AngloGold braces for tougher times

While the gold sector adjusts to deal with a lower commodity price, taking the knife to jobs, operations and budgets, AngloGold Ashanti has had a few of its own issues to contend with.

With two mines about to come online and a new chief executive at the helm, dealing with the challenges a lower gold price affords hasn’t been an easy feat for the bearish producer.

AngloGold Ashanti chief executive Srinivasan Venkatakrishnan (Venkat) recently explained that, while the group remains positive about gold’s long term prospects, in the short to medium term the group expects to endure heightened turbulence.

"It is best to be prepared for a low gold price environment so you are better positioned to tackle an upside in the gold price," he said.

In order to do this the group is using a gold price of $1,100 as its base for planning and honing in on costs and revenues.

 “Our revenue enhancement efforts are focused on stripping out unprofitable production and bringing our Tropicana and Kibali projects to production in the coming months,” Venkat said.

“These two important new mines are expected to contribute approximately 550,000oz to 600,000oz of new annual production next year at below our current average cost, improving the group’s cash cost profile.”

On the cost side, the group has already set its Project 500 initiative in motion, aiming to eliminate roughly $500 million from operating costs within the next 18 months.

AngloGold Ashanti executive vice president Graham Ehm said the company is “well underway” when it comes to achieving operating and in-direct cost savings, as well as “sustaining capital expenditure over the next 18 months”.

“Although the gold price has tumbled, and has brought about a sense of despair and panic, I see an opportunity for optimism and for the industry to re-adjust to a lower gold price future,” he said.

Ehm conceded that the company “saw this coming”.

“Over the last six months, as the gold price was coming down we stopped recruiting, we fortunately had Tropicana [gold mine] so we could move people around and redeploy,” he said.

AngloGold Ashanti is the world’s third largest gold producer with 21 operations on ten continents.

Producing 3.94 million ounces globally last year, of which Australia contributed 7 per cent, the company is expecting 2013 to be even bigger setting a guidance of between 4 to 4.1 million ounces.

But the miner’s second quarter results have been dragged down by the falling gold price which has dropped by almost a quarter since January.

Taking a $2.4 billion hit, AngloGold Ashanti has plans to cut 40 per cent of its 2,000 management jobs globally and more than halve 2014 corporate costs.

"We've taken the decision to prepare our business for a volatile gold price environment," Venkat said.

"We expect that during the last quarter of this year, after taking into account the notice periods that need to be provided to affected employees, approximately 35-40 per cent of these roles will have been removed," the company told Mineweb.

The group’s total cash cost remains stubbornly on the higher end of the spectrum, coming in at $898 per ounce for the second quarter, in line with guidance.

Ehm explained the gold price fall is motivating every producer “to examine how they can protect and grow margins and returns to generate safe and sustainable free cash flow”.

The company has flagged potential savings and efficiency improvements could amount to $482 million next year and have anticipated a fall from the $240 million forecast for corporate costs this year, to between $120 million and $140 million in 2014.

Ehm explained capital expenditure is being redirected to higher quality assets, spending is being cut and projects which yield lower returns are being shelved.

He said about 70 roles have been cut from Australia but with AngloGold’s newest development, the Tropicana gold mine in Western Australia, coming online redeployment has been a real option, lowering the total number of redundancies to 27 workers.

 

Going Troppo

tropicana.jpg

Entering into a joint venture with Independence group, AngloGold holds a 70 per cent interest in the Tropicana project which is due to pour first gold this month.

“Tropicana is a significant new, low-cost mine in an emerging gold province and will improve the quality of AngloGold Ashanti (and Independence Group's) portfolio; we continue to make good progress with out partners on a project we've taken up the value curve, from discovery to commissioning,” Ehm said.

Located 300 kilometres northeast of Kalgoorlie, the operation was originally forecast to begin production in December this year, but with commissioning already underway ramp-up has now been moved forward to occur in the December quarter.

“First gold is obviously a significant milestone, but achieving a smooth ramp up and steady state production is just as significant,” Ehm said.

“We’ve modelled Tropicana against other similar operations to generate a ramp-up profile and expect to be at 91 per cent availability within four to five months.”

Despite moving ahead of schedule the estimated capital expenditure for the project is unchanged at between $820 and $845 million.

The company is aiming to achieve a production rate of between 470 000 to 490 000 ounces in the first three years.

Tropicana has been on the radar of many analysts for some time now, after the joint venture partners announced in December last year that they had upped the total estimated resource to 7.89 million ounces of gold.

At the recent Diggers and Dealers conference Ehm said the successful development of “new lower cost operations” is critical for growing margins.

It is estimated cash costs for Tropicana will be between $590 and $630 per ounce.

OreSample_002.jpgBuilding the operation from scratch has allowed the joint venture partners to re-engineer grade control at the site, reducing manual handling and thus lowing injury risk and improving accuracy.

“Now samples come off the rig onto a rack mounted on a light vehicle which then transfers them to the laboratory where they enter an automated sample preparation process,” Ehm explained.

During this process the company also generates infrared spectral data which shows which samples hold gold and which are waste.

The process change has reduced the number of people needed from nine to two, sped up turnaround and reduced assay costs, Ehm explained.

“It also provides us with additional data to feed into our integrated planning system,” he said.

Innovating Tropicana’s integrated planning system has also enabled AngloGold to more accurately predict process plant performance enabling it to be “proactive rather than reactive” when it comes to the mill circuit and maintenance schedules, Ehm explained.

Exploration takes a hit anglogold-ashanti-tropicana-drill.jpg

AngloGold is also adding its name to the long list of miners who are shying away from committing to exploration programs, halving exploration spending for 2013.

“We don’t want to cut back fully on exploration programs; we’ve invested for a good five years in building a good global greenfields exploration platforms,” Ehm said.

“Although we’re going to pull back we’re not going to decimate it.”

Reducing its exploration focus to Colombia, Australia and Guinea the company will, for the time being, withdraw from 13 other jurisdictions.

For the rest of 2013, the group expects to spend $327 million, compared to the previous guidance of $377 million. And, in 2014, it plans to reduce this spend even further to between $150 million and $175 million, Mineweb reports.

"We are looking to suspend speculative exploration, where the goal is the discovery of the world's ext gold belt. The junior explorers are also struggling for financing in this market so, to put in money in order to trade that market doesn't make logical sense in the current environment," Venkat said.

 

Venkat took on the top job in May when former CEO Mark Cutifani left the company to head up Anglo American and despite all the gloom he says 2014 will be better.

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