senior gold producers riding high on surging gold prices ... · surging gold prices have driven...

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Senior Gold Producers Riding High on Surging Gold Prices: Initiating Coverage on Newmont / Barrick / AngloGold Sector / Industry: Mining Click here for more research on the company and to share your views

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Industry Data*

*See last page of this report for important disclosures, rating and risk definitions. All figures in US$ unless otherwise specified.

YTD 12M

Gold (XAU) 29% 37%

TSX GLOBAL GLD INDEX 55% 72%

Highlights ➢ Surging gold prices have driven stock prices of gold miners to multi-year

highs as shown by the TSX Global Gold ETF (XGD), which currently trades at C$25.2, a shade away from the all-time high of ~C$28.0 hit in 2011.

➢ Among senior producers, Gold Fields (NYSE:GFI) is the top performer YTD with a gain of 139%, followed by Harmony Gold (NYSE: HMY) at 93%. Barrick Gold (NYSE: GOLD), Newmont (NYSE: NEM) and AngloGold (NYSE: AU) also fared well, surging over 50%.

➢ Higher prices coupled with lower cash costs are likely to significantly improve the earnings of gold producers (20%-40%) in 2020 and 2021. However, production could take a hit at a majority of senior gold producers due to COVID-induced plant shutdowns.

➢ In terms of production, Newmont leads the pack with 2019 production of 6.3 Moz gold, ahead of Barrick (5.5 Moz) and AngloGold (3.3 Moz). However, in terms of costs, Newcrest Mining has the lowest All In Sustaining Costs (AISC) at US$827/oz for 1Q20 compared to the average of $975/oz. In terms of EV multiples, Gold Fields has the lowest EV/EBITDA of 4.8x while Harmony Gold has the lowest EV/Reserves of $179/oz.

➢ We initiate coverage on the top three producers – Newmont, Barrick and AngloGold Ashanti, and find them attractive plays on rising gold prices with stable production profiles and declining costs. We employ an equal-weighted blended approach comprising P/NAV and EV/EBITDA to arrive at target prices of US$75 for NEM, US$32 for GOLD and US$48 for AU.

➢ Our gold price forecast for the second half of 2020 is $1,925 per oz, and $1,730 per oz for the full year. We expect prices to revert to our long-term average price of $1,400 by 2024. See our latest report for our short-term and long-term gold price forecasts.

Risks ➢ Decline in gold prices due to faster than expected recovery from the

pandemic and the resulting economic recovery could take the sheen away from gold as a safe-haven asset.

➢ Lower than expected gold production due to the pandemic and inability to meet cost reduction targets could lead to lower earnings and accordingly lower valuations.

Gold price – 52 week high/low

$1,413 - $1,939 / oz

Avg. AISC of Senior Producers

$1,031 / oz

EV / Reserves (2019) $ per oz

604

EV / EBITDA (2020E) 9.3x

P / NAV 1.4x

*Data as of July 27, 2020.

Sid Rajeev, B.Tech, MBA, CFA Head of Research

July 29, 2020

http://www.researchfrc.com/

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Equity Research of 22


Record gold prices driving senior gold miner stocks to all-

time highs

Gold Fields is the top performer YTD

with a gain of 139%

Overview

Surging gold prices driving senior gold miner stocks Surging gold prices have driven stock prices of gold miners to multi-year highs as shown by the TSX Global Gold ETF (XGD). Apart from higher gold prices, other factors driving stock prices of gold miners include investment money coming back to miners from cannabis stocks and bitcoin, and higher margins due to lower production costs resulting from weak oil prices. The XGD is just ~10% away from the all-time high of ~C$28 hit in late 2011.

Gold Price (US$/oz)

Source: FRC, Bloomberg

Among senior gold miners, Gold Fields is the top performer YTD with a gain of 139%, followed by Harmony Gold at 93%. Barrick Gold, Newmont and AngloGold also fared well, surging ~50%. The majority of senior gold miners in our list outperformed the YTD gain of 29% in gold prices.

