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Morningstar | AngloGold Ashanti on Track to Hit Both Production and Cost Guidance After 3Q

AngloGold Ashanti announced operating results for the third quarter, extending its solid performance through the end of September. Although production was largely flat over the prior-year quarter at 851,000 ounces, cost improvement continued as companywide total cash costs dropped 3% to $722 per ounce and all-in sustaining costs, or AISC, declined by 11% to $920 per ounce. However, with gold prices falling 5% over 2017 to $1,202 per ounce, adjusted EBITDA fell 10% to $355 million. Had AngloGold not made progress on the cost front, adjusted EBITDA would have declined even further.

With three fourths of the year complete, management largely maintained its full-year guidance. AngloGold Ashanti does expect to hit the higher end of production guidance of 3.325 million to 3.450 million ounces at the lower end of AISC guidance of $990 to $1,060 per ounce. We agree, as we forecast full-year production of 3.429 million ounces at AISC of $1,008 per ounce.

Our forecast remained mostly intact as production and costs have come in largely as expected. We’ve lowered 2018 investment capital expenditures to reflect deferral of spending into 2019 at Obuasi, which has minimal impact on our model. However, concurrently, we’ve lowered our sustaining capital forecast to reflect spending that’s lower than we had previously anticipated. As a result, we’re raising our fair value estimates to $12 per ADR and ZAR 170 per share, up from $10 and ZAR 145 for no-moat AngloGold Ashanti. The increase in our rand-denominated fair value increase is smaller to a stronger South African rand relative to the U.S. dollar since our last update.

In September 2018, the U.S. Federal Reserve once again raised the federal-funds target rate by 25 basis points to 2% to 2.25%. This was the third rate hike of the year. Most central bank officials expect one additional rate hike in 2018 and three in 2019. The market appears to be largely in line with this view, as current interest-rate option prices imply a more than 80% chance that there will be at least one more hike by the end of 2018.

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 proven true, as ETFs have seen net outflows since June through September.

On the back of weak investment demand, gold prices have fallen to nearly $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.