AngloGold Ashanti Plc (AU) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Welcome to AngloGold Ashanti's Q2 Production Update. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Stewart Bailey. Please go ahead, sir.

Thanks, Denay, and welcome everybody to our Q3 market update. Before we go any further, I would like to direct you to the second slide in the presentation which provides important information and forward-looking statements and information that may appear in the presentation. Important, so I urge you to look at it. Today's presentation on our Q3 number, Kelvin will be providing an introduction; Sicelo Ntuli our COO for Continental Africa will follow; Ludwig Eybers next of our International portfolio and explorations results; Graham Ehm will give an update on Obuasi; Christine will focus through the financials and Keven will provide some concluding remarks. Kelvin, over to you.

Thank you, Stewart, and thanks to everybody for joining us on our call today. I'd like to start as we usually do, with our strategic focus. Our objective is to deliver better quality production aimed at widening margins, extending mine lives and improving the portfolio. We're committed to maintaining discipline in the current price environment with emphasis on further deleveraging the balance sheet, progressing the ongoing divestment processes, enhancing margins, and bringing Obuasi into production. And importantly, we're working to maintain and strengthen our licensed stock grades through effective ESG practices. On the safety front, we're making solid progress. The third quarter has been another encouraging period. The group achieved an all injury frequency rate for the quarter of 3.23 injuries per million hours worked, which is near historical levels. We've operated more than a year without a fatality and by the end of the quarter we achieved 541 consecutive fatality free days, a new company record. Now I know this should be the expectation and it is, but nonetheless it shows continued progress for more of the business growth. And while these are important milestones, there will be no complacencies and our focus remains on achieving our goal of zero harm. As we discussed at our Q2 results in August, production for the year is backend weighted. For the first nine months of the year, we produced 2.38 million ounces of gold which puts us at 71% achieved relative to the midpoint of our full year guidance range. Production of 825,000 ounces was 3% percent higher quarter-on-quarter due to strong performances from Iduapriem, Geita, and AGA Mineração. We anticipate a solid uplift in production in Q4. All-in sustaining costs rose 12% year-on-year to 1,031an ounce reflecting higher sustaining capital and lower production levels along with some inflationary pressures when compared to the same period last year. Our operating teams are pulling the next set of levers to drive cost improvement. Sicelo, Ludwig, and Christine will cover our operating and financial performance in more detail a little later. We're strongly focused on expanding margins. Our mission has been achieved even with the gold price of significantly levels than we see today. For the third quarter, the higher price gave us a help of tailwind. We remain firm in our commitment through disciplined capital allocation and cost management. This will ensure we take advantage of the positive gold price environment, but we won't rely on it. As we provided previously, converting our earnings into cash has been a challenge. We are actively working to improve this by more efficient cash repatriation from certain of our jurisdictions and by reducing care and maintenance costs from Ghana and South Africa particularly. I'll now hand over to Sicelo to discuss the operational performance of the African business.