Top performers YTD

Data as of July 27, 2020. Source: FRC, Bloomberg

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2019 rally driven by slowing global economy and low intereest rates

YTD 2020 rally driven primarily by COVID-




Production could take a hit at a

majority of senior gold producers due to COVID-induced

plant shutdown

Our senior gold producers list comprises 14

companies globally

Newmont tops the list in terms of

production, with 6.3 Moz gold produced

in 2019

Earnings of seniors to surge amid rising gold prices and lower cash costs, but production could take a hit amid pandemic-induced plant shutdowns Higher gold prices coupled with lower cash costs for some seniors could result in earnings surpassing estimates for revenue and EBITDA. However, production could take a hit at a majority of senior gold producers due to COVID-induced plant shutdowns. As shown in the table below, Newmont, Barrick and AngloGold all have some curtailments at their plants due to COVID in the second quarter, which will impact their 2020 production.

Specific Impact of COVID-19 on gold producers Ticker 2Q20 curtailments Impact on production

NEM Peñasquito (Mexico) and Musselwhite (Canada)

To shave 4% off annual production

GOLD Veladero (Argentina) Guidance maintained but production to be 10% lower than 2019 2Q20 production to be lower than 1Q20

AU Curtailments in South Africa ~5-7% decline in 2020 vs 2019

Source: Company filings, FRC

Analysis by key metrics We have analyzed the senior producers based on four parameters – size, operating performance, liquidity and balance sheet, and valuation. Our senior gold producers list comprises 14 companies globally with production >500 Koz and EV > $4 billion. Size Newmont tops the list in terms of production, with 6.3 Moz gold produced in 2019, followed by Barrick Gold (5.5 Moz) and AngloGold Ashanti (3.3 Moz). Newmont also reported the largest reserves (including proven and probable) of 95.7 Moz in 2019, followed by Barrick Gold (71 Moz) and Gold Fields (53.2 Moz). Alamos Gold Inc. (NYSE: AGI) has the smallest production (495 Koz), while B2Gold (NYSE: BTG) has the lowest reserves (6.5 Moz).




Freeport-McMoRan recorded the largest

TTM revenues of ~$13 billion


Operating performance Freeport-McMoRan (NYSE: FCX) recorded the largest TTM revenues of ~$13 billion (but gold contributes only ~15% to total revenues), followed by Newmont and Barrick Gold with $10.5 billion and $10.3 billion, respectively. However, on the core operating profit front, Barrick Gold topped the list with TTM EBITDA of $9.6 billion, followed by Newmont and Freeport-McMoRan. On the cost front, Newcrest Mining (ASX: NCM) had the lowest All-in Sustaining Cost (AISC) of $738 per ounce, while Sibanye-Stillwater (NYSE: SBSW) reported the highest AISC of $1,544 per ounce as against industry average of $1,024 per ounce, according to our list of senior gold. Newmont, Agnico Eagle, and Barrick are the top thee dividend paying companies on a per share basis while Freeport-McMoRan, Polymetal International, and Newmont top the list in terms of yield.





Liquidity and Balance sheet Alamos Gold Inc. has the lowest debt to total capital and debt to equity ratios amongst our list, with 3% each. B2Gold ranks second with debt to total capital of 11.3% and debt to equity ratio of 12.8%. In terms of liquidity, Alamos carries the highest current ratio of 3.1x, while Gold Fields holds the lowest current ratio of 0.81x, as of 2019.




Alamos Gold has the lowest debt to total capital and debt to

equity ratios amongst our list

In terms of EV/production,

Harmony Gold has the lowest multiple at

~$3,000/oz.

Source: Bloomberg, FRC

Valuation Metrics In terms of EV/annual production, Harmony Gold has the lowest multiple at $2,953/oz, followed by AngloGold and Kinross Gold (NYSE: KGC) at ~$4,700/oz each. Barrick Gold and Kinross Gold are the most attractive with EV/TTM EBITDA multiples of 6.3x and 6.5x.

