Earnings Call Transcript - AU Q3 2021

Operator, Operator

Good afternoon, everyone. Welcome to AngloGold Ashanti's Q3 2021 Results. Thank you very much for making the time today. Alberto and Christine will handle the Lion's share of this presentation. And then I'll be handing over to Alberto for questions afterwards. And as always, please do note the Safe Harbor statement at the front end of the presentation, which contains important information regarding forward-looking statements. I'd ask you please to take a moment to look at that. Without any further ado, I'm going to hand over to Alberto.

Alberto Calderon, CEO

Thank you, Stewart. I will start where we always do, which is with safety. Our all injury frequency rate was 2.15 injuries per million hours worked, which remained well below the ICMM member average. It's also worth noting that the injury severity continues to decline. We're making progress implementing our revitalized safety strategy, which is focused on the controls needed to eliminate our major hazards. What does it mean? That each person on every site knows by heart the three or four major hazards that are most likely to cause fatalities and the priority controls we need to prevent them. This is crucial in eliminating accidents and especially fatalities from our sites. Our emphasis on COVID-19 remains on safely ensuring business continuity. We're also working with our host governments and communities to provide healthcare support and other assistance in areas that are feeling strained from the pandemic. Access to vaccines is improving in our operating jurisdictions, with all sites making good progress with about a quarter of our workforce having received the first dose. About 45% of the workforce has received at least one vaccine dose. Higher vaccination levels will be a significant plus for our employees and our business. Our operational and financial highlights indicate that while we saw a better quarter with the operating parameters stabilizing, there is clearly a lot more that needs to be done to improve relative to the potential of our assets. We started addressing the fundamental performance of the business, and while it may take time to get to where we want to be, we are beginning to see an improving trend. Gold production was 613,000 ounces, underpinned by strong performance at Siguiri, AGA Mineração, and Tropicana, with investments in our bigger assets AGA, Tropicana, and Iduapriem on track and remain on schedule. Brazil is working aggressively to complete the systematic conversion to comply with new legislation. Cumulative inflation for the current year is estimated to be around 5%, mainly driven by fuel, freight, logistics, steel, and heavy equipment costs due to both consumable pricing and competition for scarce labor resources, particularly in Brazil and Argentina. COVID-19 impacted production by about 4,000 ounces and all-in sustaining CapEx by about $20 an ounce in the last quarter. All-in sustaining CapEx was highly variable quarter-on-quarter due to a 27% increase in sustaining capital expenditure. We generated $18 million in free cash flow, which was lower year-on-year mainly because of higher CapEx and lower production and gold price. The balance sheet remains in a solid position; gearing is still very low, and we have $2.5 billion in liquidity. Revised guidance remains on track, albeit at the lower end of the production and the higher end of the cost range. Obuasi has successfully resumed underground mining, and we've reached an agreement to acquire Corvus Gold, which will give us a clear pathway to our Tier-1 production base in Nevada. At Quebradona, the mining operations license was approved by the Secretary, which is good news. However, the National Regulatory Environmental Rights declined to make a call. So we will require an appeal and a resubmission, and this will delay us by about 18 to 24 months. We're confident that we will get it in time, but it is a serious delay. Core priorities, back to basics. With about two months behind me now, it's clear we need to change how we do things; we must go back to basics, and success will follow from this. My objective in the short to medium term is to offer a compelling investment proposition, narrow our focus on cost per host, and perhaps the most critical thing, sharpen project execution and improve cash flow conversion. That starts with having the right team and structure in place, making the implementation of the proposed new operating model the most crucial first step in our change. I'll cover this structure and operating model in more detail in a moment. We're moving quickly on this and plan to have it in place by the end of the year. We intend to strengthen our leadership; we've put our best operators in charge of our Ghana business, and we have new leadership across our Brazil operations and Latin America operations. Marcelo Godoy has joined us from Newmont, bringing one of the best minds in the industry on mine planning and asset optimization. He'll be leading a detailed analysis together with our CEO and every one of our operations to determine the capability of each asset and then develop detailed plans to close the gap between the current performance and their inherent potential. A team is conducting a productivity and cost review focused on removing costs that are not aligned with our key strategic imperatives. These teams are carefully scrutinizing the 2022 plans to ensure they can be delivered with confidence and are establishing stretch targets to unlock the full potential of our assets. Improving our overall social license to operate is fundamental. We're working on safety, continuing to respond to our host governments and community needs, and ensuring we have an updated and detailed climate response. All of this is vital to our long-term success. Unlocking value through a more accountable, effective organizational structure. To ensure effectiveness and accountability in any business, functional service roles should not be located at multiple layers of the organization. Ideally, these roles should apply only in two places: at the corporate level and as close as possible to the assets that generate revenue. The two-level structure improves accountability and outcomes by providing the assets directly with the resources needed to deliver their plant production costs and other metrics. The corporate functions should have a clear mandate to govern minimum requirements which the assets must perform and, in special circumstances, provide the asset specialists temporary high-quality support where needed. My aim is to ensure that we design and implement an operating model that ensures the right people are in the right places, making the right decisions at all times. I have absolute conviction that the proposed course of action is in the best interests of the long-term success of the business and the many stakeholders who depend on it. This view is fully supported by the board and the executive committee. Moving into the quarterly performance, here is a snapshot of some of the key operating and financial metrics. I don't intend to go through it in detail, but let me draw your attention to some key points. The surface capital more than doubled, as we continue to push ahead with our reinvestment strategy and compliance with TSF regulations in Brazil. We also continue to spend on Obuasi Phase 3 without the benefit of any meaningful production. Exploration