Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

AngloGold Ashanti Limited (NYSE:AU)

Q2 2006 Earnings Conference Call

July 27 2006, 9:00 am ET

Executives

Charles Carter - Executive Officer, Investor Relations

Bobby Godsell - Chief Executive Officer

Srinivasan Venkatakrishnan - Finance Director

Thero Setiloane - Executive Officer, Marketing

Neville Nicolau - Chief Operating Officer, Africa

Roberto Carvalho Silva - Chief Operating Officer, Americas & Australia

Richard Duffy - Executive Officer, Business Development & Exploration

Mark Lynam - Treasurer

Analysts

George - RBC Capital Markets

Victor Flores - HSBC

Heather Douglas - BMO Capital Markets

Terence Ortslan -- TSO & Associates

Barry Cooper - CIBC

John Bridges - JP Morgan

Presentation

Charles Carter - Executive Officer, Investor Relations

Welcome to the presentation by the AngloGold Ashanti executive team of our results for the Second Quarter Ended 30th June 2006. The format of the presentation will be as follows; Bobby Godsell, our CEO, will review the company’s financial and operating performance over the period, Venkat, our Financial Director will briefly discuss financial disposition followed by Thero Setiloane, who heads up the marketing wing, briefly review a new all enlisted net core entity and this will be followed by the presentations of two chief operating officers with Neville Nicolau discussing the Africa operations, and Roberto Carvalho Silva covering the international operations. Last but not least, Richard Duffy, who heads up business development and exploration, will review our exploration activities during the quarter. After these presentations, we will take your questions.

Before we begin, it is necessary for me to read a declaration regarding forward-looking statements that may be made during this presentation. Certain statements made during this presentation including without limitation those concerning the economic outlook for the gold-mining industry, expectations regarding gold prices, production, cash costs and other operating results, growth prospects and the outlook of AngloGold Ashanti’s operations including the completion and commencement of commercial operations of certain of our exploration and production projects, and our liquidity and capital resources and expenditure contain certain forward-looking statements regarding AngloGold Ashanti’s operations, economic performance, and financial condition.

Although AngloGold Ashanti believes that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to be incorrect. Accordingly, results could differ materially from those set out in the forward-looking statements as a result of among other factors: changes in economic and market conditions, success of business and operating initiatives, changes in the regulatory environment and other government actions, fluctuations in gold prices and exchange rates, and business and operational risk management. For discussion of such factors, refer to AngloGold Ashanti’s Annual Report on Form 20F for the year ended 31 December 2005, which was filed with the Securities and Exchange Commission on 17 March 2006. AngloGold Ashanti undertakes no obligation to update publicly or release any revisions to these forward-looking statements to reflect events or circumstances after today’s date, or to reflect the occurrence of unanticipated events. I will now hand over to Bobby Godsell.

Bobby Godsell - Chief Executive Officer

Thank you, Charles. I am pleased to report an improved financial performance for the June quarter with adjusted headline earnings 63% higher at $140 million of 51 US States proceeds. This improvement was primarily the result of increased production, which was up 6% on the final quarter and a better-received price 10% higher.

Regarding safety, the quarter saw a modest improvement in the lost-time injury rate, which improved from 6.8 to 6.6. It also showed a more significant reduction in fatal accidents five this quarter compared to last quarter’s 11. Fatality rates reduced significantly from 0.28 to 0.12. Three operations in the company stand out for the lost-time injury pre-quarter Cripple Creek and Victor in Colorado, Bibiani in at Ghana and Yatela in Mali. These seven operations recorded only a single lost-time injury for the three-month period these being Cerro Vanguardia in Argentina, Sunrise Dam in Australia, Serra Grande in Brazil Morila and Sadiola in Mali, and Iduapriem in Ghana.

As we have seen improved safety performance across all our operations from what remains a core focus of the management team. Turning to the operating performance I would characterize the solid production rose 6% to $1.4515 million ounces due primarily to improved results for most of our South African assets where four out of the seven operations reported by our production and lower costs and also several of the international operations particularly Sunrise Dam in Australia and Cerro Vanguardia in Argentina.