Name Bloomberg Ticker Current ratio Debt to total capital Debt to equity

Polymetal International POYYF 2.76 47.48 90.42

AngloGold Ashanti AU 1.16 45.16 82.36

Sibanye-Stillwater SBSW 1.83 43.65 77.46

Gold Fields GFIOF 0.81 42.83 74.90

Freeport-McMoRan FCX 2.47 36.60 57.74

Agnico Eagle AEM 1.54 26.48 36.02

Kinross Gold KGC 2.96 26.19 35.49

Newmont Goldcorp NEM 2.63 23.56 30.82

Harmony Gold HMY 1.35 20.73 26.16

Newcrest Mining NCMGF 2.93 20.73 26.14

Yamana Gold AUY 0.98 19.03 23.50

Barrick Gold GOLD 2.90 15.65 18.56

B2Gold BTG 2.60 11.32 12.76

Alamos Gold Inc. AGI 3.10 3.00 3.00

Average 2.14 27.32 42.52

Min 0.81 3.00 3.00

Max 3.10 47.48 90.42




Source: Company Filings, Bloomberg, FRC

Conclusion Based on our overall ranking using eight key metrics – Production, Revenues, EBITDA, EV/Revenue, EV/EBITDA, AISC, Dividend yield and Debt to Capital – we find that Barrick Gold ranks first with the best (lowest) total score of 34, followed by Newmont (49) and Kinross Gold (50). Barrick’s leading position in production, revenues and EBITDA, coupled with lower costs, earned it the top




Our analysis shows Barrick Gold ranks

first with the best total score of 34.

Newmont is the world’s largest gold

miner with production of 6.3

Moz in 2019.

spot, while Newmont’s higher costs and valuation pushed it to the second place.


Initiating coverage on top three producers Newmont Corporation - world’s largest gold producer

BUY Current Price: $69.04 Fair Value: $74.64 Risk: 2

Data as of July 27, 2020

Price and Volume (1-year)

Returns Company Data

52 Wk Range $98.0 - $187.5

Shares O/S 803 Mn

Market Cap. $55.1 Bn

EV/EBITDA (2020E)

11.14

P/NAV 1.8

Dividend Yield – 1.5%

2-yr Beta to gold prices: 1.6

Newmont is the world’s largest gold miner with production of 6.3 Moz in 2019. The company’s portfolio consists of eight assets, led by Boddington (1.0 Moz annual production), Peñasquito (1.5 Moz), and Nevada (JV- 1.5 Moz). With the largest gold reserves (96 Moz as of 2019) and resources (74 Moz measured and indicated) as well as emerging development projects and ramping up of existing projects, Newmont is well positioned to deliver stable targeted production of 6-7 Moz annually over the next ten years. Eight World-Class Assets Stable production over next years

Source: Company presentation

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NEM US Equity XAU BGN Curncy

YTD 12M

NEM 59% 85%

Gold (XAU) 29% 37%




Newmont aims to reduce its ASIC to

$800-$900/oz by 2023, from the

current ~$1000/oz.

For Newmont, every $100 increase in

gold prices results in robust incremental cash flows of $400

million.

Targeting $800-$900/oz ASIC by 2023 Through capital discipline encompassing stable sustaining capex of ~$1.0 billion and gradually declining development capex, Newmont aims to reduce its ASIC to $800-$900/oz by 2023, from the current ~$1,000/oz. This would significantly improve margins and cash flows.

Declining CAS and AISC


Superior free cash flow generation and solid balance sheet rewarding shareholders Higher production coupled with higher gold prices helped Newmont report a 57% jump in free cash flows to $1.4 billion for 2019, and a 75% y/y jump to $611 million in 1Q20. For Newmont, every $100 increase in gold prices results in robust incremental cash flows of $400 million. The company also has a solid balance sheet with $6.6 billion in liquidity including $3.7 billion in cash as of 1Q20, sufficient for funding new project developments. In 2019, Newmont returned almost the entire free cash flows generated or $1.4 billion to shareholders as dividends (~$0.9 billion) and share repurchases (~$0.5 billion). Since inception, Newmont has executed $800 million or 80% of its share repurchase program at an average price of $42 ($321M in 1Q20 @45 per share). Going forward, Newmont plans to invest about half of its FCF back into the business and the other half towards dividends, share repurchases and cash on the balance sheet. The company increased its annual dividend to $1.00 per share starting 1Q20, which translates into a dividend yield of 1.6%.




