EUR 850.00 For Business Accounts Only

Morningstar | AngloGold Ashanti Maintains Solid Performance in 2Q; New CEO Will Take Over in September

First-half performance for AngloGold Ashanti was solid, as production excluding sold operations increased 4% to nearly 1.6 million ounces and all-in sustaining costs, or AISC, fell 2% to $1,005 per ounce. Combined with a higher gold price over first-half 2017, adjusted EBITDA from retained operations rose 22% to $722 million. Given solid first-half performance, the company now expects gold production at the high end of its full-year guidance of 3.325 million to 3.45 million ounces and at the low end of AISC guidance of $990 to $1,060 per ounce. We think the high end of production guidance is achievable, but the company is likely to hit the middle to higher end of its cost guidance given year-to-date performance.

We’ve made minor adjustments to our forecast that aren’t enough to affect our U.S.-dollar-denominated fair value estimate of $10 per ADR. However, the U.S. dollar has strengthened 16% relative to the South African rand since our last update.  This leads us to increase AngloGold Ashanti’s rand-denominated fair value estimate to ZAR 145 per share from ZAR 126. As the company remains one of the higher-cost gold miners under our coverage, we leave its no-moat rating unchanged.

On Sept. 1, current Barrick President Kelvin Dushnisky will take over the CEO role at AngloGold. Given his experience cutting down Barrick’s portfolio into a more streamlined and profitable operation, we think he has the potential to improve AngloGold’s middling portfolio. Barrick endured a few years of asset sales and deleveraging before its situation finally looked better, so it may take some time before a turnaround at AngloGold is complete. With shares currently trading at roughly a 25% discount to our fair value estimate, we think AngloGold Ashanti looks undervalued, even after taking into consideration its very high uncertainty rating.

In June 2018, the U.S. Federal Reserve once again raised the federal-funds rate by 25 basis points to 1.75% to 2%. This was the second rate hike of the year. Most officials at the central bank expect two additional rate hikes in 2018. The market appears to be largely in line with this view, as current interest rate options prices imply a more than 60% chance that there will be at least two hikes for the full year.

All else equal, the prospect of higher inflation adds to gold's investment appeal, which is one reason ETF gold holdings rose through most of 2018 and spot prices remained above $1,300. However, as we had anticipated, higher inflation has emboldened the Fed to pursue rate hikes at a quicker pace, which lifts the real interest rate and, in doing so, increases the opportunity cost of holding gold.

Historically, we've observed a strong inverse relationship between the real interest rate and the price of gold: When the former rises, the latter tends to fall. We thought it was only a matter of time before gold investment adjusts to the higher opportunity cost, not only leading to slowing investment demand, but also outflow of gold from ETFs back into the gold market. Our prediction has begun to take hold as ETFs saw outflows in all regions in June.

On the back of weak investment demand, gold prices have fallen to below $1,200 per ounce. Nevertheless, we still believe gold has a promising future, and we forecast a nominal gold price of $1,300 per ounce by 2020. We expect that, in the long term, Chinese and Indian jewelry demand will fill the gap left by waning investor demand.