In South Africa, the Mponeneg, Kopananag and TauTona mines reported particularly strong results with increases of 14%, 11% and 9% respectively and total cash cost improvements of 5% at both the Kopanang and TauTona mines at 8% at Mponeng. For the region, production increased by 6% to some 20,150 kg in total cash cost came in again below the 600,000 Rands per kilogram market improving 4% for the quarter to 59,200 Rands per kilogram of both produce. If you speak of the other African assets, two of the Malian operations reported solid results, as did Siguri in Guinea with production rose 4%.

Neville will speak in greater detail to the Tanzanian operation data. This mine continued to suffer the effects of Q1 drought and subsequent heavy rain and the associated delay in the pushback of the Nyankanga pit. This has the effect of reducing production by 15% to 71,000 ounces and crossed 38% to $507. We have also applied a new great evaluation model at Geita and the ultimate effect of this has been to reduce our forecast of the feed grade and consequently grown pit. The combination of these three factors has resulted in a revised production outlook for Geita in 2006 to approximately 50,000 ounces for the year with a potential to double this next year in January 2007 as we access the higher grade in the Nyankanga pit.

I should note that this revision does not impact our view of the long-term potential of this, which remains one of the key long life assets of the company.

The international assets were marked by some excellent performances this quarter including Sun Rise Dam in Australia, the higher grades led to production at 24% and Cerro Vanguardia in Argentina where production was up by 23%. AngloGold Ashanti Mineracao in Brazil also reported 16% higher production. At Cripple Creek and Victor in the United States, the production and total cash cost improved modestly by 2%. Despite this improvement however, we revise down the 2006 production outlook for this operation to approximately 30,000 ounces for the year.

Roberto will take you through this in greater detail, but the revision is largely the consequence of the quarter’s reduced rainfall. The release of these ounces in the path does not get -- producing gold is anticipated to improve the production outlook a couple of feet in Victor in 2007. The effect of the downward revision at Cripple Creek and Geita combined with the company’s year-to-date performance suggest to us we need to lower our production outlook for the year to approximately 5.7 million ounces. This is modestly below the low end of the range we provided to the market earlier this year, which -- low end in was 5.8 million ounces. Total cash cost for 2006 are estimated at around $301 an ounce and capital expenditure is $851 million. These forecasts are based on exchange rates. In the case of South Africa of Rands 6.65 per US dollar. In Brazil of 220 Real to the dollar, Argentina 309 Pesos to the dollar, in the case of Australia on a forecast rate where in Australian dollar would buy 75 American cents. Over the next quarter we are estimating production fault at around 1.4 million ounces with an average cash cost of $306 per ounce. This is use for the quarter exchange rates of 7 Rand to the dollar, 218 Brazilian Real to the dollar and 307 Argentinean Peso and in Australian dollar by 75 American cents. Finally for the headline earning in the 30 June 2006 with the clearing of dividend of Rand 2 or $0.30 per share. This is on the basis of a similar power ratio as the first six months in last year and the 40% of the adjusted headline earnings, which we regard as a prudent for to all time high capital expenditure space. The interim dividend of $0.30 represents in Rand terms, an increase of 34% on the interim dividend of last year.

I'm now handing to Venkat.

Srinivasan Venkatakrishnan - Finance Director

Thank you Bobby. Bobby has noted production was up 6% on the previous quarter with total cash cost 1% lower than that of the last quarter. Our price proceed at $600 an ounce was 10% higher than that of the March quarter and some 5% lower than the average spot price during the quarter. In this higher gold price environment and given the substantially increased volatility that has come to characterize today’s gold markets, you should expect our price received to be in a range of some 5% to 10% off average spot price.

Importantly, this is because we continued to deliver into the book as fully as we possibly can. That’s I would point out to you that if you look it up hedge book this past quarter the hedge delta at quarter end was 315 tones or 10.1 million ounces. Marking a 10% reduction or a decrease of some 1.1 million ounces from the previous quarters reported hedge delta. This was achieved despite the gold price that was some $38 per ounce higher as compared to the previous quarter end price. Going forward, we remain committed to opportunistically implementing value accretive hedge reducing strategies although we do not intend to reduce the hedge book at any cost particularly in this highly volatile gold price environment.

Our treasurer Mark Lynam is with us today and will be happy to take any questions you may have on the hedge book. In terms of our adjusted headline earnings, you will see that these are 63% higher than the previous quarter at $140 million or $0.51 per share on the enlarged share capital. This improvement has been driven mainly by production and price, together with marginally improved costs. Our financial returns on both capital employees and on equity are now comfortably back in the double digits.

