Why You Should Hold AngloGold Ashanti

The South African miner is well positioned to benefit from rising gold price

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Gold price outlook

Federal Reserve announced a surprise 50 basis point cut to the federal funds rate as an emergency move due to the novel coronavirus's potential effects on the economy. However, the preventative measure has not dispelled market participants’ fears.

As proof of this, U.S.-listed stocks continued to sell off on Tuesday, with the major indexes concluding the day in negative territory. This day will also go down in history as the first time that the 10-year yield for U.S. Treasuries bonds dropped below 1%.

In line with expectations of how gold usually reacts to an interest rate cut, the price of a troy ounce jumped 3.11% to $1,644.40 on Tuesday on the Comex futures market and gained 1% to $1,615.50 on the London bullion market.

AngloGold Ashanti Limited

Investors can take advantage of the next rally in the price of gold by holding shares in best performing mining stocks. AngloGold Ashanti Limited (AU, Financial) is one such company.

In the past year, when the precious metal gained more than 20%, AngloGold Ashanti share prices soared 52%, topping the Van Eck Vectors Gold Miners exchange-traded funds (GDX, Financial) by an impressive margin of 21%.

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Regardless of the significant growth, the share price of AngloGold Ashanti ($20.27 as of March 3 for a market cap of $8.42 billion) seems affordable as it still trades below the 50- and 100-day simple moving average lines, though it is now above the 200-day SMA line.

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This share price is situated above the middle point of the 52-week range is $11.29 to $23.85. Also, the price-book ratio of 3.35 is ranked lower than 75% of 1,981 companies that operate in the metals and mining industry.

The enterprise value-Ebitda ratio of 8.02, which is a more reliable valuation metric for assessing gold operators (as mining is a capital-intensive activity), is almost on par with the industry median, meaning the stock is reasonably priced compared to intrinsic value.

AngloGold Ashanti Limited is a Johannesburg, South Africa-based gold mining company with 14 operations, several greenfield mineral projects and exploration activities located in the Americas, South and Continental Africa and Australasia.

The portfolio provides investors with a relatively low investment risk due to its long-life activities, which guarantee a good level of diversification as a result of variety in the geographic distribution and ore body types of mineral resources.

From nearly 44 million ounces of gold hosted in mineral reserves, AngloGold Ashanti produced approximately 3.281 million ounces of metal in 2019 (in line with estimates), bearing total cash costs of $776 per ounce and all-in sustaining costs (aka AISC) of $992 per ounce.

Activities showed up with challenges for miners in Guinea and Western Australia, but thanks to higher gold prices and unique performances from other key assets in Western Australia as well as in Congo, Tanzania and Western Ghana, the miner saw the free cash flow grow strongly. Before capital growth, the free cash flow came in at $448 million in 2019, increasing 106% year over year which, helped the company to fortify its financial conditions.

The balance sheet is stronger as a result, with the adjusted net debt to adjusted Ebitda ratio standing at 0.91 as of Dec. 31, 2019.

The South African operator is well-positioned to reach the gold output estimate of 3.05 million to 3.3 million ounces at an AISC of $1,040 to $1,100 per ounce in 2020. It will also lead key exploration and development activities to achieve higher operating flexibility and establish new mines.

As of February, four sell-side analysts on Wall Street have issued their recommendation ratings on this gold stock. One analyst suggests a strong buy, two recommend a buy and one recommends a hold rating. The average target price is $23.26 per share.

Disclosure: I have no positions in any security mentioned.

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