was also up more than 50%, again, aligned with the sharper internal focus on improving our ore bodies. We're still targeting to at least replace a depletion this year probably slightly more than that. You will see the impact of the increased investment in our costs and cash flows, which were also affected by lower production and lower price. While the operation is safe and has faced challenging three months, we did see an improving trend relative to the first two quarters. Some key points for the period include transitioning all our Brazilian operations to dry-stacking to meet deadlines, completing the review of the ground management plan at Obuasi, starting mining operations, and continuing investment in exploration and development to improve flexibility and resource confidence, which is essential for improving our operational performance. COVID-19 infections have steadily declined across all operating jurisdictions, with vaccination efforts gaining momentum. In Australia, pressure remains in the labor market, and in Brazil, our staffing levels are gradually returning to full complement. Still, we expect it will take some time before we return to pre-pandemic productivity levels. Africa overview: Kibali reported gold production of 94,000 ounces for the quarter, with all-in sustaining CapEx of $771 an ounce, in line with the same quarter of last year. A decreased production of 48,000 ounces was significantly below the 69,000 ounces achieved in the same quarter last year. Mine and process were 20% higher; however, this was not sufficient to mitigate the impact of lower mine grades. We are making good progress with waste stripping the Cut 7 and expect to access high-grade ore in Blocks 7 and 8 later this year. A better year is anticipated in 2022; the all-in sustaining capital for the period at $1,580 an ounce reflects near-term investment in waste stripping and new tailings storage facilities. Siguiri produced 76,000 to 77,000 ounces, well above the 52,000 ounces achieved in the same quarter last year. This reflects a combination of better grades and higher throughput as we ramp up the processing plant. All-in sustaining CapEx at $1,271 an ounce was consequently 6% lower year-on-year, and we expect further improvements as we ramp up delivery of offsite ore from Block 2. Geita reported production of 125,000 ounces, which is lower than the second quarter of last year. That mine is currently in a deposition period between the depleted Nyankanga open pit and the new Nyamulilima open pit. Until then, it's entirely dependent on underground operations. I'm encouraged by the development of the open pit, which is ahead of schedule, and ore mined will increase in the quarter, contributing to 50% of gold production in 2022. I would add that this will be the first time we have three or four years of reserves, and that should remain for the foreseeable future. In Brazil, the Latin American overview indicates that Brazil produced 102,000 ounces in the quarter, which is well below the 134,000 ounces in Q3 last year, making it one of the regions most heavily impacted. We've had to take a short-term decision to scale back plants through low throughput to stay within permitted tailing limits. While we fast track the transition to dry-stacking, a combination of lower production and additional capital contributed to abnormally high all-in sustaining CapEx unit costs, which are not comparable to prior periods. All-in sustaining CapEx unit costs will trade down following a difficult transition period when the dry-stacking is complete. The Brazilian senior leadership team has been restructured as part of our operating model review, and a full organizational review is underway. AGA Mineração reported production of 84,000 ounces compared to 103,000 ounces achieved in the same quarter last year. This decrease is largely due to the underperformance of the Corrego do Sitio mine, which will now be managed by the two other operating teams. Capital expenditure for the period was $61 million, adding $714 an ounce for all-in sustaining CapEx. Cerro Vanguardia's performance was significantly lower at 18,000 ounces relative to the 31,000 ounces reported in the same quarter last year. Costs included an additional $32 million capital, which equated to $1,800 an ounce and is clearly not comparable to last year. The General Manager and Site Leadership Team has been replaced. In Argentina, Cerro Vanguardia's operations are normalizing as COVID-related travel restrictions are lifted, allowing underground and open-pit mining to return to full capacity. Gold production of 38,000 ounces was 80% below the prior year's reporting period, which had the benefit of higher-grade stockpiles. All-in sustaining CapEx at $1,402 an ounce was higher than the previous year's, reflecting increased capital for stripping, ore reserve development, and maintenance projects that were put on hold during the COVID pandemic. Australia's production was 24,000 ounces down year-on-year, largely due to the wall failure in the Boston Shaker open pit, which we highlighted in Q2; a strong Aussie dollar hasn't helped either. The pinnacle slip at Tropicana resulted in gold production of 67,000 ounces compared to the 75,000 ounces in Q3 last year, deferring 30,000 ounces of gold production into next year. All-in sustaining CapEx at $1,146 an ounce was 5% higher than the prior year. At Sunrise Dam, gold production was 58,000 ounces, down from 74,000 ounces last year due to unfavorable wage reconciliations in the underground mine. All-in sustaining CapEx was consequently higher at $1,485 an ounce compared to the prior year. Q4 production is expected to increase with higher-grade ores from the Western Shear zone and the newly discovered Frankie orebody. Mining in the Golden Delicious pit is progressing well, with additional material stockpiled to be blended with underground ore, contributing to higher productions in the final quarter. Looking ahead, we expect to see ongoing improvements in our operational performance in Q4 as mines increase productivity and ramp up production. Improvements are expected at Tropicana, with an absence of mine constraints in 2022, and we anticipate seeing the full benefits of the Boston Shaker. The Obuasi redevelopment project is being developed in three phases. Phases 1 and 2 have been completed, enabling a mining rate of 4,000 tons per day. The refurbishment of the KRS shaft and material sampling system is complete. So is the GCVS ventilation shaft and the process plant and associated infrastructure including the water management facility. Focus is now on Phase 3, which sets up the necessary mining infrastructure to serve as the production areas move deeper into Blocks 10 and 11. Phase 3 aims to upgrade the KMS shaft and material handling system and new ventilation shaft, KMS, underground pumping stations, and refurbishments of the BSVS sub-shaft below the KRS shaft. Setup is done, and engineering and procurements are underway. We have maintained good continuity with the project team from the earlier phases and expect to work closely with Ghanaian contractors to support the project. In the first two phases, as I hand over to Graham, I would like to say we are on track to reach the 4,000 tons per day target with an expected production of 250,000 ounces for 2022. So with that, I'll hand over to Graham to discuss the resumption of mining and provide an update on Phase 3.