Lastly turning to our debt position, the proceeds of our recently completed equity raising and improved cash generation from the business have enabled us to reduce the company’s net debt level by some 38% from $1.66 billion to $1.03 billion during the quarter. The annual rolling net debt to EBITDA ratio improved from 2.27 times at the end of 2005 to 1.1 time as of 30th of June 2006.

I’ll now hand you over to Thero to discuss the recent listing of Nufcor Uranium Limited.

Thero Setiloane - Executive Officer, Marketing, Anglo Gold Ashanti

Thank you Venkat. I’m going to briefly walk you through the recent IPO on London's alternative investment market of Nufcor Uranium Limited. First, let me start with some background.

Since 1999, AngloGold Ashanti has held 50:50 joint venture with First Rand International in a London based company called Nufcor International Limited. This was established to market and trade nuclear fuel products in various stages of the nuclear fuel cycle including but not limited to our own production of uranium. Nufcor International is today a well-established player in the global uranium products market. It is Nufcor International that has listed a newly created investment company Nufcor Uranium on Aim. This new listing which started trading last Friday under its ticker NU is 10% held by Nufcor International with the rest now being a free float held by institutional investors. The strategy of Nufcor Uranium is to buy and hold uranium in the form of U3O8 for the long term and not to trade it actively. This is really the first time that equity investors can gain direct exposure to the uranium price in the form of U3O8 on a European exchange. As you will know, U3O8 is an ore used in the feedstock in the early stages of production of nuclear fuel for use in nuclear power stations. It can only be transferred between licensed and secure storage facility.

In respect of the IPO of Nufcor Uranium based on an offer price of £2.5 cents per ordinary share, the market cap is from £67.6 million or $123 million. Proceeds will be used to acquire £2 million of Uu3O8 from Nufcor International. Having done so, the company will have approximately $22 million in cash for further purchases of U3O8 and to meet operating expenses. Nufcor International is contracted to provide custodial and advisory services to Nufcor Uranium.

We are also delighted with the successful launch of this investment opportunity on Aim. Going forward, we will continue to work on additional ways to optimize our Uranium production capabilities and to leverage on our well-established expertise in this very attractive market.

I will now hand you over to Neville Nicolau to take you through the operational performance of the African region.

Neville Nicolau - Chief Operating Officer, Africa

The African assets produced a mixed set of results for this quarter with some significant improvements amongst the operations in South Africa and in Mali tempted by lower ounces and higher cash costs from all three of the assets in Ghana and a disappointing quarter at Geita.

As Bobby mentioned of the seven South African operation full posted improved production and cash costs for this quarter reporting a particularly impressive 14% production increase and 8% lower total cash cost at 47,250 Rands per kilogram. At Savuka and Tau Lekoa, our two South African operations undergoing restructuring to take advantage of the high gold price. Operational performance was solid.

At Savuka, production was on par with the previous quarter, at 653 kilograms and cash costs were 3% higher due to the additional maintenance work and re-development related to the decision to postpone Savuka’s closure. At Tau Lekoa, production declined 10% according to the down sizing plan and cash costs consequently improved 9%.

Turning to the greater Africa, the Ghana in essence had a difficult quarter. Bibiani and Iduapriem production declined 40% and 5% respectively. At Bibiani, the decrease was in part the results of the operations continue down scaling to a tolling-only status. Although, lower recovery rates resulting from a circuit chain breakdown and power outrages also contributed to the reduction. At Iduapriem (inaudible) breakdowns resulted in lower production. At both Bibiani and Iduapriem, the problems are being addressed and we should see operational improvements from these operations in the next - in the second half of the year. (Inaudible) production was more or less on par with the previous quarter at 97,000 ounces. A 5% yield decline partially offset by an improved processing availability lead to a 16% increase in the total cross cost $406 per ounce. Surface drilling continued to (inaudible) during the quarter with the 2D (inaudible) reaching depths of 876 meters and 1400 meters. The recent decisions are expected in the first half of 2007.

