AngloGold margins under pressure

AngloGold had a very unhappy time in 2021. There were major operational issues from suspended operations at Obuasi and the company had to deal with the impact of Covid in addition to all the usual challenges that make mining a risky place to play. Obuasi is producing again under a ramp-up plan, with full production only expected by the middle of 2022.

A 52-week share price range of R213.56 to R434.78 tells you everything you need to know about the journey the share price and investors have been on.

AngloGold has extensive operations in Africa, Australia and the Americas. There are no operations in South Africa, with the last operations here sold to Harmony in 2020. In the latest quarter, the regions contributed to production as follows: Africa 56%, Australia nearly 22% and Americas just over 22%.

A number of mining houses have recently reported disappointing quarterly updates. Production is lower in many cases and the impact of inflation is hurting margins, with cash costs per unit rising faster than commodity prices in this quarter for many of the companies due to decreased production. Mines have enormous fixed costs that need to be recovered by pushing resources through the system and out the door.

In the first quarter of 2022, AngloGold Ashanti managed to achieved flat year-on-year production numbers, which looks ok relative to the broader mining sector at the moment. Quarter-on-quarter though, production fell by nearly 11%.

The price received per ounce improved by 5.2% year-on-year and 4.6% quarter-on-quarter.

Total cash costs only increased by 4% year-on-year. Inflationary pressures were partially mitigated by operating efficiencies and an 8% increase in underground grades. This wasn’t enough to maintain adjusted EBITDA margins unfortunately, with adjusted EBITDA down 2% year-on-year and adjusted EBITDA margin at 43%. This is well below adjusted EBITDA margin of 47% in Q1’21 and 46% in Q4’21.

Free cash flow has swung considerably into the green year-on-year, with an outflow of $92 million in Q1’21 and an inflow of $268 million in Q1’22. This was mainly attributable to $326 million received from Kibali gold mine in the DRC. This helped AngloGold achieved $2.5 billion in liquidity at the end of March, including $1 billion in cash. An additional $210 million was received from Kibali after the end of the quarter.

Adjusted net debt at 31 March was $917 million, reflecting an adjusted net debt to adjusted EBITDA ratio of 0.51x.

In addition to the focus on efficiency, AngloGold has also been busy with acquiring and developing resources. The $365 million acquisition of Corvus Gold was closed in January 2022, giving the company a much stronger position in Southern Nevada in the United States. This asset should be in production in around three years from now.

The company has reiterated its 2022 guidance, which means that this quarter went largely to plan. Bringing Obuasi back to full production is key to achieving the production guidance.

The highlight of this quarter is clearly the free cash flow story. Investors will be looking closely at production numbers this year, with a strong operational performance key in this difficult inflationary environment.

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