AngloGold output up, hedge cut

Johannesburg - AngloGold Ashanti has cut 4.4 million ounces out of its hedgebook, narrowing the discount to the spot price it will receive this year and reducing earnings for the second quarter by $1.1bn.
AngloGold, one of the world's largest gold producers, said its second quarter gold output and cash costs were better than it had initially forecast for the second quarter.

The company has raised $1.7bn in a rights issue towards restructuring its hedgebook, which this year would have resulted in a 47% discount to the spot price for the the second half of 2008, and tipped the company into a run of losses.

"What AngloGold has essentially done is take the bulk of the pain in one hit," said a gold analyst, who declined to be named. "They've gone from three quarters of losses to one quarter. They're over the hump."

AngloGold has 6.9 million ounces left on its hedgebook, a 39% reduction from the 11.3 million ounces at the start of 2008.

"The company capitalised on a weaker gold market during the second quarter in order to execute a combination of delivery into and early settlement of non-hedge derivative contracts,? AngloGold said in a statement.

"The restructuring will, however, result in the realisation of an incremental pre-tax loss of approximately $1.1 billion during the second quarter and therefore will translate into a negative received price," it said.

The giant bite out of the hedgebook means there is a much smaller target of just 800 000 oz left to meet the target set by CEO Mark Cutifani earlier this year.

Cutifani, who took over AngloGold Ashanti in October, made the reduction of the hedgebook one of his priorities.

"The completion of our landmark rights issue has given us the flexibility to restructure our forward commitments in gold and facilitate much greater spot price participation going forward," he said.

The discount to the spot price, assuming $900/oz, will be 17% for the remaining half of 2008. If the rest of the restructuring goes to plan, the discount will fall to just 6% in 2009.

"This will be the beginning of the start of the re-rating of the stock. Taking into account the rights issue, the stock has moved sideways. It was the right thing to do," the analyst said.

Srinivasan Venkatakrishnan, the chief financial officer, said the company would be much stronger financially in 2009 after a year which was always seen as a tough one for the company because of the unfavourable hedgebook, which coincided with reduced gold output from the Geita gold mine in Tanzania.

"Next year, we'll have a six percent discount to spot, better group gold production, with Boddington coming on line, and more uranium production onto the spot market, which will all translate into a pretty good kicker for earnings," Venkatakrishnan told Miningmx.

"If we can continue to deliver and beat our production guidance... the margin is opening for gold and uranium in 2009, yes, you'll be looking at a completely different income statement going into that year," he said.

In coming years, AngloGold will "restructure and smooth out the profile" of the hedgebook. "We'll do that one step at a time. The first thing is to address the hedge reduction in 2008 and 2009," he said.

AngloGold has produced three percent more gold than its forecast 1.25 million ounces in the second quarter of 2008. Cash costs improved by $30/oz over the guidance, coming in around $434/oz.

AngloGold is reviewing its portfolio of assets, tightening up ownership where it can, taking strategic positions in companies in favourable jurisdictions and selling off assets it deems no longer core to its business.

It sold its 50% stake in Nufcor International Ltd, the uranium trading company, for $50m. It has retained its 100% ownership of the Nuclear Fuels Corporation of South Africa (Nufcor SA) calcining business, which processes yellow cake, a product containing 75% uranium oxides which increasing numbers of companies in the country are beginning to produce.

AngloGold used that $50m towards cancelling a million pounds of uranium forward sales, a one third reduction of contracts on its books at the start of 2008, freeing the company to be more exposed to the higher spot prices from the start of 2009.

"Our view is that most utility companies have secured their uranium for 2008, but we think there is a squeeze coming in 2009 when a large chunk of the one million pounds would have matured," Venkat said.

What it means for AngloGold is that around 300 000 pounds of uranium will come onto the spot market this year against the initial contracts for virtually all production to be sold into contracts at prices well below the spot price.

Another 700 000 pounds will be sold at spot prices next year, he said.

The spot price is currently $60/lb, according to industry website, The Ux Consulting Company.

AngloGold will double uranium production to two million pounds by 2012, Cutifani has said.