Takeover Target?, page-8

Can we wait to see if McPhillamy's DA gets approved first? On the RRL website they said CY2021 but in the last quarterly they said H1CY2022.

I still can't get over the Tropicana numbers. An OzPOG over A$2,500 and AISCs over A$1,100. Production (30%) of 130,000ozpa giving an inflation protected return for the next 15 years of over 20%pa (before tax). What other investments offer that? Even Ponzi schemes offer returns less than half that.

Has anyone noticed our Tropicana JV partner Anglogold's share price has risen 25% over the past 3 weeks? That's about A$3b in MC. They could buy us easy.

They only just announced a very tough Q3 result. The share price increase seems to be more to do with it hitting rock bottom.

https://seekingalpha.com/article/4469932-anglogold-ashanti-another-tough-quarter-for-this-senior-producer

Notice the massive increase in AISCs worldwide. Australia actually got off light. World major miner production has been down in CY2021 supporting the POG. Some projects (especially Latin America) may be shelved unless the POG increases.

A takeover at A$3.00ps would a be MC of ~A$2.25b. Given A$903m for the Tropicana (30%), they'd pick up Duketon and McPhillamys for ~A$1.35b. Ridiculous.

I don't want a takeover. The underlying value must eventually become reflected in the share price. Patience.

US NFP gets announced on friday night.

Next FOMC meeting is on 15Dec21. Powell already announcing he wants to accelerate taper. He should've started 7 months ago. Will he crash record heavily leveraged equity markets before Xmas? Enter Omicron.


AngloGold Ashanti: Another Tough Quarter For This Senior Producer
Nov. 16, 2021 11:44 AM ET

Summary

AngloGold Ashanti released its Q3 results last week, reporting quarterly gold production of ~613,000 ounces at all-in sustaining costs of $1,362/oz.

This translated to a sharp decline in production from the year-ago period, with costs soaring due to fewer ounces sold and increased capital expenditures across the portfolio.

At a share price of US$21.60, AngloGold Ashanti trades at 10x FY2022 earnings estimates, which is not unreasonable for a multi-million-ounce producer with a decent development pipeline.

However, with the stock up more than 45% from its lows, I would not be chasing the stock above $22.00 per share.

We're more than three-quarters of the way through the Q3 Earnings Season for the Gold Miners Index (GDX), and one of the most recent companies to report its results was AngloGold Ashanti (AU). Unfortunately, while most producers posted flat production offset by lower margins in Q3 due to the weaker gold price, AngloGold saw a massive decline in production, which led to a significant decline in all-in sustaining cost [AISC] margins and free cash flow. This was partially related to higher capital expenditures, but also due to much weaker operational results than planned at Obuasi. At 10x FY2022 earnings estimates, the stock is not expensive, but I believe there are better bets elsewhere in the sector.

AngloGold Ashanti ("AngloGold") released its Q3 results last week, reporting quarterly gold production of ~613,000 ounces, a more than 25% decline from the year-ago period (~837,000 ounces). This sharp drop was partially due to the divestment of its South African operations, but even on a continuing operations basis, production slid by 17% (~613,000 ounces vs. ~741,000 ounces). Given the significant decrease in metal sold combined with a massive increase in capital expenditures, AISC soared to $1,362/oz vs. a much more respectable figure of $1,006/oz in the year-ago period. Let's take a closer look at the results below:

As shown in the chart above, gold production declined sharply from last year's levels but managed to hold the line on a sequential basis in Q2 thanks to higher production at Geita, Siguiri, Kibali, and Tropicana, as well a sharp increase in production at AGA Mineracao. However, on a year-over-year basis, results have been quite disappointing, with lower production from Obuasi not able to offset lower grades at other operations. During the quarter, 57% of production came from West Africa, and production was down relative to Q3 2020 levels at every asset except for Kibali and Siguiri.

Given the sharp decline in production in Africa, it's no surprise that costs were higher, with AISC soaring to $1,119/oz in Africa, up from $903/oz in the year-ago period. The costs weren't much better elsewhere in the portfolio, with costs at Latin American operations nearly doubling to $1,805/oz (Q3 2020: $963/oz) and costs in Australia increasing more than 10% to $1,363/oz. In South America, the significant increase in costs can be attributed to the tailings compliance program in Brazil, a significant investment to convert existing tailings storage facilities to dry-stack facilities at all mine sites. Unfortunately, this project is taking place at a time of labor tightness due to COVID-19, translating to higher costs than planned.

While the sharp increase in costs in South America is very disappointing and weighing on company-wide free cash flow ($17 million in Q3 2021 vs. $336 million in Q3 2020), these costs will improve, and the current AISC are not representative of future costs at these operations. Meanwhile, though costs in Africa came in much higher than planned, this was partially attributed to Obuasi, where costs came in at $2,541/oz due to much fewer ounces sold than expected. This was related to a suspension of mining activities at Obuasi following a fatal incident in late Q2. Meanwhile, capex at Iduapriem increased due to waste stripping, translating to a sharp increase in costs when divided by fewer ounces sold in the period.

