Africa’s leading mining group and world’s third largest gold producer ‒ AngloGold Ashanti Limited ‒ views its exploration initiative in Eritrea as being at a similar stage as when it moved into Colombia, where it had so far delineated a resource of 12.3Moz of gold at the La Colosa project.
Miningmx reports that this is according to AngloGold Ashanti senior vice-president for global exploration Roric Smith who said:
The risk is very high and we are not sure where it will all end up, but Eritrea represents a significant opportunity.”
Interviewed after the AngloGold Ashanti March quarterly presentation here, Smith said that while AngloGold was a relative latecomer to the country, the group had immediately committed considerable resources to its exploration effort.
The attraction of Eritrea – and adjacent countries where AngloGold was also exploring such as Egypt, Saudi Arabia, Djibouti and Ethiopia – was that it lay on a geological formation called the Nubian shield. The Nubian shield is highly prospective for gold deposits, but very little exploration work has been carried out so far because of the region’s turbulent political history.
In Eritrea, AngloGold has so far completed a 10,000 line kilometre airborne electromagnetic, magnetic and radiometric survey at its Kerkasha and Akordat North exploration licences.
The preliminary results were being interpreted and surface geochemical programmes had started. Smith said exploration drilling could start in the fourth quarter of this year.
AngloGold CEO Mark Cutifani said:
Eritrea is one of the most prospective new frontiers for the gold mining industry and there is still plenty of ground available for exploration.
“We have picked up around 4,000sq km of ground so far and have other applications in. Our strategy in the area is one of organic growth, and is not an acquisition-driven strategy.”
AngloGold’s projects in this region are being carried out through a 50/50 joint venture set up in 2009 with a company called Thani Dubai Mining, which is headquartered in Dubai.
AngloGold heading for golden age
Market fundamentals support a gold price of $1,500/oz, while any price above that is investors taking a view on the financial markets, says AngloGold Ashanti CEO Mark Cutifani.
Explaining on Wednesday why the gold price has blasted to new highs in the past month while gold equities have come under pressure across the board, Cutifani told those attending a presentation of the company’s March quarter results that investors might be questioning whether the higher gold price was backed by fundamentals.
“People are not quite sure if the gold price is going to stick at these levels,” said Cutifani. On a company basis, he said more and more investors would focus on value creation.
“Hence the removal of the hedge book and restructuring,” he said.
The world’s third-largest gold producer, AngloGold Ashanti spent $2.6 billion eliminating its hedge book. As one of the few gold producers still hedging their production, AngloGold was not taking advantage of rising gold prices.
These forward contracts often benefit a gold company in times when the gold price is exceedingly low but are a disadvantage to the company when prices rise as they have this year.
Having closed out its hedge book at a cost of $1,300/oz late last year, the company has full exposure to the record gold prices. And the move is already paying off.
In the three months to the end of March, which was the first quarter without the hedge book, cash flow generated from the company’s operating activities was $513 million while free cash flow – after capital expenditure, finance costs and tax – was $229 million. The company, which is targeting cash flow of $2 billion for the year, reported negative free cash flow for the preceding three quarters.
“This is the first quarter in a long while that we have produced free cash flow,” said Srinivasan Venkatakrishnan, AngloGold Ashanti’s chief financial officer. The increased cash flow allowed the company to reduce its net debt by a further 15% to $1.1 billion.
The company also delivered solid financials. Adjusted headline earnings tripled to $0.53 a share in the March quarter from $0.17 a share for the corresponding three months of last year. This was due to improved year-on-year performance from the South African mines as well as the full impact of higher bullion prices.
South African production came in at 401,000 ounces at a total cash cost of US$637/oz for the quarter. Total production was, however, almost 4% lower at 1.039 million ounces (Moz) compared with 1.079Moz in the same quarter last year.
Total cash costs of producing gold were up 14% to $706/oz from $619/oz last year. This is slightly above the company’s first-quarter guidance of 1.04Moz at $675/oz to $700/oz.
Looking ahead, the company provided guidance for the second quarter of 1.09Moz at $760/oz, assuming an exchange rate of R6.75/$ and Brent crude price of $120 a barrel. This suggests a 5% increase in production and a 5% hike in costs quarter on quarter.
Venkatakrishnan said that the company’s earnings were particularly sensitive to currency fluctuations and the oil price. He said a 1% swing in local currencies against the US dollar resulted in a $5/oz addition to cash costs while a $10 move in the Brent crude price would add $6 to cash costs.
But Cutifani is exceptionally optimistic about the company’s future, despite the challenges faced by gold companies globally. “We are generating free cash flow and see enormous potential in upcoming projects,” Cutifani said.
Besides its Tropicana project in Australia, which is currently being developed, the company has a significant interest in an Egyptian project and is securing land positions in Saudi Arabia, Eritrea and Ethiopia. In fact, the company has put a $5.9 billion value on four of its more advanced greenfields exploration projects. These include Tropicana, Mongbwalu in the Democratic Republic of the Congo, as well as Gramalote and La Colosa in Colombia.
AngloGold Ashanti is a firm believer in adding ounces through exploration rather than through acquisition. The company is currently adding ounces at US$300 an ounce, while Cutifani said between $500 and $1,000 was being paid for each ounce added through acquisition.
“Exploration is a significant value contributor in our industry,” Cutifani said.