AngloGold Ashanti Limited announced that it had agreed to sell its remaining South African operating assets to Harmony Gold Mining Company Limited.
The assets include the company’s West Wits operations and its mine waste and surface operations. The transaction is credit positive for AngloGold because it reduces the company’s average all-in sustaining cost (AISC) by about 2.4% and allows it to recycle capital into growth projects that have lower cost structures and higher returns on equity, such as the Obuasi redevelopment project in Ghana.
The announcement also reflects positively on the company’s disciplined approach to capital allocation. AngloGold reported an AISC of $1,002/ oz for the first six months of 2019, and we estimate that excluding South African operations, the AISC would be approximately $978/oz. A lower cost structure is important for gold miners because it allows them to better withstand periods of low gold prices without being reliant on adding new debt to fund negative free cash flows.
The most important asset that is being sold in this transaction is the mature Mponeng mine, which is the deepest gold mine in the world with a depth of about 4 kilometres and as of December 2018 had gold ore reserves of approximately 11.6 million oz. As shown in Exhibit 1, the mine has the highest cost structure as measured by AISC among AngloGold’s key goldproducing mines. With a remaining mine life of eight years, the company would have had to start planning and preparing for a large capital investment in the near future to extend the mine’s life if it was committed to keeping this asset in its portfolio
As Exhibits 2 and 3 show, of the approximately 1.6 million oz of gold produced by the company for the first six months of 2019, the South African operations accounted for 12.4%. However, these operations contributed only 6% of EBITDA over the same period given their higher cost structure
AngloGold will receive sale proceeds through three components, of which $200 million will be cash proceeds at the time of transaction closing. Deferred payment considerations include receiving $260/oz for production in excess of 250,000 oz per year from the West Wits operations. This condition will be effective over a period of six years starting from 1 January 2021 and could bring in approximately $100 million of cash by AngloGold’s estimates.
In addition, the company will receive $20 for every ounce of gold produced from underground reserves that are below existing mine infrastructure. The sale is consistent with the strategy the company announced in early 2019 to streamline its asset portfolio and optimise capital allocation through a divestiture of assets in South Africa, Mali and Argentina.
The Sadiola mine in Mali was sold in December 2019 for approximately $25 million with an additional $25 million (AngloGold’s share of the sale proceeds) to be received under deferred payment conditions. However, the transaction is still subject to condition precedent. The Cerro Vanguardia mine in Argentina is in a sales process. Cash proceeds will help the company to execute its expansion projects, all of which are outside of South Africa.
The upfront cash proceeds of $200 million from this latest sale are material in the context of AngloGold’s growth capital spending guidance for 2019 of $330 million to $360 million. The company’s overall scale of production and portfolio diversification will not deteriorate as a result of the sale because it is more than offset by the recent completion of the Obausi mine redevelopment. The mine achieved its first pour of gold in December and will ramp up production by the end of this year. The mine has a 20 year life and will have a steady-state production rate in the range of 350,000 oz to 400,000 oz per annum at an AISC of approximately $800/oz.