AngloGold Reports 3rd Quarter Results

The miner benefits from improved free cash flow

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AngloGold Ashanti Ltd. (AU, Financial) released the results of the third quarter on Nov. 14, showing a huge improvement in the free cash flow of the period.

In the third quarter, the free cash flow was $161 million, a 422% increase from the negative figure of the same period of 2015.

The third quarter free cash flow was even better than the total cash flow that the gold producer generated during the first half of 2016 when AngloGold Ashanti generated a free cash flow of $108 million.

The impressive improvement in free cash flow was mainly due to the increase in the price of gold. The average quarterly gold price increased nearly 19% on the London bullion market from $1,124.996 per troy ounce in third-quarter 2015 to $1,334.932 per troy ounce in third-quarter 2016.

Cash costs per ounce increased as well on a year-over-year basis, but it wasn’t enough to offset the positive impact that higher precious metal prices had on AngloGold Ashanti’s economics. In the third quarter, cash costs increased 8% on a year-over-year basis from $735 per ounce of gold produced in the third quarter of 2015 to $797 per ounce of gold produced in third quarter of 2016. The miner attributed higher cash costs to “lower grades, lower units of production and inflation.”

Thanks to the increase in the price of gold, the gold margin improved with a positive impact on gross profit and earnings. In the third quarter of 2016, AngloGold Ashanti reported adjusted EBITDA of $395 million, a 36% increase on a year-over-year basis. The gross profit of AngloGold Ashanti improved as well: more than a 105% increase on a year-over-year basis, from $115 million in third-quarter 2015 to $236 million in the comparable quarter this year.

The miner closed the third quarter producing approximately 900,000 ounces of gold, a 7.6% decline from the same quarter of the prior year. Lower production was due to lower grades of ore processed at South African operations and international operations.

Besides the increase the cash costs per ounce of gold extracted, higher “exploration, corporate and marketing costs” together with an increase in the expenses sustained to upgrade the assets made the all-in sustaining costs (AISC) per ounce of gold to increase as well, according to the company's NR. In the third quarter, the miner reported AISC of $1,071 per ounce of gold, a 14% increase on a year-over-year basis.

Improved results in the third quarter also had a positive impact on the miner’s ability to decrease its debt, which is showed by the net debt to the adjusted EBITDA ratio: as of the third quarter the net debt to adjusted EBITDA ratio is 1.26 x versus 1.54 x at the end of the same quarter of the prior year. Furthermore the company says that “debt levels remain well below the covenant of net debt to Adjusted EBITDA of 3.5 times under the revolving credit facilities.”

AngloGold Ashanti is trading at $11.85, up 1.11% from the previous close. The gold stock gained 66.2% and it is set to trade higher as long as the Fed keeps the interest rate low.

The analysts recommend buying AngloGold Ashanti, estimating a price target of $22.95 per share on average.

The Enterprise Value/EBITDA is 5.77 and the Price/Book (mrq) is 1.83.

Disclosure: I have no positions in AngloGold Ashanti.

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