Despite the shutdown of certain plants due to COVID-19, Newmont expects to meet the lower end of its prior 2020 production guidance. Our fair value for NEM is $75

Free cash flow sensitivity to gold prices


COVID-19 impact to marginally affect 2020 production and earnings Despite the shutdown of plants due to COVID-19, Newmont expects to meet the lower end of its prior 2020 production guidance of 6.4 Moz +/- 5%, or ~6.0 Moz. This will be achieved by ramping up production at Cerro Negro, Yanacocha and Eleonore, and gradual opening all plants (as of June 2020, ~90% of its plants were operational). Sustaining and development capex have also been slashed – to $350M from $625M, and $800M from $975M. We believe some of the reduced production this year will move into 2021. Earnings sensitivity to gold prices As per our analysis, assuming production constant, every $100 point move in gold prices will lead to around $375 million change in EBITDA for 2021E.

Source: FRC

Valuation and Rating We initiate coverage on Newmont with a 12-month price target of $74.64 and view it as an attractive play on the rising gold prices given its stable production profile and declining costs. Strong free cash flow generation will fund both dividend payouts and capex. Our target price is based on equal weightings of 1.5x our NAV of $39.4 per share ($31.6 billion @ $1,400/oz) and 12.0x (a 20% premium to industry average) EV/2021 EBITDA. We believe the premium is reasonable given the company’s strong production and reserves profile and given that it has traded at a premium to the industry average historically (current EV/2019 EBITDA multiple stands at ~13.0x).

Price

6,311 1,480 1,580 1,680 1,780 1,880

7,600 5,422 5,786 6,150 6,514 6,878

Production 7,700 5,493 5,862 6,231 6,600 6,969

7,800 5,564 5,937 6,311 6,685 7,059

7,900 5,634 6,013 6,392 6,770 7,149

8,000 5,705 6,089 6,472 6,855 7,239

Sensitivity of EBITDA to price and production




For comparison purposes, we have also provided fair values based on historical 3-year EV/EBITDA multiples as a worst-case scenario, should gold prices drop significantly and take down valuation multiples. Our fair value based on this comes to $56, significantly lower than the fair value using current multiples.

Table: Newmont Valuation


Particulars 2021E

EBITDA ($ Mn) 6,311

Peer multiple (x) 10.2x

Target multiple 12.0x

EV ($ Mn) 75,733

Less: Total Debt ($ Mn) 6,116

Less: Minority Interest ($ Mn) 929

Add: Cash ($ Mn) 3,709

Equity Value ($ Mn) 72,397

Shares Outstanding (Mn) 802.58

Target Price ($) 90.20

CMP 69.04

Upside 31%

Valuation MethodFair Value per

share ($)Weight

Weighted value

per share ($)

EV/EBITDA (12.0x) 90.2 50.0% 45.10

P/NAV (1.5x) 59.1 50.0% 29.54


CMP ($) 69.04

Upside/(Downside) 8.1%

Forward Dividend Yield 2021E 1.45%

Total return Including dividend 9.6%

Valuation based on 3-year historical EV/EBITDA average

EV/EBITDA (based on 3-year historical avg of 7.2x) 52.5 50.0% 26.23

P/NAV (1.5x) 59.1 50.0% 29.54


CMP ($) 69.04

Upside/(Downside) -19.2%


Total return Including dividend -17.8%




Barrick Gold is the second largest gold producer in the world, with production of 5.5 Moz gold in FY 2019.

Barrick Gold HOLD Current Price: $29.91 Fair Value: $31.58 Risk: 2





52 Week Range $12.65 - $30.20

Shares O/S 1.76 Bn


EV/EBITDA (2020E)

