AngloGold Ashanti Ltd. (AU, Financial) announced last week it has ceased activities at the La Colosa gold project in Colombia, one of the largest open-pit mines in the world.
The South African gold producer headquartered in Johannesburg made the decision after Columbian voters, through a referendum, decided to ban mining in the municipality of Cajamarca, which is in the state of Tolima.
Shareholders of AngloGold Ashanti are, of course, concerned about this decision since the miner has invested more than $900 million in the South American country over the last decade and has spent more than 14 years exploring the site.
The suspension of the Colombian project, known to be one of the most promising in terms of future production of gold – an estimated 28 million ounces were expected to be added to AngloGold Ashanti's total future production – will influence the company’s future guidance on production and operations.
The interruption of operations, which will impact a considerable number of employees, will hopefully be temporary. There is a concern, however, that there will be a definitive mining ban. This would be a significant problem as AngloGold Ashanti would have to determine how to recover the $900 million spent on the project to date.
In addition, it is faced with missing revenues from the potential production of 28 million ounces of gold. The mine accounts for more than half of the company's gold reserves.
At a first glance, this obstacle may not seem to be a big issue since the gold producer has a respectable portfolio of assets across three continents. The company has a total volume of 50 million ounces of gold, grading 1.34 g/t, in reserves as of Dec. 31, 2016.
But what if gold does not trade high enough for the company to mine its reserves at a profit? The company will likely be forced to milk more gold from those reserves which have a higher concentration of the precious metal in the mineral, which of course will involve less operating costs, accelerating the inevitable impoverishment process of higher grade mines in Brazil, Argentina, Australia, Tanzania, Mali, Ghana and Democratic Republic of Congo.
For these reasons, investors hope AngloGold Ashanti will be able to work with Colombian authorities in order to return the La Colosa gold project to operations.
Following the news, shares of AngloGold Ashanti are down 10 cents or 0.87%. The gold stock is now trading at $11.38 per share with a price-book ratio of 1.71 and an EV/Ebitda ratio of 4.96.
The stock has gained 8% year to date even though it has been downtrending since mid-April.
Disclosure: I have no positions in AngloGold Ashanti Limited.
