The gold miner’s sweeping review of its operations to catch up with its rivals is commendable if it wants to compare more favourably with them
As a standout underperformer in the upper echelons of the global gold mining industry, it is commendable that AngloGold Ashanti is embarking on a sweeping review of its operations to catch up with rivals.
The review should deliver an early win for relatively new CEO Alberto Calderón’s business strategy, but it may not bring to acceptable levels the discount at which AngloGold trades to its larger Canada-based rivals, Barrick Gold and Newmont Corporation.
AngloGold, which emerged from a mining empire created by Sir Ernest Oppenheimer, sold its last remaining SA asset last year, a deal that helped it recast itself as a global miner with low-cost, profitable operations in Australia, Brazil and several African countries, including Ghana and Mali.
But it is struggling to shake off an image as a company with operations in SA, where companies like Sibanye and Harmony are grappling with the high costs of extracting ore from old and deep mines and with an erratic electricity supply that often leads to millions of ounces in lost output.
But by ending AngloGold’s more than century-long operational presence in SA, Kelvin Dushnisky, the then-CEO who took over from Srinivasan Venkatakrishnan before abruptly resigning after less than two years, alleviated a common corporate headache across the SA mining industry: regulatory uncertainty.
Yes, a high court judgment in 2021 brought some certainty when it ruled in favour of the industry body Minerals Council SA that the “Once empowered, always empowered” principle stands, meaning mining companies will not be forced to top up their empowerment credentials to maintain the minimum black ownership requirement imposed by the latest iteration of the Mining Charter.
Still, the years-long dispute sowed the seeds of distrust, illustrated by the downward spiral in mining exploration spend, and, one might argue, in the industry’s decision to return more money to investors via dividends than use the supersonic rally in commodity prices to pump money into new shafts, exploration and other growth projects.
Minerals Council CEO Roger Baxter said in 2021 that R20bn worth of projects were caught in a snarl of red tape. The consequence of that is that budgets for exploring SA for nonferrous metals, excluding certain industrial minerals such as coal, have dropped in recent years, from about $300m in 2012 to a range of $50m-$100m since 2015, according to the latest data from S&P Global Market Intelligence. That spending is now less than 1% of the global total, far from mineral resources & energy minister Gwede Mantashe’s pledge in 2020 to increase exploration expenditure five-fold over the next five years.
The upshot is that all these issues are sensible reasons for SA mining companies to trade at a discount to their global peers. But AngloGold, whose boss has said the valuation gap between the company and its two larger rivals is an enormous 80% in fair value terms, is not one of them.
Sure, AngloGold does not compare favourably to rivals in terms of operating efficiencies, as measured by the so-called all-in sustaining cost (AISC), which came in at about $1,355/oz in its latest earnings report, higher than $1,026/oz at Barrick Gold and the $1,050/oz forecast by Newmont for the 2022 financial year.
Calderón, who wants the measure of the overall gold production cost of miners to be about $1,100, is confident that closing that performance gap would change how investors look at AngloGold, which is trading at least 10 times its historical earnings, compared with about 26 times for Newmont and 20 times for Barrick.
While his wide-ranging review of operations success seems to be a sure bet for Calderón, it is doubtful that hitting the AISC target in 2022 will be enough to close the gap opened by rivals in the stock market. He may have to return to the board with an idea that we know has been on the agenda before: move the company’s primary listing to deeper capital markets in London or Toronto.
In that scenario, spare a thought for the JSE, whose shrinking universe for pension funds and other investors means there is less to choose from to prudently guard against risk.