10.7

P/NAV 1.7 2-yr Beta to gold prices: 2.0

Barrick Gold is the second largest gold producer in the world, with production of 5.5 Moz gold in FY 2019. The company has ownership interests in gold mines across the world including Argentina, Canada, Cote d'Ivoire, the Democratic Republic of Congo, the Dominican Republic, Mali, Papua New Guinea, Tanzania, and the United States. Recently, the company merged its Nevada assets (61.5%-owned) with Newmont in July 2019, as well as acquired Randgold Resources in September of 2018. Sustainable production on the back of key assets Barrick has a large portfolio of gold assets including six tier one gold assets (>500 Koz of annual production) currently under operation. In addition to this, the company also owns mines and projects with the potential for promotion to Tier One. The company is focused on high margin, long-life operations and projects clustered in the world’s most prospective gold districts. Barrick produced 5.5 Moz gold in FY 2019, an increase of 21% y/y, driven by robust reserves (~71 Moz in FY 2019) and strong mineral resources (~167 Moz). Barrick estimates its production level to be around ~5.0 Moz annually until 2029, with North America continuing to contribute the largest part, followed by Africa and the Middle East. Porgera (located in Oceania) is also expected to see growth in the future, offsetting declines in LATAM and AP.

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GOLD US Equity XAU BGN Curncy

YTD 12M

GOLD 61% 75%

Gold (XAU) 29% 37%




Barrick estimates its production level to be around ~5.0 Moz annually until 2029 Production in 2Q is expected to be lower due to mine sequencing and planned maintenance and COVID-related shutdowns. Barrick reported a 71% y/y jump in cash from operations in Q1.

Barrick 10 year Gold Production plan

Source: Barrick Presentation Q1 2020

However, the company reported a 9% decline in production in Q1FY20 to 1.25 Moz, impacted by processing lower ore grades at Cortez and the sale of its 50% interest in Kalgoorlie. Moreover, production in 2Q is expected to be lower due to mine sequencing and planned maintenance and COVID-related shutdowns. Despite this, management is confident of achieving its revised full-year guidance of 4.6-5.0Moz of gold for FY 2020. Low operating cost structure to provide competitive advantage over peers Barrick carries one of the lowest-cost gold productions compared to its peers, with all-in sustaining costs (AISC) of $894 per oz in 2019 (compared to Newmont’s $1,222) and cash operating costs of $671 per oz. According to the company’s latest 2020 guidance, Barrick’s AISC for 2020 is estimated to be in the range of $920-$970 per oz and cash operating costs for 2020 are estimated to be between $650 and $700 per oz, comfortably falling within the lower half of the industry’s cost curve. This low operating cost structure helps the company deal with fluctuating/weak gold prices while providing a competitive advantage over higher-cost producers. Moreover, with the consolidation of the Barrick and Newmont operations (eight mines and associated infrastructure) in Nevada, the company will be benefiting from synergies of up to $500 million per year until at least 2024, on the back of a reduction in the costs of logistics as well as administrative costs. Strong cash flow and reducing debt bode well Barrick reported a 71% y/y jump in cash from operations in Q1, which helped it to exceed capital expenditures (rose to $451 million) and dividends (increased to $122 million) for the third consecutive quarter. Higher gold prices during the period helped the company realize a higher gold price of $1,589 an ounce, up 22% vs. 1Q19's $1,307.




Although dividend payments significantly declined since 2012, Barrick’s recent increases in dividends should attract dividend seekers.

Moreover, Barrick’s net debt fell to $1.9 billion in 1Q20, the lowest since 2007, as a result of the January call of $337 million of 3.85% senior notes due 2022, mainly supported by strong cash flow. We believe this continued debt-reduction trend will result in lower leverage, thus improving its credit profile. Attractive return with increasing dividend In the last 12 months (LTM) to March 2020, Barrick paid out $337 million in dividends compared with $427 million in the LTM to March 2019, which included the final $254 million payment to former Randgold shareholders. Although the dividend payment has significantly declined since 2012, the company’s recent increases (25% in 3Q19 and 40% in 4Q19) should attract dividend seekers. Earnings sensitivity to gold prices As per our analysis, assuming production constant, every $100 point move in gold prices will lead to around $220 million change in EBITDA for 2021E.

Source: FRC

Valuation and rating Similar to NEM, we view GOLD an attractive play in the senior gold space on rising gold prices and stable production and declining costs. Our $31.58 target price is based on equal weightings of 1.5x our NAV of $17.7 per share ($31.4 billion @ $1,400/oz) and 12.0x EV/EBITDA multiple. For comparison purposes, we have also provided fair values based on historical 3-year EV/EBITDA multiples, should gold prices drop significantly and lower valuation multiples. Our fair value for GOLD based on this approach comes to $23.

