Fitch Ratings – London – 10 Jul 2020: Fitch Ratings has affirmed AngloGold Ashanti Limited’s (AGA) Long-Term Issuer Default Rating (IDR) at ‘BBB-‘ with a Stable Outlook.
The affirmation and the Stable Outlook reflect the group’s position as the third-largest global goldminer, its diversified asset base and low leverage. We expect funds from operations (FFO) gross leverage to average 1.8x and net leverage at 1.2x over 2020-2023.
The rating factors in the group’s presence in geographies with higher operating environment and country risk, such as Tanzania, South Africa (disposal in 2020), Guinea, Ghana, Brazil, Democratic Republic of the Congo (through a JV) and Argentina, its lack of commodity diversification, relatively high cost of mining operations and the relatively short operating mine life of 12 years, although this is usual for gold miners (eight years post South Africa and Mali asset disposals).
We do not see the operating environment as a constraint for the current rating, despite the weak economic environment in most of the countries where AGA’s mines are located, as AGA is a global commodity player selling gold in world markets, with strong access to international financial markets.
KEY RATING DRIVERS
Australian Country Ceiling: The Country Ceiling (CC) applicable to the group is ‘AAA’ resulting from our assumption that operations in Australia are sufficient to cover hard currency gross interest expense over the rating horizon in accordance with Fitch’s Non-Financial Corporates Exceeding the Country Ceiling Rating Criteria.
Large Diversified Goldminer: AGA is the world’s third-largest gold producer, but smaller than world leaders Newmont Goldcorp (6.3 million ounces (moz), 6.9 moz including gold equivalent ounces (GEO)) and Barrick Gold (5.5 moz). It compares well with peers Kinross Gold Corporation (BBB-/Positive) and PJSC Polyus (BB/Stable) at 2.5 moz and 2.8 moz in 2019, respectively. Smaller peers Nord Gold SE (BB/Stable), Yamana Gold Inc. (BBB-/Stable) and Compania de Minas Buenaventura S.A.A (BBB-/Stable) produce around 1 moz GEO annually.
We expect AGA to maintain consolidated production between 2.5 moz and 3.0 moz annually, with asset sales in South Africa offset by increased production from other mines, as well as potential future projects.
Despite being a single-commodity producer, the company’s scale and diversification are further strengthened by production being diversified across 14 operations (10 from 2021 onwards) with no mine accounting for more than 16% of total production in our forecast.
Asset Disposals Aid Deleveraging: We expect AGA to use proceeds of asset disposals in 2020 towards deleveraging. In February 2020, AGA announced the sale of its South African assets and related liabilities to Harmony Gold Mining Company Limited for a total consideration of USD300 million, with a total cash upfront consideration of USD200 million and around USD100 million in deferred payments expected.
There is the potential for additional consideration related to the West Wits mineral rights.The proceeds for the sale of the Sadiola Mine in Mali, which we expect to materialise in 2H20, are USD52.5 million in total with an upfront cash consideration of USD25 million.
Exposure to Challenging Operating Environments: AGA’s main operations are located in countries with higher country risk e.g. Tanzania, South Africa, Guinea, Ghana, Brazil and Argentina, with 22% of total consolidated production coming from low-risk Australia.
However, AGA has considerably de-risked its country exposure with the sale of the Sadiola asset in Mali in 2020. We do not expect the sale of its South African assets to Harmony to have a meaningful impact on the company’s overall operating environment. Future projects in Colombia could help further diversify its country risks.
Extended Lock-up of Cash Proceeds May Increase Leverage: The group is experiencing slower cash repatriation from its Kibali Joint-Venture in the Democratic Republic of Congo. At end-March 2020 AGA had received USD25 million cash dividends, but the attributable cash balance increased to USD252 million (2018: USD53 million).
The joint venture partner, Barrick, which operates Kibali, remains confident that the cash lockup will be resolved shortly. Our base case includes USD225 million dividends to be received in 2020, and USD200 million per year in 2021 and 2022.
Should the receipt be delayed AGA is expected to have sufficient liquidity and leverage headroom within our rating case.
AGA’s significant working capital outflows (average of USD200 million in 2019-2020) are largely explained by delays in receiving VAT refunds locked up in Tanzania, export duties in Argentina and inventory build-up on ramping up projects.
We expect the company to be able to offset higher percentage of the income tax payment against further VAT lockups from 2021 onward, leading to a smaller working capital outflow in the Fitch forecast. Without the positive impact on cash flow generation of these events, we would expect the company to deleverage less but still be well within the sensitivities throughout the forecast horizon.
Limited COVID-19 Impact: At the end of March, AGA decided to withdraw its guidance due to uncertainty of the impact on its operations of the COVID-19 pandemic. We do not expect a material impact on AGA’s production and performance in 2020, but consider some future but manageable production disruption impact in our base case.
The impact has been concentrated, with South African mines operating at limited capacity for some time. Serra Grande in Brazil and Cerro Vanguardia in Argentina were briefly suspended. This is in stark contrast to certain gold miners in Latin America that are facing double digit declines in gold production in 2020.