Why this midcap gold stock is crashing (it’s not gold prices)
What happened
Shares of a South African based gold miner AngloGold Ashanti (NYSE: AU) collapsed on Friday, down 13.7% as of 1:30 p.m. EDT. At a time when most gold stocks are pulling silver from rising gold prices, AngloGold’s second quarter numbers released this morning left a lot to be desired.
Worse yet, the gold miner lowered its annual forecast, immediately drawing an analyst down on its stock, which is weighing even more on the stock price today.
So what
AngloGold’s gold production climbed 4% year over year, but its all-inclusive sustaining cost (AISC) jumped 7% to $ 1,380 per ounce of gold. AISC is a key cost measure used in the gold industry and includes most of the costs incurred over a period of time, from exploration to operating expenses and sustaining capital expenditures. AngloGold’s AISC Q2 is among the highest in the industry.
Image source: Getty Images.
In addition to COVID-19 related restrictions that affected production, AngloGold had to suspend operations at its Obuasi mine in Ghana after a fatal accident in May. Unfortunately, the Obuasi mine is still under investigation and AngloGold does not expect the mine to restart before the end of the year. AngloGold therefore expects a weaker year to come. Here’s what its revised guidelines look like:
| Metric | Original orientation for 2021 | Revised guidance for 2021 | Actual 2020 |
|---|---|---|---|
| Production (thousands of ounces) | 2,700-2,900 | 2 450-2 600 | 2 806 |
| AISC per ounce | $ 1,130 to $ 1,230 | $ 1,240 to $ 1,340 | $ 1,037 |
| Total capital expenditure (millions) | $ 990 to $ 1,140 | $ 1,030 to $ 1,190 | $ 757 |
Data source: AngloGold Ashanti.
Shortly after the results were announced, analysts at RBC Capital lowered their price target for AngloGold stock to $ 20 apiece. Mid-cap stocks are changing hands at around $ 16.50 a share at the time of this writing, but the pessimism was enough for investors to shed gold stocks today.
Now what
The timing of the incident in Obuasi could not have been worse. Last year alone, AngloGold generated its highest free cash flow since 2011, and management changed its dividend policy to increase the payment in FCF from 10% to 20%. It also decided to pay dividends semi-annually instead of being annual starting this year. More importantly, AngloGold predicted that its gold production would increase at a compound annual rate of 5% between 2021 and 2025, largely thanks to a ramp-up at Obuasi.
AngloGold’s outlook could improve if it acquires Canadian gold miner Corvus Gold with assets in Nevada, as proposed. Still, with 2021 turning out to be a tough year for AngloGold, investors may want to look at other top gold stocks right now to bet on gold prices.
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