DBRS Confirms AngloGold Ashanti, Changes Trend to Negative

DBRS has today confirmed the Senior Unsecured Debt rating of AngloGold Ashanti Limited (AngloGold or the Company) at A (low), but has changed the trend from Stable to Negative as the Company continues to face operational issues at a number of its mines.

2007 was a challenging year for the Company on a number of fronts. Although overall production was only down 3%, expectations were for a turn around year (please see DBRS’s April 2007 AngloGold rating report). However, this did not materialize – as production was down at 14 of the Company’s 20 mines (as the Company faces operational issues at a number of its mines). In particular, the Geita mine in Tanzania, where production has been halved over the past two years, was unable to recover production back to 2005 levels due to a pit collapse (delaying access to higher grade ore). On a positive note, production at the Sunrise Dam mine in Australia increased to a record 600,000 oz in 2007 from 465,000 oz in 2006 – thus, this mine is now the Company’s largest single asset gold mine (representing 11% of total 2007 production).

AngloGold’s total cash costs for 2007 rose by 16% to $357/oz from $308/oz in 2006. This was mainly the result of lower production, stronger local currencies and continued inflationary pressures (e.g., increasing consumables, labour and energy costs). Although costs remain a challenge for the Company, DBRS does note 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 past few years (industry average total cash costs have risen from under $200/oz in 2002 to over $350/oz in 2007). Going forward, if the depreciation of the Rand versus the U.S. dollar continues (it is down over 20% since the beginning of 2008) – this will positively impact the Company as its cash costs are reduced in U.S. dollar terms.

Following the announcement made on January 25, 2008, in which AngloGold was advised that Eskom Holdings Ltd. (Eskom, the South African electricity supply body) would be interrupting power supplies to the Company’s South African operations, AngloGold halted mining and gold recovery at these operations. Subsequently, AngloGold announced on January 29, 2008, that it had begun the process to restart production at its South African operations following a meeting with Eskom and industrial electricity consumers at which, Eskom had agreed to provide AngloGold with 90% of its electricity demand (i.e., a 10% cut) prior to the shut down so as to return the operations closer to normal production levels. During March 2008, Eskom indicated that the initial 10% cut would be revised to 5% – highlighting the importance of mining to the South African economy. Although gold production will be impacted in 2008, DBRS believes that this situation is manageable for the Company.

Revenues increased by $316 million, from $3.0 billion in 2006 to $3.3 billion in 2007, representing an 11% increase over the period. This increase was primarily due to the increase in the realized price for gold in 2007, which was $629/oz, representing a $62/oz or 11% increase over the 2006 level. However, the higher realized gold price was unable to offset the higher operating costs and increased hedge book losses, thus 2007 net income decreased to negative $668 million ($112 million pre-hedge losses) from negative $44 million ($195 million pre-hedge losses) in 2006. Accordingly, profitability as measured by ROE decreased to -33.3% in 2007 from -1.5% in 2006.

The Company’s debt profile is tilted towards the near term with $1.3 billion coming due over the next two years. The Company should not have a problem refinancing its debt; however, in the current financing environment, pricing may be more aggressive than historically. DBRS does note that liquidity is strong with cash on hand at over $500 million and $627 million of the Company’s revolving loan facility remaining available for draw-down (as at December 31, 2007).

Capital expenditures, which were a record $1.02 billion in 2007, are projected to be $1.26 billion in 2008 as AngloGold pursues internal growth, modernizes and develops its asset portfolio. The largest expenditure (approximately $381 million) will be bringing the world-class Boddington gold mine in Australia into production. Thus, the balance sheet may weaken in the near term as the Company uses additional debt to partially fund its capex program.

Going forward, DBRS expects (1) Anglo American to sell the rest of its AngloGold holdings (16.6%) in a manner that does not adversely affect the Company, and (2) the Company’s operational and financial performance to improve (taking into account its power difficulties in South Africa). The balance sheet is expected to weaken further (although only marginally) driven mainly by the high capex program, in the near term. DBRS will revisit the rating if operational and financial performance of the Company does not improve in 2008.

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

To obtain the full report, please click on the link below or contact us at info@dbrs.com.