AngloGold Ashanti Ltd. (ANG)’s decision to scrap a $2.1 billion share sale in response to investor opposition will put the debt burden of South Africa’s largest gold miner under scrutiny.
Chief Executive Officer Srinivasan Venkatakrishnan proposed the equity offering alongside a plan to place international operations into a separate company. That would have left the South African operations debt-free. Now, AngloGold needs to find another way to grapple with the industry’s worst debt-to-equity ratio as gold prices trade near an eight-month low.
“The problem is not going to go away,” said Peter Major, a mining analyst at Cadiz Specialised Asset Management in Cape Town. “The only way you get of it is with a rights issue. Every play they put forward is going to sound hollow now.”
Investors including hedge-fund billionaire John Paulson opposed the issue because it diluted existing shareholders too much. Having rejected that plan, the company will focus on getting cash from existing operations while considering asset sales, Venkatakrishnan said yesterday.
“The fundamentals of the business are still strong if you see what we did in terms of production and costs,” he said on a conference call. “You can expect to see cash flow generated from these to help de-leverage the company.”
With $3.2 billion of net borrowings, AngloGold has a net debt-to-equity ratio of 103 percent, more than any other major gold miner, according to data compiled by Bloomberg.
Nonetheless, some investors said the rights offer had been unnecessary and applauded yesterday’s decision.
“The company realized that the market and us shareholders wouldn’t have supported the rights issue,” said Charl Malan, a mining analyst at Van Eck Associates Corp., which holds 5.2 percent of AngloGold shares. “Venkat and the rest of the managers are the best mining managers you’ll find. They’re doing a good job of bringing costs under control.”
The company’s shares, which slumped a record 15 percent on Sept. 10 when the share sale was announced, rose 2.1 percent in Johannesburg yesterday.
Paulson, whose Paulson & Co. holds 6.6 percent of the company and had campaigned for the split, objected to the size of the share sale and planned to vote against the proposal.
“The concept is good, but the execution, the way they’re doing it with this massive dilutive equity offering, it’s value-destructive,” he said last week
The South African Reserve Bank only consented to the proposal to split the company up after AngloGold agreed to raise enough money to become debt-free, people with knowledge of the matter said last week.
“Taking that feedback into account, we’ve done the right thing by removing the uncertainty from the market,” Venkatakrishnan said.
A sale of assets was one possibility the company will consider, he said. It may bring in partners for its Colombia projects to reduce cash investments, Venkatakrishnan said.
“We don’t have a gun held to our head,” he said, referring AngloGold’s debt facilities and bonds. “We’ve got time to look at all of these options.”
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