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Morningstar | No Surprises in AngloGold Ashanti's 1Q; We See Limited Risk-Adjusted Upside

AngloGold Ashanti announced limited operating results for the first quarter of 2019 that revealed few surprises. The company produced 752,000 gold ounces, down 3% when only including retained operations. Companywide costs declined slightly, with total cash costs falling 5% year on year to $791 per ounce and all-in sustaining costs falling 2% year on year to $1,009 per ounce.

The company had previously guided that production would be heaviest in the back half of the year. As such, it maintained full-year guidance of 3.25 million-3.45 million ounces at total cash costs of $730-$780 per ounce and AISC of $935-$995 per ounce, ranges that still look achievable to us.

We’ve left our forecasts largely unchanged and maintained our fair value estimates of $14 per ADR and ZAR 200 per share. We also retain our no-moat rating. In our last update, shares were trading slightly above our fair value estimates, so we saw no risk-adjusted upside at that time. Although shares have since traded down about 15%, we still don’t see enough upside after taking into account the company’s very high uncertainty rating.

In addition to first-quarter operating results, AngloGold Ashanti announced that it is exploring divestment options for its South African assets. The company has previously sold assets in the country, which is now its lowest-producing and highest-cost region. As such, it makes sense to us for the company to explore divestment opportunities. We’re unsure if there will be heavy interest, as the country has been a difficult place to mine, particularly when it comes to dealing with mine labor. Nevertheless, the company appears dedicated to selling the assets for at least fair market value, which should help protect against potential value destruction.

After last raising the interest rate in December 2018, the Federal Reserve has paused its increases, leaving the federal-funds target rate at 2.25%-2.50%. Amid signs of a slowing economy, including slowing consumer spending and business investment, the Federal Open Market Committee now sees no rate hikes in 2019. The dot plot has reflected a meaningful change in expectations, as the December dot plot implied two rate hikes this year.

The market view is even more bearish. Current interest-rate options imply not only no chance of a rate hike but also more than a 50% chance that there is at least one rate cut by the end of 2019.

All else equal, the turn in the Fed’s sentiment on its rate hike path has reduced the downward pressure on investment demand for gold that we’ve observed over the last few years. However, the FOMC would probably 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, per ounce gold prices have settled in the high $1,200s to low $1,300s ounce range, falling roughly in line with our forecast for a nominal gold price of $1,300 per ounce by 2020.