Thank you, Kelvin. Let us take a high level look at the Africa operations. In continental Africa [indiscernible] produced 387 kilo ounces at an all-in sustaining cost of $900 an ounce compared to 391 kilo ounces at an all-in sustaining cost of $834 an ounce in the third quarter of 2018. We saw a significant increase in Iduapriem's production and good performance from Geita. There was lower contribution year-on-year from Siguiri and I'll come back to what we are doing to turn this around. At Geita, the development of the underground mine is progressing well and we continue to see great benefit coming through. At Kibali, another solid quarter, despite coming off a very high base last year. The Kibali operational team is shifting its focus from open pit mining to predominantly sourcing ore from underground. Our team's strong operational performance was underpinned by an increase in grade and tonnage treated. The grade benefit is due to the continuous investment in cut back of the Teberebie peak, while the improved throughput rate is due to various operational excellence initiatives. We are expecting a strong finish to the year after a planned shutdown at the beginning of November this year. At Siguiri, production was lower due to commissioning challenges at the combination plant which is flat with our Q2 results. These were compounded by heavy rainfall and resulted in crusher plant blockages caused by [indiscernible] which impacted on grades. However, there are no technical flaws to the project, but does require some minor one off fixes in crusher capacity and fine screening. Suffice to say we were somewhat optimistic about the timing to get to steady state. That said, we are focused on recovery plans that are materializing, but we'll see higher hard rock volumes and lower costs into the new year. We have the capable and experienced team on the ground focused on stabilizing Siguiri. In South Africa, costs rose on the back of lower production and inflationary pressure, particularly offset by weaker exchange rates, as important an increase in seismicity impacted availability of the planned higher grades those above 109. It has improved and in the beginning of Q4 we are now seeing grades ticking higher, particularly above below 109 level in the new projects area. In fact, we have seen significant improvements on the safety front at [indiscernible] and some efficient improvement, all as a result of the improved work quality on the [indiscernible]. This is mainly due to improved face time which has been the key objective of the new shield arrangements [ph]. With that, I'll hand over to Ludwig for International operations. Thank you.

Thanks Sicelo. In the Americas, the increase in cost due to lower production incentives and byproduct revenues, as well as geochemical soil campaign. At AGA Mineração production was as expected higher year-on-year at 92,000 ounces mainly due to increased tonnages and grades. We saw poor ground conditions at Cuiabá in the deep areas of the mine. Taking no changes on safety, we took a decision to slowdown the rate of mining until and actually work is done to improve ground conditions. As we have done in the prior years when found to have [indiscernible] challenges we put in place an ounce support regime. We communicated at our Q2 results the serial draft goals related to TSS [ph] and the consolidation [ph] in Brazil. We have been proactive in reviewing our planning of the position methodology following [indiscernible]. All seven of our TSS [ph] in Brazil received external stability declarations ahead of the legislative September study of [indiscernible] and we continue to accelerate the transition to drive stack tailings. The first [indiscernible] pant at Cuiabá has been commissioned and we are building mobile [indiscernible] plant at CDS [ph]. We are also pleased to report that we received all our planning sands [ph] permits that could have had an impact on the 2020 production. We are optimistic that we received the outstanding permits for the following years. The impact of [indiscernible] provisions under the new laws, all cost to be in the range of $20 million to $28 million. This equates to a noncash impact of about $6 per ounce to $9 per ounce at the group level, which will reflect in our full year earnings and spending costs. This impact had not been previously factored into our guidance. At Tropicana in Australia, lower mold feed [ph] price offset by higher mold [ph] shipments, this kept production relatively flat year-on-year. We recently completed our regular [indiscernible] shutdown, which occur every 17 weeks. The Boston Shaker underground project remains on schedule and we're pleased with the 650 meters of development during the quarter. At Sunrise Dam, production was impacted by low underground tonnages. This has a negative effect on our ore blending at [indiscernible]. The key for Sunrise Dam is for us to improve our flexibility. This will ensure consistently higher underground tons to displace lower grade surface stocks. Report of the strategy in our Q3 development and exploration drilling is way above our targets. The largest [indiscernible] east are now being commissioned for production next week. This results in high underground volumes in Q4. As we said before, our assets will benefit from additional investment in development and reserve conversion. We've had world class exploration efforts to support this strategy. During Q3 we completed more than 234,000 meters in Brownfields drilling and more than 27,000 meters in Greenfields drilling. Turning to next year, additional capital will be allocated for Brownfields exploration to increase the flexibility and size availability in our mines. We will take a disciplined approach to this additional inward investment. And also our aim is to extend the visible life of the operations, increase the resource confidence in our ore bodies, use theories, reserve replacement and growth to support our planning process, allow better operational flexibility, all of which we believe will provide an overall value outlook. This will allow us to guide accurately beyond any year outlook we currently provide. With that, I'll hand over to Graham who will give us an update on Obuasi.

