Fundamentals to drive gold

Johannesburg - Gold mining companies have spent nowhere near what their counterparts in base metals have poured into new operations and this, along with other fundamentals, will kick gold back up to $1 000/oz, said Mark Cutifani, CEO of AngloGold Ashanti, the third-largest gold producer.

"In the gold sector we've seen anything near the sort of investment. The gold industry, from a production perspective, is in crisis," Cutifani told a results presentation.

In the last seven years, there's been a reduction production capacity. "We'll see another five years of decline in this industry," he said, adding the estimated rate of decline is around three percent a year for the next five years.

"On a fundamentals basis, the industry is not investing enough in future production. As a consequence, you'll also see increasing cost pressures on those operations going deeper, increasing strip ratios; mine grades have dropped 30% over the last five years."

"On fundamentals, we believe the gold price will be strong and certainly we've been encouraged in the fact it's performed relatively well through the current crisis," he said. "In the industry we are seeing a structural break and we believe the fundamentals will drive where the price goes."

The gold price has been driven by movements in the dollar, the oil price and inflation fears. It has also been driven by investment flows as people look for a safe haven for their cash in times of turbulence.

"Will it be next month, the next three months or six months that we'll see the fundamentals fully assert themselves and again move towards the $1 000 an ounce target we see as long-term sustainable?"

AngloGold is engaged in a two-phase programme to make it the most valuable gold company around, with the first phase due to end in February once it has settled a $1bn bond, that will be refinanced through asset sales, debt, bridging finance and possibly some internal cash.

As part of the first phase, in which safety was addressed, AngloGold has aggressively reduced its oversized hedge book, the largest of all gold producers, cutting nearly five million ounces out of forward sales, leaving it 6.3 million ounces by the end of September.

The target is to take the hedge book to six million ounces, but not much further than that so that AngloGold conserves its cash, Cutifani told Miningmx.

By cutting the size of discount to the spot price because of the hedge book to six percent from 26%, AngloGold will generate an extra $250m to $300m in revenue in the March 2009 quarter alone, assuming a gold price around $900/oz, he said.

"That's a significant milestone for our shareholders, a significant step forward in value creation in our business," he said.

Safety is a critical component of the reshaping of the company, not only from a moral and ethical stance.

In the September quarter, for example, the South African mines produced up to 18 000 less gold because of shut downs to address safety issues. The value of that gold is nearly $16m at the average spot price in the quarter of $872/oz.

The second phase, which has been drawn up during 2008, is the reconstruction and improvement of operations.

Using an analogy of a car, Cutifani said the bodywork and tyres were all sorted out, but now work was being done on the engine.

"AngloGold will be, on a total cost basis and margin basis once we've tackled the hedge book, the most competitive gold producer in the world," Cutifani said.

"With the second phase we'll demonstrate in the next 18 months we'll be the number one value creator in the gold space with the strategies we are putting in place."

AngloGold aims to boost productivity by a third over the next fives years and bring cost down in real terms by a fifth and improve recoveries.

"Those programmes will only just take us ahead of the nominal price increases you'd expect to see in our industry due to inflation," Cutifani said.

- Miningmx.com

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