AngloGold Ashanti: Basic materials

The Company

AngloGold Ashanti, with gold production of approximately 4m oz, is the world’s third-largest gold producer by production, with a presence in exploration, mining and marketing. Headquartered in Johannesburg, AngloGold Ashanti has 21 operations in 10 countries. Major development projects are the Tropicana located in Australia, Kibali in the Democratic Republic of the Congo (DRC) and La Colosa in Colombia. The company’s extensive brownfield, greenfield and marine exploration programmes extend to 12 countries, in both established and new gold-producing regions through managed and non-managed joint ventures, strategic alliances and wholly owned ground holdings. In addition to primary mining operations, AngloGold Ashanti has an interest in Rand Refinery in South Africa, and owns and operates the Queiroz refinery in Brazil. South Africa accounts for 35% of group production; it comprises two mining areas – West Wits and Vaal River – which together comprise six deep-level mining and surface operations. In July 2012 AngloGold Ashanti concluded the acquisition of First Uranium, the owner of Mine Waste Solutions, which operates in the Vaal River area of South Africa. The Continental Africa unit manages operations in Ghana, Guinea, Mali, Namibia and Tanzania, as well as projects in the DRC. The region produces around 1.5m oz and accounts for approximately 35% of group production. The Americas unit comprises operations in Argentina, Brazil, the US and projects located in Colombia. AngloGold Ashanti concluded the acquisition of the remaining 50% interest in Serra Grande in Brazil in 2012, with the region now accounting for 23% of group production. The Australasia unit currently focuses on a mine and a project in Australia. Whilst we envisage a scenario where strike action could materially affect production rates (and thus profitability) at South African mines in 2013 due to the combination of labour union disputes, retrenchments and wage negotiations, with a production base which touches all regions of the globe, AngloGold Ashanti is well positioned among more domestically focused peers to navigate this challenging environment.

Development Strategy

AngloGold Ashanti is the most geographically diversified company within our South African precious metals coverage, with just 36% of earnings before interest, taxes, depreciation and amortisation stemming from South Africa. We expect the company to experience strong production growth over the next five years, as it brings relatively low-risk greenfield projects on-line over the next 18 months, reducing overall group operating costs.

Of particular importance are AngloGold Ashanti’s Kibali and Tropicana projects, which are located in Australia and the DRC, respectively. Having visited Tropicana in September 2012, we believe the project is both logistically and geologically straightforward; increasing our expectations of a ramp-up that meets production and cost guidelines. Kibali is a Tier 1 gold asset, with both resource scale and high grades. These properties mean that we expect the asset to produce at around $600 per oz at steady state, improving the quantum and quality of company earnings. We expect both of these projects to enter production in the fourth quarter of 2013. The combination of falling capital expenditure and almost immediate earnings contribution from these two assets means that we expect free cash flow per share to increase from a $1.3 per share loss in 2013 to a $0.3 per share gain in 2014.

After it completes its current project pipeline, AngloGold Ashanti has a considerable resource base in Colombia that will be the focus of its exploration and development spend over the next three years. Closer to home, the company is pioneering technology advances within the South African deep-level mining environment. The technology introduces reef boring combined with ultra-high-strength backfill, which could improve the region’s productivity and profitability. The company is currently testing the mining methodology at its TauTona mine, which could lead with the potential roll-out across the South African portfolio by 2020.