Mark Cutifani - CEO, AngloGold Ashanti
Few would scorn the views of the Oracle of Omaha, but Mark waxes lyrical about gold.
Interviewer: Alec Hogg
16 Feb 2012
ALEC HOGG: It's Wednesday February 15 2012 and in this Boardroom Talk special podcast, Mark Cutifani, the chief executive of AngloGold Ashanti, joins us with financial results for the December quarter, which are a record. Now given that AngloGold Ashanti goes back many, many years, this is, I guess, Mark, a reflection of a number of things, starting with the gold price?
MARK CUTIFANI: Yeah, absolutely, obviously the gold price has been central, supported by the fact that we got rid of the hedge book and also a very strong operating performance improvement over three years. So a good combination of those three factors.
ALEC HOGG: With the hedge book, what would the difference have been?
MARK CUTIFANI: On those numbers it would have been in the range of 200m off the top of the head, so a substantive difference
ALEC HOGG: 200m on 1.3bn, indeed it is and the decision to increase the dividend, I've been following South African gold shares since 1980 and back in the ‘80s stocks on this market used to offer juicy dividend yields ‘cause they had to. Now the dividend yields are pretty low but to see a group like yours doubling its dividend suggests that there is some demand from investors.
MARK CUTIFANI: Oh yeah, in the last three years we've been growing our dividend and, in fact, I think our compound growth rate is about 58%, so improving performance. We are investing in new projects and will grow our business by 25% over the next couple of years. So putting certainly a lot of money into those new projects that will improve our cash flow per share by 25% but at the same time we've got a very conservatively geared balance sheet and we've got the room to return some to the shareholders. So we're trying to do both.
ALEC HOGG: We were scratching our heads this morning trying to find the all in cost, cash cost figure, now for gold miners. You say in this set of results that your cash cost's US$728 an ounce. We know that the gold price is $1700 an ounce, so there's a big margin but I guess the cash cost doesn't take everything into account?
MARK CUTIFANI: No, if you want to go on a total cost basis, we're running at about $1200. The industry average is probably around $1250, so we're a bit under the average on our total cost basis. In fact, we're more competitive on a total cost basis because our capital is being kept pretty tight over the last few years, so we're doing much better on that figure. So about $1250 average for the industry, we're about $1200 that's about how much better we're doing than the average industry player.
ALEC HOGG: That's a big margin though for any industry and I guess brings the question of how sustainable it is into the future?
MARK CUTIFANI: Well, from our point of view on...don't forget the average gold price last year was about $1550, so on an $1150 average for last year that's about a $400 margin and that gives us somewhere between 15% to 20% return on capital employed or a bit higher than that for the full year. In fact, we showed full year 20% on return on capital employed and 25% return on equity but we're at the top end of the industry. If you look at the industry across the board, we're only just returning our weighted average cost of capital. That means 50% of the businesses aren't even returning weighted average cost of capital. So at the moment the industry is not in stellar results territory but certainly we're on the right side of the average and we're continuing to improve.
ALEC HOGG: That's interesting, so it's not super profit area yet where you would find all kinds of new players coming in, apart from the fact that any investment in gold mining is a long term one.
MARK CUTIFANI: Yeah, exactly and we're enjoying a 25% to 30% margin, which gives us a reasonable return on capital but when you look at the risks and you look at where we've got to go to develop new projects, you look at capital costs increasing, you look at government's talking about increased taxes, boy, you want to be making some sort of margin because it's going to get taken off you again.
ALEC HOGG: Talking about risks, Warren Buffett decided to have a go at the gold industry again, this week he wrote in Fortune Magazine that's a valueless asset and that there's a self-inflating bubble and that gold investors are going to be left with egg on their faces. I know you don't agree with him but why?
MARK CUTIFANI: Well, firstly Warren's been wrong for 5000 years. He's been an astute investor obviously in a whole range of other asset classes and it must be embarrassing to get it so badly wrong in the gold sector and I think that's on the basis that he fundamentally doesn't understand the gold sector. It's been there for 5000 years, gold is pleasant to the eye, gold is workable in many different shapes, which makes it ideal for the jewellery sector, for example, and it's indestructible in terms of not corroding. So the reason gold is so special and has been for 5000 years, it's so different. People who've been brought up in the industrial age tend to think of value only in terms of things you build things with but when you've come from cultures that are thousands of years old, they value beauty, they value art and poetry, gold is like art and poetry to those that have been in those societies for thousands of years. That's where the value is. Now that's like trying to tell you why Lord Tennyson's poetry is something beautiful to behold, if you can't read you can't understand where the beauty is. I think that's the sort of conversation I think Mr Buffett's in and he's great on things that are tangible, that are hard, that bounce up and down and support industrial consumption but when it's these other less tangible things, a lot harder to describe where beauty is.
