AngloGold Ashanti (NYSE:AU) ended the week on a horrendous note. Its shares experienced two brutal sessions in a row, plummeting 18% since Wednesday. What happened? The shares had become wildly overbought and simply had gone up too much in too short of a time giving it an unrealistic valuation. Profits took a hit, and hit hard, especially when the price of gold fell below $900 and AU disclosed that its previous production guidance for the first quarter was too high at 1.13 million ounces and the company cut guidance by 2.5%, to 1.1 million ounces. AU blamed the shortage on temporary mine closures related to safety issues. The market does not like negative surprises and consequently punished the shares brutally on a 50% jump in share volume.
The shares are still too high: The stock nearly tripled in the last six months from $13 to $39, but could easily retrace up to one half of those gains, back down to the $26 area. The stock is still too expensive in comparison with its peers.
Key ratios versus the competition: AU is bloated with debt ($2 billion), has minimal book value and a higher share price to sales ratio compared with other gold producers such as Newmont (NYSE:NEM), Barrick (NYSE:ABX) and Goldcorp (NYSE:GG). AU’s debt to equity ratio of .83 is almost three times higher than ABX’s .30 reading, and twice that of NEM’s .47 debt to equity ratio. GG is lucky enough not to have a debt to equity ratio, since it is essentially “debt free”. AU’s price to sales ratio of 3.77 is about 32% higher than the group’s average of 5.53, providing further evidence of a price disconnect.
AU is selling at more than five times its book value, followed by ABX at 3.85, NEM at 2.95, and GG with the highest relative book value, at only a 1.59 multiple of book.
Cost to produce: At an extraction rate of $450 per ounce, AU is at the high end of producers and this should be reflected in its valuation, but so far it has not been factored in. Credit Suisse seems to agree, as it recently downgraded its opinion on the company from “outperform” to “underperform”.
I admit, I was woefully wrong last December when I recommended shorting this stock, but I am sticking to my guns on this one, with a “what goes up, must come down mentality”. The crux of AU’s problem is its dependence on the price of gold. It really has no control over the precious metal’s direction and is a “sitting duck”, when it is exposed to the” whims” of the commodity markets. It is certainly better when companies have control over their own destiny, rather than the other way around. Shorting the shares at this juncture makes sense, as the trend has certainly changed in favor of the bears with downside momentum building. An additional 15% drop seems realistic and an appropriate place to eventually cover.
Disclosure: Short AU.