DBRS Confirms AngloGold Ashanti at A (low)

DBRS has confirmed the rating of AngloGold Ashanti Limited (AngloGold or the Company) as the Company’s profitability improved in 2006 (up from a low level in 2005). DBRS notes that AngloGold’s operational and financial position is improving – yet it is still below expectations. It was expected that 2007 would be the year that the Company would finally maximize/optimize the Ashanti assets that were acquired in April 2004. However, it appears that the Company will take another year (i.e., 2008) to accomplish this goal.

Recently, Anglo American plc (Anglo) announced that it planned to reduce its 42% interest in AngloGold to zero over the next three years.

Although costs remain a challenge for the Company, DBRS notes that AngloGold has the lowest costs of the senior producers in South Africa (by at least $50/oz) and that costs across the gold industry have risen over the last few years (industry average total cash costs have risen from under $200/oz in 2002 to over $300/oz in 2006). AngloGold’s total cash costs for 2006 rose by 10% to $308/oz from $281/oz. in 2005. This was mainly the result of the underperformance of some assets (e.g., Geita mine), continued strength of the South African rand versus the U.S. dollar, and inflationary pressures (e.g., increasing consumables, labour and energy costs). However, high realized gold prices more than offset these higher costs, as 2006 net income increased to negative $14 million from negative $160 million in 2005. Profitability, as measured by ROE, increased from –4.2% in 2005 to –0.4% in 2006 (five-year average of 9.3%) with larger non-hedge derivative losses partially offsetting the high gold price.

AngloGold has a consistent record of producing strong cash flows (operating cash flow has averaged $610 million and cash flow-to-total debt has averaged 0.46 over the last five years) and maintains good liquidity ($506 million in cash at December 31, 2006). In 2006, AngloGold used the proceeds of an equity issuance to reduce its debt level by $0.5 billion. Gross debt in the capital structure decreased from 41.5% at year-end 2005 to 32.7% at year-end 2006. EBITDA gross interest coverage, although below the five-year average of 10.2 times through 2006, was still adequate for the rating at 8.8 times.
Capital expenditures, which were a record $817 million in 2006, are expected to reach $1.1 billion in 2007 as AngloGold pursues internal growth, modernizes and develops its asset portfolio. The largest expenditure ($312 million) will be bringing the world-class Boddington gold mine in Australia into production.

Going forward, DBRS expects (1) Anglo American to sell the rest of its AngloGold holdings in a manner that does not adversely affect the Company, and (2) the Company’s operational and financial performance to continue to improve as the benefits of its investment program and optimization of the Ashanti assets are realized (the balance sheet is expected to weaken slightly driven mainly by the high capex program, in the near term; however, this will depend on the Company’s realized gold price in 2007). DBRS will revisit the rating if either of the two points above is not achieved.

Notes:
All figures are in U.S. dollars unless otherwise noted.