When cash is king over gold

AngloGold Ashanti confirms its ongoing generation of free cash flow, so elusive to so many gold diggers.

JOHANNESBURG  - 

Johannesburg-based AngloGold Ashanti, one of the world's biggest gold producers, announced third quarter 2009 results showing the group moving further towards substantial free cash flow generation, a feat that continues to prove elusive for the majority of gold miners, despite record high dollar gold bullion prices. The latest round of gold quarterly results have, however, also seen substantial net free cash flow reported by Barrick, the world's biggest gold digger by production and value, and also Newmont.

Fellow global Tier I gold producers Gold Fields and Harmony continue to battle somewhat against the tide. The two South African-based miners, particularly Harmony, have also faced higher exposure to a strong rand, and rapid increases in administered prices, not least for electricity. AngloGold Ashanti ranks as the most internationalized of the big South African gold miners.

AngloGold Ashanti is producing positive free cash flow, despite its hedge book, which was under water to the tune of US$2.3bn on 30 September 2009. The hedge book is a substantial remnant of decisions taken years ago, when a largely different management believed that gold bullion prices would trend neutral to down. Hedges were sold forward as "insurance" against such a possibility.

Dollar gold bullion has been generally rising since early 2001. The AngloGold Ashanti hedge book amounted to 4.3m ounces at the end of September 2009, and is anticipated to be down to 4.1m ounces by the end of the year. The group has been spending substantial cash to reduce its hedge book exposures, absorbing cash outlays of US$1.3bn in 2008, with US$797m spent so far this year. AngloGold Ashanti plans a continuation in this trend, "decaying" its hedge book by about 800,000 ounces a year, until it is substantially dead by the end of 2014.

Funding demands saw AngloGold Ashanti raise US$1.7bn via a rights issue earlier this year, and another US$287m more recently. Earlier this year the group received US$900m cash from Newmont after AngloGold Ashanti sold its stake in Australia's Boddington mine to Newmont. By the end of this year, Newmont is due to pay another US$240m cash in a second-tranche payment for the Boddington stake.

AngloGold Ashanti has also budgeted US$337m cash for acquiring a 45% stake in the Moto gold product in the Democratic Republic of the Congo; 45% has also been purchased by Randgold Resources, a Tier II gold producer that concentrates on Africa-only mines.

AngloGold Ashanti's generally rising free cash flows, equity raisings and proceeds from Boddington have enabled it to manage down its net debt from US$1.5bn at the end of 2008 to about US$800m at the end of the third quarter. For AngloGold Ashanti, operational free cash flow was substantially higher during the third quarter of 2009 than the year-ago quarter in each of its four main operating regions, viz., southern Africa, continental Africa, Americas and Australia.

Seen at this level of measurement, southern Africa (where AngloGold Ashanti operates a good number of South Africa's biggest gold mines) posted the highest total number, followed by continental Africa (reflecting substantially better performances from Geita in Tanzania and Obuasi in Ghana), the Americas and Australia.

Despite recent constraints on cash flows, AngloGold Ashanti spent US$55m on exploration during the September 2009 quarter, an increase of 28% over the previous quarter. Expenditure increased in Colombia, where the group has discovered one of the world's biggest gold deposits seen in a good number of years. Regional exploration in Canada and Australia, as well as the initiation of the feasibility study on the Tropicana project in Australia also demanded additional dollars. The group also signed a deal to cooperate with De Beers in the search for gold ore bodies on the ocean floor.

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