MINING MARKET & INVESTMENT NEWS – INVESTMENT COMMENTARY — Anglogold leads the way in international gold sector

An African lion roared on Wall Street this summer to signal the arrival of Anglogold as the newest listing on the New York Stock Exchange. Simon Beardsmore, gold analyst with T. Hoare & Co., says the streamlined gold giant is now better-positioned to secure growth opportunities in an increasingly competitive global environment.

“Despite already being the largest gold producer in the world, Anglogold has a strategic imperative to diversify away from its South African roots as it builds its international profile,” Beardsmore notes in a research report. “The combination of technical expertise in underground mining, strong cash flows and an un-geared balance sheet gives Anglogold a secure platform for international expansion, while the present depressed market for resources in general could generate attractive opportunities.”

In his report, Beardsmore notes that Anglogold’s annual production of 7 million oz. is almost as much as Barrick Gold and Newmont Gold combined. He points out that real cost reductions are being achieved at the company’s mines, and that these achievements are being accelerated by the declining rand. He tempts bargain-hunters by pointing out that the giant gold producer’s market rating is at “50-60% that of Ashanti Goldfields, and even less compared to other major international gold miners, [which] leaves significant upside potential for Anglogold.”

Created from the merger of Anglo American’s gold mining companies, Anglogold is expected to produce 7 million attributable ounces this year, and 95% of that total is being derived from mines in South Africa. The company has also streamlined its corporate structure and taken steps to replace outmoded management systems with ones better suited for the next century. Beardsmore believes these changes, together with a more international focus, should ameliorate investor disaffection and help shrink Anglogold’s discount to its international peers. Accordingly, he rates the company a buy.

“Anglogold trades at a significant discount to the world’s other major gold producers,” Beardsmore writes. “As the magnitude of its achievement in producing some of the world’s most profitable gold from between 2 km to 4 km depth for as little as US$160 per oz. becomes more widely recognized, we expect the discount to narrow, offering investors considerable appreciation.”

Beardsmore notes that the company’s potential growth and low cash costs are underpinned by the highest dividend yield (about 5.5%) in the sector. “This gives shareholders an immediate and tangible reward for their support, in contrast to the promise of future returns offered by some of the other international gold producers.”

Having sold off some of its higher-cost mines in South Africa, Anglogold now has core production of some 6 million oz. per year (at an estimated cash cost of US$250 per oz.), most of which is produced from mines in the Free State, Klerksdorp and West Wits goldfields. Additional attributable production is derived from the company’s share of Driefontein and its non-South African operations in Mali and Namibia.

Beardsmore estimates that total average cash costs will fall to US$244 per oz. this year from US$285 in 1997, though he cautions that costs are incurred in weak rands, which means U.S. dollar costs reduce in line with the weakening exchange rate. “Further depreciation in 1999 is likely to cut costs to as low as US$225 per oz.,” he adds.

The report states that Anglogold has attributable ore reserves “of almost 150 million oz., within a total resource base of over 240 million oz.” The overwhelming majority of these reserves and resources exist near mines in South Africa’s Witwatersrand Basin.

The report also includes a review of education and training programs aimed at improving worker productivity. Beardsmore says the effect of these programs can be dramatic.

“At Western Deeps, for example, gold production per employee has increased over 50% from 4.2 oz. in the first quarter of 1997 to 6.7 oz. in the first quarter of 1998,” he writes. “The effect on unit costs of these productivity improvements is striking; costs at Western Deeps have declined by one third from US$332 to US$219 per oz.”

Singled out for special attention is Anglogold’s largest producer, the No. 8 shaft at Val Reefs (also known as the Great Noligwa mine), which Beardsmore says “ranks with some of the world’s great surface mines,” even though production is from a depth of 2.3 km below surface. This year, the No. 8 shaft is expected to produce 1 million oz. at a cash cost of just US$188 per oz.

“The March 1998 quarter’s production of 292,000 oz. at a cash cost of US$153 per oz. suggests that this target is eminently achievable and could well be exceeded,” he adds.

On the financial front, Anglogold’s strong balance sheet and around US$700 million per year of operating cash flow “should provide ample scope to raise debt finance for overseas acquisitions,” Beardsmore concludes. “This financial firepower, backed by Anglogold’s technical underground mining expertise, makes most of the larger Australian gold miners and a significant number of North American producers potential acquisition candidates.”