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Posts Tagged ‘AngloGold Ashanti’

26
Apr

BARRICK RETURNS TO AFRICA

   Posted by: Mr. Gold    in Uncategorized

It is hard to fathom the rationale behind Barrick’s juicy premium for EQN. It was only 18 months ago that Barrick, with much fanfare, “left Africa”, leaving behind a limping offshoot (African Barrick), unloved by the London market, deprived of any growth story, plagued with 70% overhang on the stock, hemorrhaging talent and serving few fund managers except those seeking a proxy for “Tanzania risk”.

So now, Barrick is back on the black continent and in search of copper (well, much is being said about copper, but there is uranium there too). Barrick’s Zaldivar and Cerro Casale projects provide a significant copper element to the stable, even though the impact is less visible than in the case of, say, Newcrest or even Newmont. But Lumwana? Granted, EQN will increase production from its flagship operation by about 100kt of copper between now and 2014, but the new owner will have to throw in $0.5bn in capex over and above the $7bn plus in cash splurged on the Australian/Canadian listed producer. Barrick also gets access to the dubious charms of Jabal Sayid – a 60ktpa early stage development project in Saudi Arabia. One wonders if Barrick’s portfolio risk is not getting a little too exposed to a region plagued by uncertainty and (at least perceptions of) instability. The company is already involved in Reko Diq project in Pakistan – sharing the burden with the most unlikely of guests, Chile’s Antofagasta.

True, EQN will spit out $1.3bn in Ebitda as early as 2013, assuming the nominal copper prices around $4/lb. Should the USD continue on its trajectory post FOMC meeting in June, this looks like a great USD hedge, but the real value of the red metal may not shine so brightly for anyone whose wealth is denominated in stronger currencies than the USD.

This rationale is probably the only common thread between the gold and copper markets. The red metal is driven by a completely different set of drivers, some of which are of discretionary, administrative nature. One could even argue that after years of guesswork on central banks’ intentions regarding gold reserves, it is now copper that suffers from increased opacity. Any attempts to penetrate the great wall of secrecy regarding copper hoarding at China’s State Reserve Bureau are bound to be frustrated. And even the estimates of unregistered stocks in bonded warehouses range from 0.5mt to over a million tonnes – a significant range in a 19mtpa market. Barrick’s move represents therefore a leap of faith, as no meaningful due diligence can be made regarding the distant future of the copper market, beside the well worn (and still valid) argument of China’s copper deficiency. But industrial metal demand growth rates could be past their peak and it is illustrative that no base metal producer tried to dislodge Minmetals’ original bid.

Andrew Michelmore – Minmetals’ CEO had seen worse times at OZ Minerals and it is difficult to disagree that walking away was the most rational of options. But from a broader perspective, this adventure amounts to yet another failure of a Chinese-funded entity to secure a stake in a Western-operated mining venture. In certain quarters of Chinese metal value chain, belligerent calls intensify. China’s steel association’s vociferous attacks on Western governments’ (!) monopoly in iron ore production is an unfortunate example of just how political the quest for “equity” participation in offshore commodity production has become. Chinese entities are still light years behind the hugely successful, long-term metal bets Mitsubishi and other Japanese shosha companies engineered in Australia and South America four decades ago.

This leaves us with the Barrick’s murky rationale (the sale could not possible premeditated on doing in the hapless African Barrick, there are cheaper ways to do this). The company’s speedy due diligence may reflect as much its nimble approach to growth as an unwelcome rashness. Or maybe Peter Tomsett – EQN’s chairman had ulterior motives? Here’s the guy to six years ago successfully brought Placer Dome’s history to its end. When Barrick made the initial approach, Tomsett remained open to an alternative bid. Newmont and AngloGold Ashanti embarked on an in-depth due diligence of PDG’s assets, until AngloGold’s visit to Porgera went badly wrong. Barrick digested Placer Dome awright and has thrived since.

Smell a revenge?

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14
Oct

ELEGY TO HEDGES

   Posted by: Mr. Gold    in Uncategorized

Only gold market veterans still remember the jovial hectoring socked onto gold mining executives by the late Julian Baring of Mercury Asset Management. Baring – in his days the most successful gold investor – spent the late 1990s castigating gold mining companies for selling gold forward. Baring’s tirades fell mostly on deaf ears but the miners soon rued their studious indifference. Famously, Ashanti – the chief victim of Baring’s verbal prowess – soon caved in under the weight of the margin calls when the sudden spike in the gold prices squeezed their positions.