Finally, I would like to discuss in more detail the problems we are currently experiencing at Geita. First, we will transition now to mining. This has been undertaken at the same time that we have been trying to do the catch up of the backlog of the stripping of the pushback number four in the (inaudible) pit. While mining rate and efficiencies have improved on our under performance earlier this year, we at the same time have been reviewing our great models to insure optimum mining of the six times of deposit. As you will be aware the (inaudible) plunges and requires increasing removal of over burden for each push back. As the debt increases the nitro of the hang wall becomes more significant in the mining process. The hanging wall content minus backlog (inaudible) in the form of hanging wall splays, which require careful definition and evaluation before mining. Our experience of mining is as we increase in depths of (inaudible) to refinements in the geological interpretation of the old body, and the application of a more appropriate grade evaluation model. This is resulted in a lowering of the full cost of the institute and an increase in the all tonnage from the major (inaudible) pit.

The effect of this is that the feed great to the plant is reduced and this decreases the gold output since the plant is running at full capacity. This was a negative effect on the monthly gold output of the mine. Management are therefore considering cost effective ways of resolving this problem, the most obvious is to increase both the plant capacity and the mining peek capacity. In the short term the rain problem has that slowdown the mining of push back for earlier this year has delayed the mining in the high grade or underneath push back four and into next year. This together with the lower than expected grades and recovery of the (inaudible) had course management to revise the outlook of this year to approximately 350,000 ounces as an overall yield of about 2 gm per ton. With the potential to double this production in 2007 as we exists the higher grade -- as an expected yield of about 3.7 grams per ton. In the medium term and assuming the current plant and fleet constrains, the mine should settle down at an annual production profile of approximately 650,000 ounces as a yield of just over 3gms per ton. Although this will vary as we mine through push back 5 and push back 6. Importantly and as Bobby noted, this near term production revision at Geita does not impact our view that this is a very significant long term all body to this end ground field exploration drilling programs are on -- have confirmed the connection between the south and central (inaudible) this quarter drilling indicated the potential for a second mineralize zone in -- south and the area three west showed encouraging results.

I will now hand you over to Roberto who will discuss the international operations.

Roberto Carvalho Silva - Chief Operating Officer, Americas & Australia

Thank you Neville. The international operation posted generally showed the result for June quarter. Looking first at South America. Cerro Vanguardia in Argentina is 24,000 ounce production level. Although total cash cost rose 10%, as a result of the continued appreciation of the Brazilian Real and slight at lower grade. (Inaudible) grew 20 million; production returned to more on normal levels increasing 16% to 57,000 ounces turning last quarter’s production halt during the (inaudible) mine. Total cash cost rose slightly quarter on quarter to $190 per ounce. Production at Cerro Vanguardia in Argentina was marked by a 23% improvement to 64,000 ounces due to higher grade. Cash cost were on par with those of the previous quarter, as increases in label four and costs offset the effect of increase -- by products and credits. Looking at growth for Australia, Sunrise Dam had an excellent quarter, Q2. With production up 24% as a result of an increase (inaudible) higher grade. Total cash cost consequent declined 12% to $366. Also from Australia, the -- project team continued to make good progress this quarter. Although we are of course is truly the early stage of the process. Finally, I would like to comment on our North American operation. Cripple Creek and Victor in Colorado.

As mentioned CC&V had a good quarter with both total cash cost improving 2% due to an increase in recoverable (inaudible). However, the (inaudible) to the higher volumes in the past and the last quarter to mitigate the effects of the lower grade minus from the bottom of the (inaudible) pit, which we said last quarter. There is now an increased water requirement at the (inaudible); in a context reduced rainfall in the Colorado area has led us to reverse down the production to 50,000 feet to approximately 300,000. Looking ahead the release of the low ounces under each bed is expected to improve the production of (inaudible) operation 2007. I should note that there are several management interventions currently underway to ensure that (inaudible) will take adequate steps to -- water supply for the rest of the year.

Most importantly we have sourced and purchase water from the nearby towns of Victor and Colorado Springs and we are in the process of installing an addition of pipelines to get this water to the mine. And I should note, this program at CC&V continues to be primarily focused on the resource expansion, results are now going set out been modest to the term the impact of new results an updated cost assumptions on expanding the deposit. And so any step out development in the south coast also continued during Q2 with encouraging results.

I’m going to hand it over to Richard, who we will discuss our exploration activities.