Price

6,249 1,480 1,580 1,680 1,780 1,880

5,400 5,672 5,892 6,112 6,332 6,552

Production 5,500 5,733 5,956 6,180 6,404 6,628

5,600 5,793 6,021 6,249 6,477 6,705

5,700 5,853 6,085 6,317 6,549 6,781

5,800 5,913 6,149 6,386 6,622 6,858





Our fair value for Barrick is $31.58 per share

Table: Barrick Valuation


AngloGold Ashanti BUY Current Price: $37.91 Fair Value: $48.29 Risk: 2





52 Wk Range $12.66 - $38.50

Shares O/S 418 Mn


EV/EBITDA (2020E)

6.5x

P/NAV 1.4x 2-yr Beta to gold prices: 2.7

AngloGold Ashanti is the world’s third largest, and the largest, gold producer on the African continent, with 3.2 Moz produced in 2019. The South African company

Particulars 2021E

EBITDA ($ Mn) 6,249



EV ($ Mn) 74,985


Less: Minority Interest ($ Mn) 8,668



Shares Outstanding (Mn) 1,758


CMP 29.91

Upside 23%


share ($)Weight

Weighted value per

share ($)

EV/EBITDA 36.7 50.0% 18.33

P/NAV (1.5x) 26.5 50.0% 13.25


CMP ($) 29.91






P/NAV (1.5x) 26.5 50.0% 13.25


CMP ($) 29.91

Upside/(Downside) -22.9%


Total return Including dividend -22.0%

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AU US Equity XAU BGN Curncy

YTD 12M

AU 70% 106%

Gold (XAU) 29% 37%




AngloGold is the

largest gold producer on the

African continent

.

has 17 gold operations in nine countries (including Argentina, Brazil, Namibia, the US, and Tanzania), as well as numerous exploration projects around the world. The company is also involved in selling silver, uranium, and sulfuric acid. The company was formed in 2004, after AngloGold Limited acquired Ashanti Goldfields Company. Smaller higher-quality and more-focused footprint AngloGold holds about 44 million ounces of proven and probable ore reserves and ~175 Moz total resources, as of 2019. Recent asset sales and a few of the open-cut operations transitioning to underground operations have led to a decline in production. AngloGold has experienced a significant decline of over 40% in production over the past five years - from 4.5 Moz in 2014 to 3.2 Moz in 2019. Nevertheless, AngloGold has sought to focus on a smaller, higher-quality asset footprint that lets it direct exploration efforts in extending mine life. We believe, in the long term, this focused approach will help the company in improving margins. The company is currently focused on resource conversion into reserves. AngloGold's current reserve base of 27 Moz (as of 1Q20) can help it sustain its production level of 3-3.2 Moz for nearly 8 years, while its large resource base of 93 Moz could deliver ~27 years of output.

Source: Company Presentation

Moreover, AngloGold Ashanti's flagship Obuasi mine in Ghana (which was placed on care and maintenance in 2014) came online in December 2019, and is expected to ramp up to 375,000 ounces of gold production per year. In our view, this will help the company to reverse or stop its declining production profile, reaching a steady state output of 3.2 Moz by 2022.




COVID’s impact on

AngloGold’s production was

minimal in Q1 2020.

The company's newest low-cost

Obuasi mine, and the recent gold-price

momentum, are expected to drive

revenue growth and margins.