AngloGold Ashanti’s closure of the hedgebook last week ends the nearly 20 years’ legacy of mining companies’ activity in the gold lending market. Skeptics believe that this could be a contrarian signal for the gold market and that the lack of accelerated buying from the miners closing their hedgebooks will remove one of the key supports under the physical flows. Arguably, net de-hedging did help to provide additional demand for gold since the last quarter of 2001, or roughly since the 10-year long bull market began. Yet the hedging and de-hedging decisions are about producers’ expectations of the future demand for their product – and the environment today could not be more different from the 1990s.

The mechanics of gold hedging was simple. Producers would borrow gold today against future production expectations. This borrowed metal was sold and the proceeds were reinvested into risk free rate instruments. To close the contract, the miner had to deliver the borrowed bullion back to the lender and the risk free instruments (e.g. Treasuries) were sold. The receipts from these instruments were effectively the revenue for the mined ounces. Naturally, this only made sense when the sovereign interest rates were way above the expectations of future gold prices. Today, this feels like stone age. But it was the market reality of the roaring 1990s.

Historically, there were three reasons why gold producers’ output was partly hedged – in reverse order of importance: acquisitions, project financing and strategic revenue security. First, during the ongoing consolidation, many smaller producers were acquired by larger rivals. Although the larger players could more easily diversify their risks, small and mid-size companies often could not secure the financing without the commitment to sell the product at a predictable price. These legacies soured revenues of companies which eventually acquired Ashanti or Bema. The other type of hedges was, precisely, related to project financing. Banks could de-risk support for capital-intensive projects in frontier markets if at least part of the future cash flow was guaranteed. Yet the timing and structure of these hedges oftentimes clashed with the strategic planning of the mining companies and their treasury departments. This is because the latter engaged in the third – and much larger – form of program hedging. Since the gold price was fixed, the value of these products depended on the combination of the interest rates and gold lease rates. The former were usually fixed, the latter most often floating – at least since the new accounting standards were introduced in 2001, pruning interest in hitherto successful spot deferred contracts.

Options were also used extensively. Less abstruse than the negotiated forwards, options focused investors’ attention on the so-called “committed” and “protected” ounces. There was, supposedly, more comfort with the latter than the former. Yet the complexity of the hedgebook’s overall architecture flummoxed even sophisticated analysts. I often found that a combination of short puts and forwards was not adequately appreciated as a cost-efficient alternative to close out parts of the book. In response, miners endeavored to concentrate the market’s attention on the delta of the hedgebook, rather than committed/protected ounces. Unfortunately, this measure of the book’s near term sensitivity to gold price’s movements was dependent on too many variables (spot prices, interest rates, volatilities) for most investors to be able to project the marked-to-market value of the book.

At the antipodes of Julian Baring’s principled harangues, there was the fragmented Australian mining industry. Aussie executives did not engage in the debate about hedging. They simply did it, without much pressure from the local, somewhat isolated investor base. On the other hand, Barrick’s wiz-kids embarked on roadshows trying to educate investors about the more arcane aspects of the book, which peaked at 20m ounces in 2001. Newmont famously dipped a toe into the hedge world at all-time low gold prices. And AngloGold – whose hands were tied by the commitment to pay dividends to Anglo American Plc – had to insist on the maintenance of revenue security, and endure investors’ wrath or indifference as a result.

All of this is now a closed chapter. Barrick bit the bullet in 3Q2009, charging $5.7bn to its earnings in the process. AngloGold Ashanti has now accelerated the demise of its one hedge, at a cost of $2.7bn. Both transactions were, arguably, accretive on NAV basis. Among the majors, only Kinross still has to battle with the legacy positions inherited from Bema’s takeover.

The end to net growth of gold hedging ushered us unheralded into a new gold market in 2001. It will be worth considering whether the end of de-hedging also marks the beginning of a new era.

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3
Jun

GOLDEN COLOMBIA

   Posted by: Mr. Gold    in Uncategorized

If you ever have a chance to travel to Colombia’s cosmopolitan capital, you will find it hard to miss the local gold museum. The collection, similar but superior to similar permanent exhibitions in Lima, Quito or Capetown, brings together exquisite artifacts from the pre-Colombian cultures of Calima, Quimbaya and Tolima. Nothing beats the gamelan-like jingle of the grand finale, offered to visitors in the hall emblazoned with countless golden disks.