Graham Ehm, COO

Thank you, Alberto. Underground mining resumed at Obuasi in mid-October. Underground mining activities had been voluntarily suspended following the sill pillar failure on the 18th of May, which resulted in the tragic loss of one of our colleagues. This disruption had a significant impact on the project ramp-up, which had been tracking reasonably well and had navigated the global pandemic challenges. A detailed review of the mining and ground management plan was conducted by a cross-functional internal team and supported by independent third-party Australian mining consultants. A comprehensive series of protocols have been introduced to supplement existing operating procedures. The full suite of procedures ahead of the mining front now includes existing systemic probe drilling procedures, extensive use of technology including cavity monitoring systems and cavity water laser systems, as well as visual inspections to confirm the position and status of backfill in previously lined areas. These protocols are being integrated into the line operating system. It is estimated that the supplementary operating procedures introduced following the review will add about $10 to $20 a ton to the lines operating costs, or about $50 per ounce. This does not materially change the mine plan or the public reserves or mineral resources. Our production in 2022, as the mine ramps up, is estimated to be around 240,000 to 260,000 ounces for the year, with all-in sustaining costs of about $1,250 to $1,350 per ounce and cash costs around $900 per ounce. As Alberto mentioned, the plan is to undertake the ramp-up in the first half achieving the 4,000 tons a day rate by the middle of next year. We estimate that in the fourth quarter of next year, the annualized production rate will be around 320,000 to 350,000 ounces a year, with annual production remaining at that level in 2023 until Phase 3 is completed in Q4 of 2023. At that point, we estimate that the mining rate will step up to around 5,000 tons per day. With all three phases of the project complete, production from 2024 to 2028 is anticipated to average 400,000 to 450,000 ounces at an all-in sustaining cost of around $900 to $950 an ounce. Thank you, Alberto.

