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Morningstar | We’ve Raised AngloGold Ashanti’s FVE After Lower Costs, but See Limited Upside

AngloGold Ashanti announced operating results for 2018, finishing the year with continued solid performance. Production fell roughly 9% to 3.4 million gold ounces, but the decline largely reflected sold mines. Organic production actually rose 2% in 2018 over 2017. However, the most meaningful surprise was the continued progress AngloGold has made on costs. Total cash costs per ounce declined 2% to $773 per ounce for the full year, and all-in sustaining costs, or AISC, declined 7%, to $976 per ounce. Further, the decline wasn’t just driven by shedding higher-cost mines, as same-mine AISC declined 5% year on year.

The company’s 2019 guidance looked better than we had anticipated, particularly on the cost guidance. Although production guidance of 3.25 million to 3.45 million ounces points to a likely production decline from 2018, cost guidance points to significant gains that should result in improved profitability. The company has guided to total cash costs of $730 to $780 per ounce and AISC of $935 to $995 per ounce, which would represent changes of negative 5.5% to 1% and negative 4% to 2%, respectively.

Progress on cost reductions is better we had previously forecast. After updating our model to reflect these changes, we’ve increased our fair value estimates to $14 per ADR and ZAR 200 per share, up from $12 and ZAR 170, respectively. However, the cost progress is not enough to justify a change to the company’s no-moat rating. With shares currently trading at roughly $15 and ZAR 200, we see shares as roughly fairly valued.

In December 2018, the Fed again raised the federal-funds target rate by 25 basis points to a range of 2.25% to 2.50%. This was the fourth rate hike of the year. However, the Federal Open Market Committee, or FOMC, appears to be taking a more cautious approach to future rate hikes. The dot plot has reflected a meaningful change in expectations. The December dot plot implied two rate hikes in 2019 versus the three hikes that had been implied back in September. Additionally, language in the FOMC statement now takes a softer tone, indicating a more cautious approach to further rate hikes.

The market has taken a bearish view on the FOMC’s more dovish tone. Current interest rate option prices imply a more-than 90% chance that there will be no rate hikes by the end of 2019. Additionally, they reflect a higher probability for a rate cut than a rate hike by the end of the year.

All else equal, a slower rate hike path reduces the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would likely return to rate hikes if inflation were to strengthen due to stronger economic growth. Although pressure on investment demand for gold has softened, we don’t expect a strong resurgence in the near future.

On the back of stabilizing investment demand, gold prices have settled in the high-$1,200 to low-$1,300 per ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.