AngloGold Ashanti: Fitch Affirms 3rd largest global gold miner at ‘BBB-‘ with stable outlook
Fitch Ratings has affirmed AngloGold Ashanti Limited’s (AGA) Long-Term Issuer Default Rating (IDR) at ‘BBB-‘ with a Stable Outlook.
The affirmation reflects the company’s position as the third-largest global gold miner and its diversified asset base.
AngloGold Ashanti’s rating of ‘BBB-‘ is well-positioned relative to other investment-grade peers rated by Fitch, such as Kinross Gold (BBB/Stable) and Yamana Gold (BBB-/Stable).
According to Fitch, temporary operational weaknesses are offset by a low leverage profile, supporting the stable outlook.
The rating factors in the group’s presence in geographies with higher operating environment and country risk, such as Tanzania, Guinea, Ghana, Brazil, the Democratic Republic of the Congo (through a JV) and Argentina.
It also factors in AGA’s lack of commodity diversification, relatively high cost of mining operations and relatively short operating mine life of nine years (11 years including Kibali in DRC).
AGA’s all-in sustain costs were exceptionally high in 9M21, being in the fourth quartile of the global gold cost curve. “We expect costs to normalise to a more sustainable level by 2023.”
Fitch does not view the operating environment as a constraint for the current rating, despite the weak economic environment of most of the countries in which AGA’s mines are located.
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This is because AGA is a global commodity producer with a well-diversified asset base across 10 operations selling gold in world markets, with strong access to international financial markets.
KEY RATING DRIVERS
Large Diversified Goldminer: AGA is the world’s third-largest gold producer (3 million ounces (moz) in 2020) though markedly smaller than world leaders Newmont Corporation and Barrick Gold Corporation, which produce 6.0moz and 4.8moz of gold, respectively. We expect AGA to maintain its production at between 2.5moz-3.2moz (including Kibali) in 2021-2024, focusing on operational efficiencies at its existing mines and successful ramp-up of Obuasi in Ghana.
Increased Costs Reflect Weak Operations: As of 9M21 AGA’s cash cost increased by 28% yoy to USD977/oz and AISC increased to USD1,343/oz from USD1,004/oz. The rise in cash costs was driven by high single-digit inflation across all geographies and lower ore grades at most of the mines, due to overall operational inefficiencies and various mine-specific challenges. Furthermore, the delay in ramp-up at Obuasi, and Covid-19 restrictions causing labour shortages, has affected Ghanaian, Brazilian, Australian and Argentinian operations, with the latter operating at reduced capacity.
Additionally, sustaining capital expenditure has been rising due to a reinvestment programme across the portfolio and the conversion of tailings operations to dry-stacking operations in Brazil (USD60/oz cost impact).
Costs to Normalise by 2023: We expect the AISC to remain elevated in 2022 mainly due to inflationary pressure on energy, labour and logistics costs, and to then decline to around USD1,200/oz by 2023 and around USD1,100/oz in 2024, driven by higher grades and lower stripping ratios following the implementation of a cost-efficiency programme, as well as Obuasi’s ramp-up and the completion of the tailings conversion programme in Brazil. The company’s control of its cost structure will be fundamental for us to maintain the current rating.
Financial Profile Supports Stable Outlook: AGA had a conservative capital structure with a reported net debt/EBITDA of 0.4x as of 9M21. The upward revision of the dividend policy to 20% of pre-growth FCF was enabled as the company deleveraged more aggressively than anticipated, with high levels of cash and low gross debt anchoring the company’s financial metrics below it through-the-cycle target of adjusted net debt/EBITDA ratio of 1x in 2021-2024.
Exposure to Challenging Operating Environments: AGA’s main operations are in locations with relatively high country risk, such as Tanzania, DRC, Guinea, Ghana, Brazil and Argentina. Of its consolidated production, 25% comes from low-risk Australia. Future expansion in Colombia and in North America could help further diversify country exposure in the longer term. The challenging country mix is offset by the diversification of the company’s production in 10 operations, with one mine accounting for 20% of total production in our forecast and the rest for 4%-15%.
Continued Cash Lock-Up: AGA continues to experience difficulties in cash repatriation from its Kibali JV in the DRC. At end-September 2021, it had received USD124 million cash dividends but the attributable cash balance had risen to USD512 million. Barrick Gold, the operator of the Kibali JV, continues to engage with the DRC government. We assume USD150 million yearly dividends to be received from Kibali in 2021-2024, and do not factor any release of the USD512 million locked up in DRC in our forecast.
AGA’s significant working-capital outflows (USD200 million average in 2018-2020 and USD130 million outflow expected in 2022) are largely due to delays to VAT refunds locked up in Tanzania, export duties in Argentina, and ore stockpiling at Iduapriem in Ghana. We expect the company to offset its higher percentage of income tax payments against further VAT lock-ups and normalise working capital from 2023.