Christine Ramon, CFO

Thanks, Graham. I'll now discuss the financials. Our cost performance reflects a significant reinvestment phase at key assets across our portfolio, particularly at Iduapriem, Geita, and Tropicana, as well as the Brazil tailing compliance costs. Our focus remains on improving operational performance, which will be underpinned by cost and capital discipline. Cash costs increased 23% or about $172 an ounce to $927 an ounce, largely due to lower grades, stockpiles, ore process movements, and inflationary pressure. This was partly mitigated by higher by-product sales, lower royalty payments, improved efficiencies, and weaker local currencies. Recovered open pit grades are 32% lower year-on-year, with most operations reflecting lower grades except for Siguiri and Sunrise Dam. Recovered grades from underground operations were 2% lower year-on-year, as all operations except for Kibali improved by 6% against the prior quarter, excluding Obuasi, where there was a 46% increase in recovered grade and Geita, a 19% increase. Stockpile drawdowns were noted at Geita, Iduapriem, Tropicana, and Siguiri. Compared to the previous quarter, cash costs improved by 8%, mainly due to higher production from producing assets and lower operating costs. All-in sustaining costs for the quarter were 35% or $356 an ounce higher at $1,362 an ounce compared to Q3 2020, driven by higher cash costs and planned higher capital expenditure to improve mining flexibility, orebody confidence, as well as tailings compliance and reserves. We saw sustaining capital increase by 70% to $213 million, mainly due to the Brazil total capital expenditure and continued stripping activities at Tropicana and Iduapriem. Moving to sustaining costs in Q3 2021, we estimated a $20 an ounce impact due to COVID-19, and a $94 an ounce impact related to the Brazil tailings compliance program. For the year-to-date, the COVID impact is estimated to be $43 an ounce, including $20 an ounce related to estimated additional costs and $23 an ounce related to the loss of production of 47,000 ounces. We are closely monitoring inflation, as cumulative inflation for the year-to-date is estimated around 5%, predominantly driven by crude oil prices in Brazil, higher freight and logistics costs, increases in steel and heavy equipment pricing, and competition for labor resources, particularly in key jurisdictions including Brazil and Australia. We are focusing on the retention of critical skills and strengthening the necessary training and graduate programs for succession planning. We continue to proactively monitor global supply chains to maintain resilience and continuity of supply and did not experience any material negative impacts from supply shortfalls during Q3. Due to our strategic partnerships and global spending strategies, as well as stocking strategies at our operations, we have benefited from delayed inflation impacts. However, we've increasingly seen cost increases in Q3 2021 and anticipate continued pressure throughout the remainder of 2021 and into 2022. We will utilize our long-range consumable contracts and operational excellence programs to mitigate these cost pressures. Moving on to the balance sheets, our balance sheet strategy continues to enforce disciplines in capital allocation and long-term balance sheet improvements based on a self-funded approach. Adjusted net debt is at $871 million, down 60% from the peak. We remain committed to maintaining a robust balance sheet with an adjusted net debt to adjusted EBITDA target ratio of one time through the cycle. Our current ratio of 0.43 times is well below target. Liquidity remains strong, and continues to provide good flexibility. We currently have cash balances of $1.1 billion, excluding our share of the Kibali cash balance of $512 million. From a liquidity perspective, cash is mainly supported by the multi-currency $1.4 billion RCF, largely unrolled. The Corvus transaction is anticipated to close during Q1 2022, funded from available cash on hand. On October 22nd, we successfully raised a new seven-year bond of $750 million, priced at a record low coupon of 3.375%. This translates into an interest saving of around $13 million per annum. The proceeds from the new bonds will be used to repurchase the $750 million, 5.125% notes due in 2022 through a cash tender offer followed by the redemption of any remaining notes. There are no other significant near-term maturities. Our dividend policy remains unchanged, which is 20% of free cash flow paid semi-annually. We paid an interim 2021 dividend of $0.06 per share in August, based on free cash flow generated in the first half of the financial year. The final dividend will be formula-based and declared at the end of the financial year. Our free cash flow continues to be impacted by lockup effects at Geita and Kibali, and export duties at CBS. In Tanzania, recoverable VAT credits increased by $8 million, totaling $252 million, despite a $7 million offset against corporate tax payments in September. The offsets for the VAT accumulated since July 2020 are expected to continue, although there is an expected lag in the administrative process. We continue to engage with Tanzanian authorities regarding a recovery mechanism on historical VAT accumulated