Yet, for years, the history of gold mining in Colombia was just that, a history. In the country known for its flagship coal (Cerrejon) and base metals (Cerro Matoso) operations, the gold production was long limited to informal sector staffed by barraqueros active in the province of Antioquia. The deterioration of the security situation in the country pushed down the national production to barely 20 tonnes per annum in the 1990s. As President Pastrana had his eyes on the Nobel Peace Prize, the country slid into chaos.

Two things have changed since then: the gold price and the Presidency. Last weekend, Colombians cast their votes in the first election since 2002 which did not feature Alvaro Uribe as a candidate. In just 8 years, Uribe’s security policy has completely transformed the country. In my frequent visits to Colombia, I could sense tangible improvements with more and more regions of the country open to astute gold explorer and nature-loving hiker alike.

And in they moved. High geological prospectivity and immaturity of the existing exploration programs run by local firms, such as Frontino and Mineras de Antioquia, enticed foreign companies to bank on further improvements in the security situation. In 2004, AngloGold Ashanti set up its first exploration office in Colombia, focusing on porphyry/epithermal systems, sedimentary-hosted gold and mesothermal vein systems. Meanwhile, Canadian junior Greystar entered Santander province, developing a high-sulphidation system in Angostura.

Thanks to the international confusion surrounding the situation in Colombia (some left-wing NGOs in Europe still consider FARC a freedom-fighting force, rather than drug-financed terrorist organization), these pioneers confronted less competition for prospective ground than in more mature areas of the Andes. A threefold strategy was necessary to turn an exploration prospect into a project and a project into a mine. First, geological work had to advance apace in often isolated, mountainous regions. Secondly, personal, access and zone security had to be assured. And finally, highly professional community development work had to engage the local population while constantly managing the expectations of prospective economic and social gains from the future mine.

But this is mining, and mining never comes without hiccups. Last April, the Colombian government asked Greystar to provide a new Environmental Impact Assessment for all operations above 3200m level, increasing the risks of delays to the Feasibility Study. The new legislation, aimed at protecting the vital paramo highlands was introduced after the filing of the original EIA by the company. Not surprisingly, Greystar’s share price lost half of its market value in one day. Earlier this week, the decision has been revoked (and the share price partly recovered), yet the grandfathering of the old EIA is not yet 100% certain.

Despite such travails, the industry remains optimistic about Colombia’s gold prospects. This week, the CEO of AngloGold Ashanti lashed out against Canberra’s efforts to socialize earnings from mining operations in Australia, and mentioned Colombia among the company’s favorite destinations. Indeed, AngloGold Ashanti’s discovery of 12moz resource at La Colosa sent shockwaves around the mining industry, long hungry for elephant-size finds in the Andes. At Toronto’s PDAC two years ago, wishful thinking abounded about a possible link-up between Aurelian’s Fruta del Norte asset in Ecuador and La Colosa. Aurelian was eventually acquired by the ever merger-happy Kinross and the border tensions between the two countries would in any case have made any such tie-up unworkable. But rumors surrounding possible M&A activity in Colombia have not entirely disappeared. Some analysts continue to believe that Gold Fields, which has operations in neighboring Peru, could be tempted by Greystar – a large, low-grade heap leach open pit mine with refractory ore that may require BIOX further down the line.

None of this effervescence would be possible without Alvaro Uribe’s dedicated commitment to rid the country of the plethora of armed thugs – from right-wing paramilitaries to EPL, ELN and FARC. There was a danger that Uribe’s continuously high approval ratings would lead to de-institutionalization of the Presidency in what is historically the most democratic country in Latin America. This danger has now been averted. Last Sunday, the former defense minister Juan Manuel Santos received nearly 47% of the vote. He has since secured the Conservative Party’s support for the runoff, making it virtually impossible for Antanas Mockus of the Green Party to win the election. Whatever could be the future of ‘Uribismo’, stability and continuity now appear guaranteed in Colombia. And that is good news for gold miners with a Colombian strategy.

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3
Feb

PITY THE SOUTH AFRICAN GOLD MINER

   Posted by: Mr. Gold    in Uncategorized

Earlier this week, ANC’s Youth League issued a policy statement, warning the mining industry of “nationalization [which] may involve expropriation with or without compensation”.