Thank you, Ludwig. I'll spend a little bit of time giving our, the reason I believe our update on Obuasi. I'm on Slide 14. At September 30th the overall project was 76% complete. Phase 1 to achieve 2000 tons per day and by the end of this year has progressed very well and is now 79% complete. I consistently commented that this was a pretty tough target and I'm pleased to say that our confidence has grown this quarter. Our Phase 2, to achieve 4000 tons per day is 44.5% complete and we are confidently on schedule. From a safety point of view, the construction team have done particularly well with a team of mostly Ghanaian contractors and have just clocked over 2 million man hours with just one lost time injury. The photos on this slide are the primary crusher discharge conveyor, we concentrate discharging into a concentrate storage pond and the fully automated twin boom jumbo. I'll more on to Slide 15, in early October, the size 1 crushing, grinding, floatation and tailings circuits were commissioned. Approximately 5,000 tons of ore at 6 grams per ton was milled to generate around 500 tons of sulfide concentrate. Growth of the BIOX bacteria starting from the laboratory scale is progressing well and has progressed to the 500 leader scale. The sulfide concentrate produced early this month enables the growth to continue to the commercial scale over the next four to five weeks. The rebuild and the dry commissioning of the remainder of Phase 1 circuit, the BIOX leach train, the CCD, the CIL circuit and [indiscernible] and the [indiscernible] will continue over the next couple of months. Milling is scheduled to commence in December leading to first gold pour at the year end. And in the photographs you see is the primary crusher, discharge conveyor, a fairly happy metallurgical team when we fired up the mill for Phase 1 and floatation concentrates at the in the rougher cycle [ph]. On Slide 16, our Phase 2 is progressing very well. Engineering by DRI is being completed. The SAG and Ball mills are being stripped to their shells and civil has made good progress in the SAG and Ball area. [Indiscernible] in the CCD and the cooling tower in the new gold room and in the emergency genset area. Steel and fabrication is on schedule. Refurbishment of the remaining BIOX trains, blowers, carbon tubes [ph] and so on is progressing. In the photographs of the concentrate thickener, the BIOX leach train, the civil works for the new gold room, and the main mill substation. The KRS [ph] shaft and the underground materials handling contracts were awarded this quarter and the [indiscernible] plant, there are all [indiscernible] construct contract was also awarded. The current structural mechanical piping and the electrical instrumentation and control contractors will roll over into Phase 2 works. We've had some challenges and the challenges now are really associated with equipment manufacture and shipping requiring active expediting. We've been consistently cracking operational readiness also, which is about putting everything in place to commence operations. This is ahead of schedule at 72%. Underground mine development year-to-date is 6,600 meters. As the deepening at the Obuasi ditch decline and access to the KRS shaft which is needed in quarter 3, 2020 around schedule. Access to the first stamping areas and stripping of the old narrow development at the [indiscernible] area has been achieved. All of the Phase 1 production area, that is for all of 2020 has now been grade controlled, so all of it is now in proven reserves. Production drilling of the first [indiscernible] commenced in early October and just last week we saw the first stope in the [indiscernible] area. The [indiscernible] stopes are secondary stopes. We drill tested the adjacent field primary stopes which are quite solid and grades in these initial stopes are like 10 grams, but we are expecting some evaluation from the old price too. We've had a few challenges in stripping old drives and re-supporting the ground and EBITDA we are on track and first stoping is clearly on schedule for Phase 1. The new GCVS vent shaft [indiscernible] has been completed and piling for the commencement of the initial sink has commenced. Geological drilling has ramped up and we now have five diamond drills operating underground. The initial project capital for Obuasi remains in the range of $495 million to $545 million and note that this include the $45 million for the mining fleet purchase which we noted earlier this year. 10% was spent in 2018. We are on track to spend about 50% of that capital in 2019 or around $270 million and the remainder will be in 2020. In terms of community and governmental fees, I think I had reported that there was high expectations within the community for employment. Through constant dialogue and discussion with the communities that level of agitation has subsided considerably as we are focused on local employment in Obuasi for ourselves and also for contractors. The Chief Mines Inspector visited the site and he approved the commissioning of the areas that I have mentioned before. We've also met with the Chief of Defense and the Chief of Police and both expressed the government's commitment to the support of ongoing security at Obuasi. We rolled out our social management plan which was part of building our relationship with the community. And just last quarter, the university campus which commenced operations in Obuasi about 340 students. And the school expansion programs are on track and we have just launched an apprenticeship program for which we received many applications. And you'd also be aware the reclamation security agreement agreed with the government to deal with the old legacy areas around Obuasi, rehabilitation of the old treatment plants and the shaft areas and the lower has commenced and the design in the [indiscernible] area and the northern tailings [ph] facilities has also commenced. With that, I'll hand over to Christine who will cover the company's finances. Thank you.