until June 30, 2020, totaling $132 million. In the DRC, cash is held in the Kibali JV's bank account in US dollars, fully available for operational requirements. Our joint venture partner and operator, Barrick, continues to receive $74 million, while in Argentina, the export duty receivables remain at $23 million. CVSA had a cash balance equivalent to $147 million on September 30, 2021, of which $140 million is eligible to be declared as dividends. Applications have been submitted to the Argentine Central Bank to approve this amount for payment. Finally, our credit ratings remained unchanged during the quarter. Both Moody's and Fitch maintain an investment-grade rating for the company, with Moody's maintaining a negative outlook and S&P maintaining a rating one notch below investment grade. Concluding on guidance for 2021, our revised guidance issued in August remains on track. We're tracking towards the bottom end of the range for the revised production guidance of 2.45 million ounces to 2.6 million ounces. As in prior years, Q4 is expected to be our peak production quarter, with improvements expected at Iduapriem, Siguiri, Australia, and elsewhere. We are trending towards the top end of the range for both total cash costs and all-in sustaining costs, with revised guidance set at $1,240 to $1,340 per ounce. Other operating expenses for the multi-million dollar negative includes Obuasi and Siguiri maintenance costs of between $45 million to $50 million for 2021. Guidance excludes any impact on production and costs relating to the COVID-19 pandemic. The revised guidance also does not assume any production contribution from Obuasi for the second half of 2021, as underground ore will only begin to be finished from run of mine stockpiles after resuming underground ore mining in mid-October 2021. We expect Obuasi to ramp-up to a full mining rate of 4,000 tons per day by the end of the first half of 2022. Capital expenditure is tracking within the guided range of $1.030 million to $1.190 million. For the remainder of the year, we will continue our reinvestment program as we pursue key growth-driven brownfield projects across the portfolio. Our sustaining capital spend rate for the nine months ended September 30 was $288 an ounce, in line with our estimated spend levels of $270 to $290 an ounce for the year. Growth capital expenditure in Q4 relates to Obuasi, Geita, Tropicana, Siguiri, and the two Colombian projects, Gramalote and Quebradona. On the Obuasi phase, we expect to achieve the commercial production stage by mid-2022. Reserve development capital will continue to be classified as growth project capital. So despite the reclassification of capital, the overall Obuasi capital remains unchanged. Key risks facing the business include inflationary pressures, the continued spread of COVID-19, and higher than normal employee turnover rates. In Brazil, our tailings facilities are currently being converted to dry-stacking operations in advance of decommissioning the existing tailings facilities. This program, taking place amidst the COVID-19 pandemic, has led to increased competition for skills and engineering resources, resulting in an increase to the planned investment to complete the conversion by the legal deadline. Our current estimates indicate that capital expenditures required in 2021 to implement this new technology will not exceed $150 million, and we expect this work to continue during 2022 to 2025. However, based on preliminary estimates today, we anticipate that the annual capital expenditures for each of these years will be significantly less than in 2021 and will decline over time. So with that, I'll now hand over to Alberto to conclude. Thank you.

Alberto Calderon, CEO

Thank you, Christine. Looking forward, why AngloGold Ashanti? We have a high-quality asset portfolio, a self-generated project pipeline, great people, and an excellent balance sheet. These are the critical foundation blocks for making a long-term success of the company. However, we are not realizing our full potential; there is significant latent potential value to unlock. How do we unlock it? We have to get back to basics. We need to ensure we're doing the business of mining right. We'll continue to strengthen our teams wherever necessary, ensuring we have the right people in the right roles at every level. The operating model review will ensure we're optimally structured and organized to execute work in a way that supports our values and our strategy. Our program of assessing the full potential gap will be fundamental in regaining the asset competitiveness that we've lost, or in other words, significantly increasing asset productivity and reducing costs. We will simultaneously continue to entrench our leadership in ESG, particularly in the climate sphere, where we aim to reduce our emissions by more than half over the next decade. I firmly believe the process we are undertaking is necessary and the journey to begin to take AngloGold Ashanti and its valuation back to its place among the top gold mining companies, which is where it belongs. Thank you. With that, I will open to questions.

Operator, Operator

Thank you very much, sir. At this time, we would like to hand it over to Mr. Bailey for questions. Thank you.