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Alberto Abaterusso
Alberto Abaterusso
Articles (1861) 

Hold Shares of AngloGold Ashanti Ltd.

Take some profit off the table after any significant strength in the stock's price

March 11, 2019 | About:

During his interview “60 Minutes” on CBS news, the president of the U.S. Federal Reserve Jerome Powell said that President Trump’s disapproval of the Fed’s four rate hikes in 2018 didn’t influence the decision of the American central bank in January to postpone the tightening monetary policy.

Powell added that policymakers decided to pause increasing rates because of stagnation in the global economy and the rise of other risks for the U.S. economy.

Several economists believe U.S. policymakers will keep the federal rate of  2.25-2.5% unaltered for the entire year of 2019. This is, of course, positive for gold, as the precious metal will become more appealing than bonds and other fixed-income securities in a low real yield environment.

However, investors should also know that increases in the price of the commodity may be tempered by a weakening U.S. dollar.

The U.S. administration needs to lower the value of the U.S. currency if it wants to start reducing the trade deficit that with Trump has reached $621 billion, the highest level over the last 10 years. A weakening U.S. dollar will boost U.S. exports and discourage imports.

Therefore, gold miner investors should keep a neutral stance on shares of publicly traded gold producers, which are basing a significant amount of operations outside the U.S. as a weakening U.S. dollar towards local currencies may offset higher prices hurting financials.

The Johannesburg, South Africa-based gold mining company AngloGold Ashanti Ltd. ADR (NYSE:AU) is one of these companies.

Wall Street issued a hold recommendation rating on AngloGold Ashanti with a target price of $14.90 per ADR or 13.1% upside from the share price of $13.17 at close Friday. The stock has a market capitalization of roughly $5.52 billion.

The share price is on par with the 50-day simple moving average line but abundantly above the 200- and 100-day SMA lines. It increased 39% for the past year through March 8 as the below chart of GuruFocus illustrates, and it is now well beyond the midst of the 52-week range of $7.08 to $15.86.

Hence, the stock is not cheap.

Further, the price-book ratio of 2.11 is over the industry average of 1.62 and the Enterprise Value-Ebitda ratio of 11.34 is significantly above the industry median of 8.71.

The Ebitda margin of total revenues of AngloGold Ashanti is 16.9% versus an industry median of 24.5%, indicating that operations are less profitable than the average peer, and this distance could be exacerbated by a strengthening local currency against the U.S. dollar. The consequences for the share price will, of course, follow lower revenues, profits and margins.

The profitability and growth rating of 6 out of 10 assigned by GuruFocus to the company is already not so high as, though still better than several competitors.

Besides gold, AngloGold Ashanti is engaged in the production of silver, uranium and sulphuric acid, but the yellow metal represents the main source of income. The company current operates 15 producing assets, which are situated in Latin America, South Africa, Continental Africa and Australasia.

The portfolio of assets of AngloGold Ashanti also includes the re-development of the Obuasi mine in Ghana, which is the main reason for an increase in the forecasted spending of $910 million to $990 million as capital expenditures for the current year.

In 2018, production of approximately 3.4 million ounces or roughly 3.3 million ounces from continuing operations determined the following financial figures.

The company generated revenues of $3.94 billion, representing a 12.6% drop from the prior year. Its gross profit was $774 million, a 0.8% decline year-over-year. It noted a positive reversal into the net income of $133 million from a $191 million loss in 2017 as a result of lower amortization. The operating cash flow fell 14% to $857 million.

For full 2019, the South African mining company targets a production of 3.25 million to 3.45 million ounces of gold.

The balance sheet had $335 million in cash and securities, and $2.05 billion in total debt as of year-end 2018. The company may improve its liquidity with the sale of assets that the company judges to be delivering lower returns. These could be the Cerro Vanguardia mine in Argentina and the Sadiola mine in Mali.

GuruFocus assigned a moderate financial strength rating of 5 out of 10.

In conclusion, I agree with analysts who recommend holding shares of AngloGold Ashanti today, and I would try to take some profit off the table as the share price significantly climbs over the 50-day simple moving average line.

The 14-day Relative Strength Indicator is 46.4, suggesting the stock is neither overbought nor oversold.

John Paulson (Trades, Portfolio) held 12,782,400 shares, or 3.11% of shares outstanding, of AngloGold Ashanti as of Dec. 31, which was flat from the previous quarter according to GuruFocus.com. The position in AngloGold Ashanti represents 3.84% of John Paulson (Trades, Portfolio)’s publicly reported long portfolio.

First Eagle Investment (Trades, Portfolio) held 1,515,964 shares, or 0.37% of shares outstanding, of AngloGold Ashanti as of Dec. 31, which was flat from the prior quarter, according to GuruFocus.com. The investment in AngloGold Ashanti represents 0.06% of First Eagle Investment (Trades, Portfolio)’s reported stock portfolio.

Disclosure: I have no positions in any securities mentioned.

About the author:

Alberto Abaterusso
If somebody asks what being a value investor means, Alberto Abaterusso would answer, “The value investor is not just the possessor of the security that represents the company, but he is the owner of that company. As an owner of the company the value investor is actively involved in the dynamics of that company and his first concern is how to have sales progressively growing. Also, the value investor is probably one of the most demanding persons in the world concerning sales.”

Abaterusso is a freelance writer based in The Netherlands. He primarily writes about gold, silver and precious metals mining stocks. His articles have also been widely linked by popular sites, including MarketWatch, Financial Times, 24hGold, Investopedia, Financial.org, CNBS, MSN Money, Zachs, Reuters and others. Alberto holds an MBA from Università degli Studi di Bari (Italy), Aldo Moro.

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