Thanks Graham, and good morning everyone. I'm on Slide 18, which talks to the comparison of key metrics. Overall, we've had a supportive macroeconomic environment with the [indiscernible] in Q3 [indiscernible] higher than the prior year at $1,464 an ounce which together with weaker currency significant benefited EBITDA and cash flow from operations. Group production was down by 3% compared to last year due to planned volume and grade reductions at CVSA, lower open ounces at Kibali in accordance with the mine plant, lower grade at Siguiri and challenges experienced with the integration of the combination plant at Siguiri. And Kelvin mentioned production in Q3 reflects an improving trend in frequency of hire compared to Q2 on the back of strong performances from Geita and Brazil. This bodes well for better production improvement in Q4. We did expect costs to be higher in Q3 due to higher sustaining CapEx for funding, however this was exacerbated by inflationary pressures and lower grades across a number of our operations. Capital expenditure increased by 44% in Q3 compared to the prior year reflecting a 2% [ph] increase in sustaining capital and a tripling in growth capital primarily due to Obuasi. Free cash flow improves significantly in Q3 to $87 million off the top funding increased Obuasi growth capital expenditure of $76 million for the quarter. Cash conversion remains a focus area for us in particular improving cash repatriation from the DRC, reducing working capital lockups and reducing care and maintenance costs. Free cash flow would have been higher by $177 million for the year-to-date as approximately $230 million had the cash generated from Kibali being received timelessly. We have received $53 million from the DRC for the year-to-date in the form of dividends and our operating JV partner Barrick continued to have constructive discussions with the DRC Government in this regard. The VAT agreement signed with the DRC Government late last year continued to be honored, reflecting a reduction in VAT receivables from the [indiscernible] section. We therefore remain cautiously optimistic that we will see an upward trend in the cash repatriation from the DRC in Q4. We also saw positive working capital movements of $37 million despite higher ore stockpiles in Australia, increased VAT receivables in Tanzania and increased Argentina export duty receivables. The Argentinean export duty should be recovered over the next year and we continue our efforts to offset the very high [ph] VAT against corporate taxes in Tanzania. In addition, the transition to earlier mining is on to commence at Geita from July 01, 2019 as we reduce the quantum of VAT lockup at Geita by approximately $800,000 a month. Care and maintenance costs for 2019 is expected to be $80 million and relate to Obuasi in South Africa. We expect these costs to be less than half next year with Obuasi coming online and this cost will reduce further with the South African asset sales. Looking at the year-on-year cost performance on Slide 19, headwinds relating to the negative impact of inflationary pressures, lower grades, higher royalties, and lower byproduct sales from CVSA weighed on the 9% increase in cash costs to $786 an ounce despite the currency, volume, and efficiency gains delivered during the quarter. All-in sustaining costs increased by 12% to result in $31 [ph] an ounce on the back of higher cash costs. The expected increase in sustaining capital and increased non-cash impacts such as environmental position refit [ph] and fee based payments included in corporate costs. All-in sustaining costs South Africa operations at $950 an ounce was 8% above the prior year despite 2% [ph] lower all-in sustaining costs in South Africa. All-in sustaining costs for the international operations increased about 17% to $1,092 an ounce in Q3 reflecting lower plant production in Argentina, lower grades in Brazil and inflationary pressures in the America's region. We expect all-in sustaining costs in Q4 to benefit from further operational efficiency improvements supported by improved production in line with BIOX train. Moving on to the guidance, our full year guidance from all key operating costs and capital metrics remain on track. We expect production to be in the lower half of the guidance range, while costs are expected at the upper end of the range in line with BIOX train's both production and capital are best way due to the second half with a significant [indiscernible] in Q4, improved production is expected at Geita, Brazil, Australia and Siguiri. Both, cash costs and all-in sustaining costs are also expected to improve on the back of improved production and current commodity price assumptions. Ludwig spoke about the impact of the change in the Brazilian trading regulations earlier, the estimate of non-cash financial impact of approximately $20 million to $28 million or $6 to $9, an ounce impacting all-in sustaining costs at group level will impact Q4 and was unplanned. These will, again will not be included in the cost guidance range provided. Capital expenditure will be skewed to Q4 in particular relating to the Obuasi growth capital. Graham spoke about the working capital [ph], which is unbudgeted approximately $45 million, including the mining fleets of which 10% was spent in 2018, 50% will be spent in 2019 and the balance will be spent in 2020. The remainder of the gross capital of approximately $60 million relates to Quebradona, Tropicana, Boston Shaker, Siguiri and Mponeng. Sustaining capital guidance is unchanged at $160 to $170 an ounce which is at the low end of the spectrum. However, going into 2020, we expect this to pick up as we work to improve reserve confidence in 2020. Finally, on our balance sheet strategy, certainly is to continue to enforce capital discipline through capital prioritization, de-leveraging the balance sheet and improving returns to shareholders. Net debt declined by 6% to $1.646 billion year-on-year and reflects a 47% reduction from the fixed debt level in 2014. Our net debt to adjusted EBITDA ratio is 1.06 times largely in line with our targets through the cycle. This provides ample headroom to our 3.5x covenant. Liquidity remained strong and continues to provide good flexibility. The local cost base in a number of economies that we are exposed to continues to benefit from weaker currencies, which provides a natural hedge to inflationary pressures. In addition, our strong leverage to the gold price is expected to further benefit cash flows in Q4. Finally, our key investment grades ratings with second half outlook with Moody’s and Fitch positions the company well once we decide to proceed with the refinancing of the 2020 fund. S&P affirmed our rating at one notch below investment grade with a stable outlook. I will now hand over to Kelvin to conclude.