Pity the South African miner. Every day he walks into a dark cage which drops him with a screech some 10 thousand feet (3250m) underground. He then takes a little yellow train which will rattle him and his comrades far away from the shaft. When the train arrives he will walk on in dim light, occasionally plunging his muddy boots into puddles of black water. It is over 40 degrees Celsius (100F) and the humidity rarely drops below 80%. Before reaching the workout, he may need to trudge up a narrow, cramped corridor, slipping on unrelenting scree. It is dark, dusty and dangerous. Packs of explosives lie around, live wires occasionally hang from the walls and many of his comrades are HIV-positive. Worse, several others may have perished in recurrent fall of ground accidents (euphemistically referred to as ‘FOGs’). When he finally reaches the mine face, he will stoop to wield a heavy, yet shaky drill, poking it into the hard, hot rock.

It is a relief to see the sunlight back on the surface. And yet, there has not been much of a relief for South African mining industry. Its safety record has been slow to improve. Attempts to mechanize the older mines have only led to very marginal improvements. And then, there is the lingering threat that the genuine efforts of these brave men (and some women) may again be annihilated by the country’s politics. When in May 2002 the first draft of a new black empowerment regulation was leaked to the press, within several days Johannesburg Stock Exchange index lost nearly 9% of its value. Plans to combine South African giants with their North American counterparts had to be shelved. Averting much more damaging upheaval, the industry leaders engaged in a tortuous process of negotiations which led to the introduction of a new legislation and opened equity pools to business groups led by historically disadvantaged South Africans. Only slowly in this process did the government activists understand that the high profile mining executives do not actually “own” the corporations they managed.

There is no denying that even today the leftist activism retains attractiveness among South Africa’s idealistic youth. South African museums extol the bravery of local Communist heroes in the 1960s and 1970s. Not surprisingly, many ambitious firebrands perceive the legacy industry – mining – as the target of the self-styled “distributive justice” and the State as the main tool to implement such a process. Unfortunately, the experiences of nationalized mining in Africa – from Zambia to Congo – are pitiful. Former mining regions are littered with crumbled installations, devoured by rust, long abandoned by the supposedly salutary hand of the State. If the enrichment of Black Empowerment group in post-2002 South Africa has quite not led to improved conditions in the townships, further ‘nationalization’ threats to the mining industry are not a panacea either.

Where does it leave the South African gold stocks? Since early December, the Johannesburg Gold Stock Index has lost 21% of its value and is now at the level where it was two years ago (February 2007), despite the fact that gold itself – denominated in South African Rand – has since appreciated 74%. Something is clearly wrong.

When South African mining industry ruled the global gold market, its companies were viewed first and foremost as value investments. Deep level shafts required heavy upfront capex and investors demanded a payout from day one. Not surprisingly, the dividend payout ratio was high. The model was jeopardized by the success of North American growth stocks in the 1980s, many of which benefited from the heap leach revolution. These US and Canadian stocks offered no dividends, but reinvested earnings into further acquisitions, promising ‘jam’ tomorrow. For as long as the sheer scale of South African towered over the competition, it did not seem to matter. But the days when one South African company accounted for over 50% of global gold production are now long gone.

South African stocks remain cheap. At current gold prices, and unusually for gold equities, Gold Fields and Harmony have leading P/CF ratios in single digits. AngloGold Ashanti is valued slightly higher – probably due to its portfolio’s lower exposure to South Africa. Some of this discount certainly reflects the higher-than-average cash costs of these producers, at the current ZAR/USD exchange rate.

Although the US dollar has been strengthening recently, the Rand has proved rather resistant. More importantly, later this year the South African mining is facing two step changes which will negatively affect its cost base. First, as of April 1, ESKOM will further hike its power tariffs, an event which has to be taken in the context of overall mining inflation. Then, in May, a new royalty regime will be introduced. The formula is structured in a way that even a loss-making company would have to pay a minimum 0.5% royalty. On average, a profitable enterprise is expected to pay around 3%.

The market expectations are low. The onus will be on the delivery by the management – Harmony is expected to reduce its overreliance on South African risk by proving that it can successfully manage its operations in Papua New Guinea and possibly acquire other assets overseas. Gold Fields – probably the biggest disappointment of the recent years – has to come to grips with the damaging seismic events on its mines. AngloGold Ashanti is expected to advance the turnaround of the former Ashanti assets in Ghana and Tanzania and accelerate the hedge book reduction. The success – or failure of these initiatives is what the investors should watch out for, not the politically marginal posturing by youthful, over-excited demagogues. Unless, of course, ANC bigwigs have used the Youth League upstarts to sound out broader opinion. This time at least, the market didn’t seem to be bothered.

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