AngloGold cost-cutting drive helps dig miner out of debt

South African group returns to free cash flow of $141m after sale of US mine
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AngloGold Ashanti reduced its net debt by 30 per cent last year and improved cash generation, highlighting how cost-cutting measures by the world’s largest gold miners have helped them respond to a long decline in prices.

The South African group, the world’s third-largest gold miner by annual output, reported a wider net loss of $70m for 2015 compared with $39m the previous year. However, AngloGold returned to positive free cash flow of $141m compared with an outflow of $112m in 2014.

Gold has been a relatively strong performer among commodities during 2015, rising above $1,200 per ounce and sparking a sharp run-up in share prices for leading gold miners. AngloGold’s share price almost doubled from November to February as the miner’s production costs in South Africa benefited from a weaker rand.

Gold miners have been bearing down on costs, which had spiralled out of control during the bull run for gold that ended when the price peaked at about $1,900/oz in 2011.

The subsequent fall in gold prices severely exposed miners that had invested heavily in new production, and AngloGold was among the groups hampered by a relatively large burden of debt. However, the company’s sale of a large US mine to rival Newmont for $819m in 2015 helped it to cut net debt from $3.13bn at the end of 2014 to $2.19bn.

Meanwhile, the mining group’s cost-cutting programme also bore fruit, with basic operating costs falling 9 per cent year-on-year and a wider “all-in” measure — including some back office costs and investments in sustaining output — fell 10 per cent. Cash costs for this year would be in line with those of 2015, AngloGold estimated.

“Progressively, you will start to see us continuing to chip away at the debt,” said Srinivasan Venkatakrishnan, AngloGold’s chief executive.

“We are in a sweet spot in terms of gold and certainly . . . we offer very good leverage in terms of the gold production. Having reduced our costs our margins are wide so we get the second kicker there, and third kicker is we have found the currency . . . helps improve the bottom line as well.”

Mr Venkatakrishnan said AngloGold was still looking at options for Obuasi, its ageing gold mine in Ghana. Randgold Resources, which has several joint ventures with AngloGold, pulled out of a proposed joint redevelopment at Obuasi in December, saying the project would not generate the returns it sought.

“[Obuasi] is still a high-grade, long-life asset and it contains very good optionality, and importantly it is very geared to the gold price. The asset looks much better at $1,200 gold than, say, $1,000 gold,” said Mr Venkatakrishnan.

Analysts at Barclays said: “AngloGold are executing on their turnround strategy and the performance of the international portfolio and resultant position on the cost curve leaves the company well positioned to deliver material free cash flows in 2016 and 2017 whilst preserving growth optionality.”

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