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Morningstar | AngloGold Ashanti's De-Emphasis on South Africa Has Improved Its Cost Outlook

AngloGold Ashanti operates in nine countries across Africa, South America, and Australia. With significant scale but high costs, AngloGold was geared to generate significant free cash flow during gold’s bull run that ended in 2013. Although costs remain high relative to peers, management has focused on improving its portfolio.Roughly 15% of AngloGold’s production is based in South Africa, lower than historical levels as continued challenges in the region drove the company to sell mines in the country. These underground mines are some of the deepest in the world, with high operating costs and safety risks. Furthermore, high labor costs (stemming from a unionized workforce historically unafraid to strike) and high electricity costs push costs in the region even higher. Nearly 50% of production is based in continental Africa. These mines have high costs and face added risk from political instability. For example, the company’s Kibali joint venture, expected to provide growth at costs below the company average, is in the Democratic Republic of Congo, which has appropriated foreign mining assets in the past. The remaining third of production is in Australia and the Americas, where mines have lower costs and lower geopolitical risk.Our long-term nominal gold price forecast is $1,300 per ounce in 2020. Investment demand has weakened as the Federal Reserve raises interest rates, weighing on near-term gold prices. However, Chinese and Indian jewelry demand should eventually fill the gap left by investment demand. Strong preferences for gold in these countries drive high income elasticity, and rising incomes should result in robust jewelry demand growth over the next few years. Strong demand will lead to a production shortfall, requiring a higher incentive price to encourage additional mine production. However, cost deflation caps the potential upside from an otherwise strong demand story. Depreciation in producer currencies, lower oil prices, and general mine cost deflation stemming from the end of the Chinese-driven commodity boom have helped drive cost reductions, lowering the marginal cost of production.