Richard Duffy - Executive Officer, Business Development and Exploration

Thanks Roberto. Exploration highlight in Q2 included the discovery of the new Havana zone at our Tropicana joint venture in Australia. Encouraging initial drew results from two of our Columbian projects, the signing of two regional exploration JVs in Columbia with Bema Gold and (inaudible) respectively, and the signing of a letter of intend for the stolen option of all of our Alaskan exploration properties and databases to international -- lines. Results from drilling of the Tropicana zone into the 34 meters at 4 gems a ton and 29 meters at 4.73gm a ton. Gold mineralization is confirm to extend 1400m along strike and drilling is aimed at testing the dawns of extension gold mineralization, which remains open. At the new Havana zone, significant drill intersect includes 15m at 1.93gms a ton and 20m at 2.1gms a ton and remains open to the North and South and down. We continue to target reaching -- ability in 2008. In Columbia phase one drilling direct to folks I need to talk with some two of projects in central Columbia return engaging initial result with a number of SA still outstanding.

We also capitalize on our first move advantage and land taking program by signing two regional exploration JVs which will facilitate accelerated exploration spend in these JV areas of interest. In June we sign an agreement with Bema Gold Corporation to form a new company to explore a select group of our mineral opportunities located in Northern Columbia. Under the terms of this agreement, this new company will have the right to earn 51% interest on any property that we elect to form up within this area of interest. By carrying out a minimum of 3000m of exploration drilling and by matching our prior exploration spend. We have initially agreed to provide a minimum of eight exploration properties to the center and Bema will provide minimum $5 million in exploration funding. In July we signed an agreement with Antapigasta[ph] to jointly explore for new copper and gold deposits in a highly perspective belt in southern Columbia. Under this agreement we will include all of our mineral applications and contracts and Antapigasta[ph] to commit to fund the minimum of $1.3 million of exploration within 12 months of signing the agreement with the option to invest an additional $6.7 million within four years to earn into 50% of the joint venture.

In the DRC the arrival of the second diamond drill rig enabled us to accelerate our drilling activities, which was focus on testing the (inaudible) corridors. Significant new intercept includes 40 meters at 6.4 grams a ton from 57 meters. Resource delineation drilling will continue in the DRC in the Q3 and Q4. We signed a letter of intent with ITH in June for the sale and option of all of our Alaskan mineral exploration properties and associated databases. Under the terms of this agreement we will be issued with just under 20% of ITH’s issued share capital. While Alaska remains highly prospective for the discovery of new gold mines our commitment in countries such as the DRC Columbia and Australia limit our ability to optimally develop these Alaskan projects. Through the inveigled cooperation with ITH the exploration program of these project will be accelerated and given that we would retain a significant share holding in ITH, in addition to JV rights an interest in the L&S -- project. Our shareholders will have considerable upside exposure to any future discoveries made in Alaska by ITH. Thank you all and now I hand back to Charles.

Charles Carter - Executive Officer, Investor Relations

Thank you Richard and -- invite you to come for questions.

Question-and-Answer Session

Operator

Thank you very much. Operator Instructions. Our first question comes from George -- of RBC Capital Markets. Please go ahead.

George - RBC Capital Markets

Thanks. Hi guys, there are two questions. The first one to Neville. Can you just shed a little bit more color to what exactly is going on and as far as sort of medium term outlook?

Neville Nicolau - Chief Operating Officer, Africa

George, as we said in the script -- we had a steady quarter-to-quarter on quarter in terms of production. And we also said that let me emphasize is that there was a decline in grade and the decline in grade was from underground and this is sort of risk, I mean it’s an effective -- very limited developed result, which is up at about five months business still very quite difficult to actually manage the mining. What is encouraging that also bad news is the affected, we managed to up returning from the mine and the profiting capacity of the pit, for the quarter and we actually improved on that. I mean the effect of this is bad news because the cost of course went up in a similar way. What we all finding it over all see is that we you know, the volatility of the monthly production sort of up and down of the monthly production is becoming less to matrix and we are starting to get in to a steady side and for the medium to we all looking forward to some steady improvement but not dramatic improvement.

George - RBC Capital Markets

Can you just give us ounces and cost as well now sort of 2007 what you think is achievable can generate you all right now?