COVID’s impact on AngloGold’s production was minimal in Q1 2020, aided by early management intervention and portfolio diversification, and we believe the full year impact is expected to be ~5%. Production of 716 Koz in Q1 was supported by strong performances from Kibali, Geita and Iduapriem, partially offset by the temporary COVID-19 related stoppages at Serra Grande in Brazil, Cerro Vanguardia in Argentina and the South African operations, which together impacted production by 11,000 oz. The miner targets full-year production at 3.1-3.3 million ounces vs. 2019's 3.27 million, since there will be no output from Sadiola and Morila. Portfolio upgrade, gold price supports costs and margins AngloGold carries comparatively higher costs (Q1 2020 AISC: $1,047/oz vs. industry average of ~$1,000/oz) on a consolidated basis. In 2019, average gold all-in sustaining costs increased 2% y/y to $998 an ounce, driven by higher cost of international operations. However, the company’s low cost Obuasi project (all-in sustaining costs below $775/oz) is expected to lower all-in sustaining costs on a consolidated basis. Moreover, selling the high-cost South Africa operations lowers cash costs by $40-$50 an ounce. We believe this will help the company to lower its overall costs in line with the industry average in the next one or two years. In terms of margins, AngloGold has seen a huge improvement in margins over the past three years, with AISC margins doubling to 34% in 2019, from 16% in 2017. The company's newest low-cost Obuasi mine, and the recent gold-price momentum, are expected to drive revenue growth in 2020, and 2021, and eventually drive margins further on the back of additional volume, with the potential for AISC to reach more than 40% in FY-2021 in our view.




Last 12-months adjusted net debt to

adjusted EBITDA was at 0.85x, well

maintained within its target of ~1.0x.


Appropriate liquidity and falling leverage bode well AngloGold continues to progress in its strategy of maintaining balance sheet flexibility and appropriate liquidity. At March 31, 2020, the group had a cash position (cash and cash equivalents) of $1.9 billion after fully drawing on its $1.4bn multi-currency RCF. At April 30, 2020, AngloGold’s available liquidity was at $2.3 billion, with no near term debt maturities. At March 2020, the company reported free cash flows of $94 million, an increase of 231% y/y. Adjusted net debt declined to $1.6 billion at March 2020, from $1.78 billion at December 2019, leading to an improvement in its adjusted net debt to adjusted EBITDA ratio to 0.93x compared to 1.0x at December 2019. Last 12-months adjusted net debt to adjusted EBITDA was at 0.85x, well maintained within its target of ~1.0x.


Falling leverage to support dividend payment: Increasing gold prices combined with strong free cash flows will enable AU to maintain its net-cash position even after regular investments in new projects. Moreover, reducing leverage below its target of 1.0x net debt-to-EBITDA should enable the company to increase dividend payments. In FY 2019, AngloGold paid a dividend of ~11 US cents per share, an increase of 57% compared to ~7 US cents per share in 2018. In Q1 2020, the company declared and paid a dividend of $38 million to its shareholders, compared to a dividend of $27 million declared in Q1 2019. As per management’s policy, AngloGold pays 10% of free cash flow before project




capital spending. Earnings sensitivity to gold prices As per our analysis, assuming production constant, every $100 point move in gold prices will lead to around $100 million change in EBITDA for 2021E.

Source: FRC

Valuation and rating In terms of valuation, we view AU as the most attractive play in the senior gold space as it trades at attractive valuations (1.4x P/NAV and 6.0x EV/2021E EBITDA). Our $48 target price is based on equal weightings of 1.5x NAV and 10.0x EV/EBITDA, both largely in line with industry averages (1.4x and 10.2x). Our NAV for AU comes at $11.1 billion at $1,400/oz gold price. For comparison purposes, we have also provided fair values based on historical 3-year EV/EBITDA multiples, should the gold price drop significantly taking down valuation multiples. Our fair value for AU based on this approach comes to $40.

Table: AngloGold Valuation

Price

2,550 1,480 1,580 1,680 1,780 1,880

3,250 2,282 2,370 2,458 2,547 2,635

Production 3,350 2,322 2,413 2,504 2,595 2,686

3,450 2,363 2,456 2,550 2,643 2,737

3,550 2,403 2,499 2,595 2,691 2,787

3,650 2,443 2,542 2,641 2,740 2,838


Particulars 2021E

EBITDA ($ Mn) 2,550



EV ($ Mn) 25,495


Less: Minority Interest ($ Mn) 38



Shares Outstanding (Mn) 418


CMP 37.91

Upside 50%




.