The good news is that Africa should bounce back nicely in H2 2022, with Obuasi mining restarted in the quarter and the asset set to begin contributing again in Q1 2022. The company hopes that the ramp-up to 4,000 tonnes per day will be complete by July, translating to FY2022 production of ~250,000 ounces at $1,300/oz, a sharp decline in costs from Q3 2021 levels. Looking ahead to the 2024-2028 period, Obuasi is projected to produce ~425,000 ounces at $925/oz at the mid-point of guidance, which will lead to a sharp increase in production from African operations at much lower costs than FY2021 levels. So, while it's easy to be disgusted with costs in the quarter across the portfolio, it's important to put in perspective that capex doubled year-over-year ($306 million vs. $146 million) and production was down sharply, which has led to much higher costs temporarily.

Moving over to the financial results, all-in sustaining cost margins fell off a cliff, sliding from $911/oz to $423/oz. This was partially related to the difficult year-over-year headwinds, with AngloGold's average realized gold selling price declining nearly 8% to $1,785/oz. However, this was mostly related to the increase in AISC, up 35% year-over-year. Given the much lower margins combined with a significant increase in capital expenditures, free cash flow slid to just $17 million in Q3 2021, down more than 90% from $336 million in Q3 2020. Once again, it's easy to be disgusted with these results, and they are certainly not great results, but this is about as bad as it gets for AngloGold Ashanti from a comp standpoint, given that it was lapping insurmountable year-over-year comps and had a very difficult quarter operationally.

The results on a year-to-date basis show that free cash flow is sitting at -$8 million, down from $501 million in the first nine months of 2020. However, capital expenditures are up nearly $300 million to $767 million, with this being a year of much higher investment for AngloGold. If we adjust for the increase in capital expenditures, free cash flow would be sitting at $267 million vs. $513 million in the year-ago period, a much more respectable figure. The one negative piece of news, though, was that the company is experiencing inflationary pressures like the rest of the sector, and these are likely to persist. So, while costs will normalize as production increases and Obuasi begins contributing more in FY2023, we could see a 3-5% permanent increase in AISC due to inflationary pressures relative to FY2020 levels.

So, was there any good news in the quarter?

The one brilliant move by AngloGold Ashanti in an ugly year was the company's low-ball bid for Corvus Gold (KOR) into a very weak market for gold developers. The company bid ~$370 million for the Nevada-based developer, helping to reduce its reliance on Tier-2 and Tier-3 jurisdictions if it can bring Corvus' assets online later this decade. Corvus owned the North Bullfrog, Lynnda Strip, and Mother Lode deposits, and it increased AngloGold's handholds in Nevada, with the company already owning the Silicon Project in Nevada. AngloGold looks to have to paid approximately 0.70x P/NAV for Corvus, which is a very fair valuation. I like that the company offered a minimal premium, given that there was a low probability of another suitor coming in on the deal. Let's take a look at AngloGold's earnings trend below:

As shown in the chart above, AngloGold posted one of the most impressive increases in annual earnings per share last year, with annual EPS soaring from $0.91 to $2.17. Unfortunately, given the much weaker results this year, annual EPS is expected to decline by more than 20% to $1.56 - $1.62. Previously, the stock looked dirt-cheap given that it was expected to deliver closer to $2.00 in annual EPS before its guidance cut, which would have left the stock trading at barely 10x current earnings. However, given the lower earnings, AngloGold trades at more than 13x FY2021 earnings estimates.

The good news is that annual EPS is expected to recover next year, with annual EPS estimates sitting at $2.02, just shy of FY2020 levels. Based on these estimates, AngloGold trades at less than 11x FY2022 earnings estimates, which is not expensive for a multi-million-ounce producer. However, it's not cheap either, unless the company can execute on its growth plans. Personally, I see Endeavour Mining (OTCQX:EDVMF) as much more reasonably valued, trading at a similar earnings multiple, but with significantly lower costs. One could argue that AngloGold deserves a premium for its more diversified operations (more mines and not entirely reliant on Africa). However, I would argue that Endeavour's industry-leading margins make up for its less favorable jurisdictional profile.

So, is the stock a Buy?

AngloGold is neither cheap nor expensive at just below 11x FY2022 earnings estimates at a share price of $21.60. Still, I generally prefer to buy high-cost producers in unfavorable jurisdictions at less than 9x forward earnings. Meanwhile, from a technical standpoint, AngloGold Ashanti is up more than 45% from its lows, and in the upper portion of its one-year trading range ($14.60 to $25.55). This doesn't mean that the stock can't go higher, but I don't see this as anywhere near a low-risk entry for the stock. In order for me to get interested in the stock, AngloGold would have to dip below US$18.00 per share, where it would trade at less than 9x FY2022 earnings estimates.

AngloGold has had a very rough year compared to its peers, and while some of this was due to being up against tough year-over-year comps, operational performance has lagged peers, with AngloGold being one of the only million-ounce producers to cut guidance. In fact, Kirkland Lake Gold (KL) and B2Gold (BTG) are on track to beat guidance. Having said that, AngloGold should see material improvements in its costs, margins, and free cash flow generation looking ahead to 2023, and the company did make a solid acquisition earlier this year. However, at nearly 11x FY2022 earnings estimates and with the stock a little overbought short-term, I believe there are better opportunities elsewhere in the sector.