ALEC HOGG: But your biggest shareholder, John Paulson, I see he's now starting to sell exchange traded funds, gold exchange traded funds, is he changing his mind yet on AngloGold?
MARK CUTIFANI: I wouldn't think so, he's backed the gold story, again, another one that appreciates that the asset class was undervalued. Maybe he sees we've done better but he still has a very large commitment in gold and certainly I wouldn't see the fact that he's selling some of his assets saying that he's not backing the class, he's still got a substantial commitment and again he was one person that recognised that gold was undervalued for all the reasons I described.
ALEC HOGG: Have you engaged with him lately to get a feeling of how he feels about the asset class?
MARK CUTIFANI: We engage on a regular basis and he's been very strong on the asset class. Again, making it very clear that it's an undervalued asset and he still sees it as an undervalued asset. So nothing's much changed, he's trimmed his holding, he's still the biggest ETF holder by the way, so I wouldn't say that's a person that is not confident in the story but like all these things, people adjust their positions depending on circumstances on the day.
ALEC HOGG: But selling $600m in anybody's language it's a big chunk, in the fourth quarter he did that. Are you telling us then it's really just rebalancing his position, which might have been overweight?
MARK CUTIFANI: Well, certainly it's not up to me to talk for John...
ALEC HOGG: Sure.
MARK CUTIFANI: ...John's got to describe why he's doing the rebalancing in the portfolio but certainly based on his current positions and certainly based on everything he said to us he sees real value in the sector.
ALEC HOGG: And he hasn't been selling your shares? The shares he owns in your company.
MARK CUTIFANI: We'll wait and see what comes out of all the information but he has been, on the face of it, rebalancing. To what degree, not sure, we'll see what happens when the numbers come out.
ALEC HOGG: Mark, one of the comments that you made in the commentary to the results that were released today was that you have now an exceptionally strong foundation to grow the business. Just take us through what that means?
MARK CUTIFANI: Well, today, if you look at where we were four years ago, we were generating about $600m cash flow from our operations. That's before capital. Today we're at $2.6bn, we've improved through operating improvements contributing more than $700m, the hedge book, the gold price in of itself helping us to get up to the balance, so significant improvements across the board. We are able to now apply those funds to build more growth in the business to take us to 5.5m ounces. So over the next two years we'll grow the business by 25%, we won't issue anymore shares and that's obviously based on what we can see today and that would improve our cash flow per share, our production per share by 25%. So from a shareholders' point of view underlying value in the business will improve 25%.
ALEC HOGG: A small thing in your life but a big thing in many other people's lives, the whole First Uranium saga. When you took a position there buying some of the Village shares there were many who felt that this was only a precursor to taking out the whole company and then you withdrew from it, you stepped away. What was behind that decision?
MARK CUTIFANI: We still remain an investor in First Uranium, we're reviewing our position and haven't yet finalised a position. So I think it's premature to say that we've stepped away but we still consider our position and we'll make our mind up what we'll do in due course.
ALEC HOGG: So it's one of those things that you probably need more time to finalise the approach?
MARK CUTIFANI: Yes.
ALEC HOGG: And then finally, looking at the growth opportunities within South Africa, we're seeing a lot of the little guys getting involved now but has a big group like AngloGold Ashanti run out of opportunities or might there be a strike here or there that no one's really spoken about yet?
MARK CUTIFANI: Well, the way I've described the work we're doing in South Africa and the really exciting work is the technical innovation. We're putting about $15m a year into the new mining methods and if we're successful we will turn 70m ounces of gold that could otherwise not be extracted using current technologies, we'll turn that gold into a real asset that we can extract. So from our point of view that's our exploration effort, which could have a major impact on the business as we know it today and certainly create another 30 to 40 years life for the business.
ALEC HOGG: Is that in recovery grades or is that by being able to go deeper.
MARK CUTIFANI: Being able to go deeper and to be able to mine gold areas at higher levels in the operation at a lower grade.
ALEC HOGG: So who said that gold mining wasn't hi-tech?
MARK CUTIFANI: Well, it's one of the most hi-tech industries in the world. That's what people don't see.
ALEC HOGG: And the whole story with - talking about going deeper - with Eskom and the increases that have come through there, I heard or one of your competitors was saying that the mining inflation figure now is around 14% a year. Would you agree with that in South Africa?
MARK CUTIFANI: Well, in actual fact across the globe it's 15% for the last seven years, compounding. So the South African inflation rate is aligned with the global rate as well.
ALEC HOGG: And that is consistent with your view or with your calculations?
MARK CUTIFANI: Yeah, in South Africa it might be a bit higher. We've done better than that because of our cost reduction work over the last couple of years but it's in the right ballpark.
ALEC HOGG: Mark Cutifani, the chief executive of AngloGold Ashanti