Conclusion Based on our valuation using the blended EV/EBITDA and P/NAV approach, AngloGold is the most attractive among the top three gold producers. However, as per our ranking analysis using scores for eight key metrics, Barrick Gold ranks first, Newmont second, and AngloGold tenth. Despite being ranked one in our rating scale, we have a HOLD rating on Barrick because we believe it is close to fully valued. Our fair value estimate reflects 6.5% upside from the current share price, which is lower than the 8% threshold for our BUY ratings (see back of the report for rating definitions). This scenario reminds us of one of the classic mistakes made by investors – which is to blindly invest in companies that they believe are fundamentally good, while ignoring their valuation metrics (a good company is not always a good investment).


share ($)Weight

Weighted value

per share ($)

EV/EBITDA 57.0 50.0% 28.49

P/NAV (1.2x) 39.6 50.0% 19.80


CMP ($) 37.91






P/NAV (1.2x) 39.6 50.0% 19.80


CMP ($) 37.91







Appendix

Senior Gold Producers – Statistics and Metrics (based on 2019 data)

Source: Company filings, Bloomberg, FRC

Ticker Company Name

Production

(Koz)

Reserves-

2p (Koz)

AISC

(US$/oz)

TTM

Revenue ($

Mn)

TTM

EBITDA

($ Mn)

EBITDA

Margins

(%)

Current

ratio (x)

Debt to

total

capital (%)

Debt to

equity (%)

EV/

Production

($/oz)

EV/

Reserve

($/oz)

EV/

EBITDA

(x)

EV/

Revenue

(x)

NEM Newmont Corp 6,291 95,730 1,222 10,518 4,295 40.8 2.6 23.6 30.8 9,021 593 13.2 5.4

GOLD Barrick Gold 5,465 71,000 894 10,345 4,900 47.4 2.9 15.7 18.6 11,032 849 6.3 5.8

AU AngloGold Ashanti 3,281 43,860 998 3,769 1,223 32.4 1.2 45.2 82.4 4,678 350 12.6 4.1

KGC Kinross Gold 2,528 24,327 974 3,591 1,829 50.9 3.0 26.2 35.5 4,670 485 6.5 3.3

NCMGF Newcrest Mining 2,488 52,000 738 3,802 1,691 44.5 2.9 20.7 26.1 8,747 419 12.9 5.7

GFIOF Gold Fields 2,195 53,200 970 2,967 1,523 51.3 0.8 42.8 74.9 5,748 237 8.3 4.3

AEM Agnico Eagle 1,782 21,585 938 2,635 1,422 54.0 1.5 26.5 36.0 10,230 845 12.8 6.9

HMY Harmony Gold 1,440 23,716 1,207 1,979 389 19.7 1.4 20.7 26.2 2,953 179 10.9 2.1

POYYF Polymetal International 1,316 23,672 866 2,281 1,038 45.5 2.8 47.5 90.4 8,097 450 10.3 4.7

BTG B2Gold 969 6,470 862 1,234 872 70.6 2.6 11.3 12.8 7,073 1,060 7.9 5.6

SBSW Sibanye-Stillwater 933 15,400 1,544 5,053 1,140 22.6 1.8 43.6 77.5 9,140 554 7.5 1.7

AUY Yamana Gold 900 7,859 978 1,402 881 62.9 1.0 19.0 23.5 6,948 796 7.1 4.5

FCX Freeport-McMoRan 882 29,600 1,286 12,916 2,019 15.6 2.5 36.6 57.7 40,805 1,216 17.8 2.8

AGI Alamos Gold Inc. 495 9,726 951 704 315 44.7 3.1 3.0 3.0 8,197 417 12.9 5.8

2,212 34,153 1,031 4,514 1,681 43.1 2.1 27.3 42.5 9,810 604 10.5 4.5

495 6,470 738 704 315 15.6 0.8 3.0 3.0 2,953 179 6.3 1.7

2,212 34,153 1,031 4,514 1,681 43.1 2.1 27.3 42.5 9,810 604 10.5 4.5

Average

Min

Max

Size Operating performace Balance sheet and Liqudity Valuation




Fundamental Research Corp. Equity Rating Scale: Buy – Annual expected rate of return exceeds 12% for micro / small cap companies, and 8% for mid / large cap companies. Hold – Annual expected rate of return is between 5% and 12% for micro / small-cap companies, and 5% and 8% for mid / large-cap companies. Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. 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