AngloGold Ashanti (NYSE:AU) is a South African Gold mining company that should frighten off sensible investors. The company is leveraged just too high with a precarious $1.3 billion of long term debt, and marginal cash holdings of only $400 million. AU's debt load is excessive when compared to its peers, such as Gold Corp's (NYSE:GG) minimal debt of a mere $10 million. Its liquidity position is less than stellar, and in these volatile economic times, poor liquidity is akin to having one foot on a banana peel and the other on a wet floor.
The shares are overbought: Gold's recent 14% rise from last month's lows has given the shares a jolt. The stock has rallied more than 60%, despite the fact gold has already retraced about one half of its recent gains. The shares have simply gone up too much in too short of a time frame and are due for a heavy dose of profit taking. This ultimate selling pressure should correct the stock back down to a more reasonable $15 to $17 area.
Fundamentals are weak: The company's cost of production shot up dramatically on a sequential basis. It cost the gold producer approximately $434 to mine an ounce of gold in its second quarter, and by its third quarter, AU experienced a 12% increase, to a hefty $486 per ounce. The company is expected to produce 1.25 million ounces of gold in its fourth quarter versus 1.27 million ounces reported in its third quarter. The bottom line is: AU's costs are going up as its production goes down, not a good combination for enhancing profits.
Other produced minerals: The company also produces uranium, copper, sulphur and silver. These minerals are mainly utilized in manufacturing processes, and with a world wide recession in full force, most of these metals have all seen dramatic price collapses due to poor demand. This does not bode well for AU's bottom line.
Recommendation: Take advantage of this overbought situation by exploiting its downside potential. Open a short position with a $23 "buy stop" market order put in place to limit your downside risk. The shares should be covered in the $15-17 area for a juicy profit.
Disclosure: Short AU.