Lower output costs at two mines that opened earlier than planned and the end of wage strikes in South Africa are giving a boost to the bonds of AngloGold Ashanti, the third-biggest producer of the metal.
Yields on the company’s $700 million (R7 billion) of bonds due in April 2020 have declined 159 basis points since reaching a record 9.16 percent on August 7, according to Bloomberg data. The average yield on dollar debt of emerging market metals and mining companies has fallen 24 basis points in that time, JPMorgan Chase indices show.
Kibali, a joint venture with Randgold Resources in the Democratic Republic of Congo, produced its first gold late last month, three months ahead of schedule. AngloGold also started the Tropicana mine in Australia. Both can dig up the metal for an average of $700 an ounce, 22 percent less than the company’s average cost in the second quarter. Pay increases in South Africa were settled with three of four unions on September 6, ending a five-day strike.
“The markets haven’t fully recognised the impact those new mines will have,” David Davis, an analyst at SBG Securities, said on Tuesday. “The surprise may be on the upside.”
The two mines will add as many as 613 000 ounces to AngloGold’s yearly production. That will raise the annual output forecast of as much 4.1 million ounces in each of the next three years by 15 percent, company statements and Bloomberg calculations show. Average production costs across all operations were $898 an ounce in the quarter to June.
Bondholders’ sentiment had improved because of the short wage strike at AngloGold’s South African mines and more favourable terms from lenders on its two revolving-credit facilities, said Harry Mateer, an analyst at Barclays in New York.
At South African operations, pay will climb as much as 8 percent, above the annual inflation rate of 6.4 percent in August but less than the demand for an increase of as much as 60 percent for entry-level workers.
The weakening rand has reduced the pressure of slumping gold prices on producers, which incur expenses in the domestic currency and get income in dollars. Gold gained 1.2 percent to fix at $1 306.25 an ounce yesterday afternoon, reducing its drop this year to 22 percent. The rand has depreciated 16 percent against the dollar this year, the most of 16 major currencies. It improved by 2.6c to be bid at R10.0455 to the dollar at 5pm yesterday.
While South Africa’s contribution to AngloGold’s output remains the biggest by geography, it fell to 35 percent in the first half of this year from 42 percent in 2008.
The start of output at Kibali and Tropicana would decrease AngloGold’s capital expenditure bill by more than $1bn next year, SBG’s Davis said.
The stock rose 1.75 percent to R131.78 yesterday. – Bloomberg