oz at a total cash cost of $600/oz for 2018, compared with 268 000 oz at a total cash cost of $784/oz for 2017.

The increase in production was mainly owing to the 26% increase in recovered grade as underground mining displaced lower-grade openpit ore, an improved recovery factor and an 8% increase in tonnage treated as a result of improved plant performance.

In Ghana, Iduapriem's production increased to 254 000 oz at a total cash cost of $804/oz in 2018, compared with 228 000 oz at a total cash cost of $823/oz in 2017. Production increased 11% year-on-year to a record, driven by 6% higher tonnage treated owing to improved grinding and plant efficiency and 5% higher recovered grade, resulting from mining deeper, higher-grade areas in the Teberebie pit.

During 2018, Obuasi remained on care and maintenance while the redevelopment project for recommencing operations continued.

Following receipt of all the requisite government approvals, including parliamentary ratification, and environmental approvals in June 2018, redevelopment of the Obuasi high-grade orebody has started. Works are set to start by the end of March.

The project is being developed in two phases, the first is to achieve production of 2 000 t/d with the first gold pour set for the end of 2019. The second is to achieve production of 4 000 t/d by the end of 2020.

In Guinea, Siguiri produced 242 000 oz at a total cash cost of $844/oz in 2018, compared with 324 000 oz at a total cash cost of $725/oz in 2017.

Production was negatively impacted by a 16% decrease in recovered grade from treating lower-grade oxide material and an 11% decrease in tonnes owing to delays in the commissioning of the carbon-in leach (CIL) combination plant. Total cash cost increased year-on-year as a result of lower production, partly offset by lower mining costs compared to the same period the year before.

Geita produced 564 000 oz at a total cash cost of $804/oz for 2018, compared with 539 000 oz at a total cash cost of $608/oz for 2017. Recovered grade saw a 5% increase year-on-year owing to a range of operational improvements, which assisted in accessing higher grade ore particularly in the fourth quarter of 2018.

Total cash costs, however, increased as a result of increased underground and openpit mining costs compared to the same period in the previous year, in addition to some operational challenges in the primary crusher during the second half of the year.

In Mali, Sadiola produced 59 000 oz at a total cash cost of $938/oz in 2018, compared to 63 000 oz at a total cash cost of $900/oz in 2017.

Production decreased owing to a 9% drop in recovered grade from limited availability of the oxide ore as mining ceased during the year. The mine transitioned to a stockpile treatment plan at the beginning of the year, partly compensated for by a 3% increase in tonnes treated as a result of newly installed variable speed drives in the mill.

Production at Morila, in Mali, increased to 30 000 oz at a total cash cost of $1 145/oz for 2018, compared with 28 000 oz at a total cash cost of $974/oz for 2017.

The Americas region produced 776 000 oz at a total cash cost of $624/oz for 2018, compared with 840 000 oz at a total cash cost of $638/oz for 2017. AISC was $855/oz in 2018, compared with $943/oz achieved in 2017.

At Cerro Vanguardia, full-year output in 2018 was maintained at the same level as 2017 producing 282 000 oz at a total cash cost of $476/oz.

In Brazil, production was 494 000 oz at a total cash cost of $706/oz for 2018, compared with 557 000 oz at a total cash cost of $693/oz for 2017.

At AGA Mineração, full-year production in 2018 was 364 000 oz at a total cash cost of $723/oz, compared with 424 000 oz at a total cash cost of $671/oz in 2017.

At Serra Grande, full-year production in 2018 was 130 000 oz at a total cash cost of $660/oz, compared with 133 000 oz at a total cash cost of $764/oz in 2017.

The Australia region produced 625 000 oz at a total cash cost of $762/oz for 2018, compared with 559 000 oz at a total cash cost of $743/oz for 2017.

For the second half of 2018, the Australia region produced 319 000 oz at a total cash cost of $735/oz, compared to 305 000 oz at a total cash cost of $717/oz for the same period in 2017.

Higher mill feed grades in the first and the last quarters of 2018 contributed to a 21% increase in year-on-year production at Sunrise Dam, which delivered 289 000 oz of gold production at a total cash cost of $920/oz in 2018.

The performance of the new Recovery Enhancement Project has been below expectation; however, a structured optimisation programme is delivering positive results and, along with a higher proportion of Vogue ore in the feed blend, recovery is expected to increase to feasibility study levels this year.

Tropicana produced 336 000 oz at a total cash cost of $594/oz in 2018, compared with 321 000 oz at a total cash cost of $564/oz in 2017. At Tropicana, production increased 5% owing to higher mill feed grades and higher mill throughput.

The South Africa region produced 487 000 oz at a total cash cost of $1 033/oz for 2018, compared with 903 000 oz at a total cash cost of $1 085/oz for 2017.

AISC for the region was $1 178/oz in 2018, compared with $1 245/oz in 2017.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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