Thanks Christine. To wrap-up the year is going well. There are some operating improvements to be made and the necessary work is underway to do so as you've heard from us [indiscernible]. We have provided clear example of the opportunity that exists for us to increase the investment of our ore bodies and the benefits we expect to doing so. Our strategy remains firmly on track. We are generating strong cash flow with the promise of more to come given the higher growth price and better cash repatriation from the DRC. Our leverage is near our target level and it improved further. Our asset sale processes are progressing well. Our major growth project, Obuasi which immensely complement our portfolio is on track to start production at the end of the year. We thought it was appropriate for Graham to spend a little more time with you on Obuasi, given that the next time you hear about the project hopefully it will be at the year-end with first gold pour. Lastly, we remain disciplined in managing costs and capital to ensure investors see the leverage that they expect. Our aim remains to build a solid predictable business that delivers value through the cycle. With that, let’s open the line for questions. Thanks. Denay?

Thank you very much. [Operator Instructions] The first question we have is from James Bell from RBC Capital. Please go ahead sir.

Yes, good afternoon and thanks for taking my question. Just the first question is really around the asset sales process, firstly in South Africa and then more widely. In terms of South Africa, you talked about steady progress and due-diligence that is being completed. Is there a chance to get an announcement around that before year-end, and do you think the gold price being materially higher than when you announced the deal, that's changed your perception of value for these assets?

Well, first thanks James for the question. Starting point, all processes are continuing and I will come back to South Africa in a second, and the other two back since we moved from Q2 to Q3, there have been new entrants in the process and we're at various stage of diligence with the new prospective bidders, so let those play out. If you go back to South Africa, that process really is going exactly according to plan and but as well as we could have expected. There has been very strong interest by a strong group of bidders. The site due-diligence is now complete and we are expecting the next phase, and we are expecting final bids in the coming routes. So at this point, all things are very positive and certainly the gold price is supportive and it really doesn’t change our view about the assets other than clearly being in this environment is helpful, but from our perspective, we expect to create value for the assets and at this point, we expect to see strong bids.

Okay, that makes sense. And then just one on your potential for medium term production profile, I know Ludwig touched on it a little bit earlier, when do you think we could see that and do you think that will be on both ounces and costs or…?

James, look I’m glad you mentioned that, because your call I mentioned when I first joined the company about a year ago that one of the objectives that I’ve seen and as a group we have to be able to guide out more than in a year. And so what has become clear is, and we need to spend time in 2020 and the addition of ORD and reserve conversion that we discussed, so that we’re in a position that we can guide out longer starting with kind of one year and then where I’d like to go is two and then to three years. So we are going to have to get measured steps in getting here. I would like to be in a position where as we come through next year, we can guide out a year further, but we do need to make sure that we're you know, the other thing worse than not guiding out further than a year is not being confident in our guidance. And so we want to make sure that we were in that position. But at this point that is directionally where we would like to go.

Okay, that is very clear. Thank you.

Welcome, thank you.

[Operator Instructions] The next question we have is from Andrew Kaip from BMO. Please go ahead sir.

Hi, good morning. Kelvin or Christine, this is a question just regarding 2020 sustaining capital. You have indicated that we should expect it to rise. Do you have a sense of where sustaining capital for AngloGold should be, is it 20% higher on a go-forward basis than what you are thinking or what we might be thinking in 2020 compared to 2019 levels, can you give us a bit more visibility on that?

Yes, Andy, well look, I think we’ve indicated before that and Christine touched on it, that our kind of sustaining CapEx guidance range should be between 160, 170 and 200-ish kind of round numbers. As we move into 2020, and I think we talked about the need to spend more on ORD and reserve conversion that we think will provide disproportionate benefit in terms of not only adding additional reserves, but in our ability to create flexibility to mine face as well as predictability and helping our mine planning. So as we move into 2020, we expect to be at the upper end of that range and as we move out beyond 2020, so we will be working hard to bring our number back more towards the mid-point of that range. I think that’s probably the best way to characterize it. Christine any…?

Yes, I would agree with that. We are full in the middle of our business spending process and we will give you more visibility on that at the year-end results of course.

Okay, thank you very much.

You’re welcome.

[Operator Instructions] So at this stage, it seems we have no further questions.

Perfect thanks and I am going to hand over to Kelvin for any concluding remarks.

Well, thank you very much. For the closing comment, I would like to add we are close to a year-now. I have set out our long-term vision for the business and we’re making real progress on it. With regard to the shorter term, I spent a lot of time looking at our mines. The operations are in good shape. But in earliest, may be a short reset in order to support the long-term quality of the business. Specifically, our ore reserve development needs more focus in order to provide the grade flexibility, less grade variability, confidence in setting short-term performance metrics and support for the objective of providing operating guidance beyond a year as we just touched on. We got the challenge in place to achieve our goals, now it's about staying focused and delivering. And I guess in conclusion, I would like to take the opportunity to say thank you for the support that you have given AngloGold Ashanti throughout the year. I think it’s quickly approaching, I don’t see it as early, but we'd like to wish everyone a safe and enjoyable holiday season and we look forward to engaging with everyone in February 2020 with our year-end results. So thank you very much.

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.