Neville Nicolau

Well, I mean, I think, I mean we had given guidance on this and we will update that guidance as we go along but from where we are at the moment I think you can look forward to some steady improvement going into the future, I really wouldn’t like to say much more than that. There one thing I can add is just is the second quarter actually had one more cost in it in terms of some salary increases which might an another particularly you guys.

George - RBC Capital Markets

Thanks. Just a question from -- one day we can just clarify I believe you might have some comments in the morning conference call about the situation with Anglo, American holding in Anglo gold how are you -- see things developing what were the options are?

Neville Nicolau

Yeah, sure and good to know this the global media works globally, I was asked to comment on the statement made by Anglo American CFO in March I think at the (inaudible) investment conference in Miami where he indicated that and a few have existed fully their gold investment in two to three years time, and I was asked to comment, both about the time table and also about the modalities of that exit.

Now I mean, firstly on the time table, I guess that some updates in the earliest type of its schedule would be significant holders for the medium term, and I guess (inaudible) medium term is to two to three years. On the modalities, obviously this is Anglo-American call, they will determine how they how they say that exits.

I just pointed it off from AngloGold Ashanti’s point of view, would be keen on the exit being as quick and clean as possible, and then talked about two methods of exits. The one being an M&I activity of some fund, and the other being as the de-merger, that is the distribution in (inaudible) of AngloGold Ashanti shares help the Anglo-American to their own shareholders, and I just think that those were two methods of competing the exit, which would meet the criteria of this company AngloGold Ashanti, are getting the exist happen sooner and quicker then that otherwise be the pick.

George - RBC Capital Markets

Thanks for clarifying the total.

Operator

Thank you very much sir. Next question comes from with Victor Flores of the HSBC.

Victor Flores - HSBC

Thanks, good morning. Just following up on George’s question, can you give us a sense for what your expectations are for reserved development, because it seems that you’ve struggled quite to get the level of development to where you want it, and that is continuing to have an impact on grade of production.

Mark Lynam

Victor, that’s too deep. I mean, we said at the -- this time last year that we hoped to be at 10-month developed reserve by the end of this year, and we are still -- I mean, we are still heading for those numbers. We should be in - at the order of 10 months developed by the end of the year. If you look at the developed results for global, development results, we haven’t had a great quarter and we have taken steps to rectify the situation.

The benefits of the refrigeration are starting to show. The infrastructure upgrades are starting to add value and at the moment, we are continually improving the developed results situations. What’s quite important is that we also have, this year completed an extensive review of the business plan of (inaudible) and this is work that is still in progress. We could have a better idea by the end of this year when we actually publish the results as to what the future of (inaudible) is. We are also doing work in terms of the deepening projects, below 50 levels, where we are looking at a series of projects to exploit those reserves, so I mean there’s lot of things going on at (inaudible) at the moment. Most of it is being -- as we have been forecasting for the last two quarters. We had switch up a little bit in the development, but we have put things inside to improve that and we think that by the end of the year we should be a 10 month develop reserve quietly importantly the 10 months developed reserve is the target for the end of the year, by moving into the road with South African mine which have a sort of a comparable mining mix problem. We would be looking for 24 months to develop as a -– to be able to manage mining mix activities and until we get the number up to that level there will be certain, you know it’s difficult to manage mining mix and you know sometimes it will be –- after sometimes it will done, but it’s encouraging from the last quarters is not to stand in the growth that we actually manage to post it to mine and to process the volumes that we require to improve the production is overwhelming.

Victor Flores - HSBC

Just a follow up, do you get the sense that you still have a problem with dilution or you think that has been brought under control?

Mark Lynam

I mean, we still have dilution that is at higher rate than what we would like it to be significantly a year ago and the benefit of this -- is the definition drilling program is all coming through we are looking quite curiously at the mining method in fact we have a project and it will be about a three months project going at the moment to try and make sure that the definition is drilling results in more efficient mine planning and therefore more efficient extraction of the ore body. So we do look at dilution the right in the last 12 months, but not so at quite level.

Victor Flores - HSBC

Okay just following on to your other problem in Geita. Can you give us a slightly better qualification of what you mean by a review of the ore body has indicated lower grade but higher tonnage and what implications that might have for increasing the plying capacity?

Mark Lynam

Well I think we cover it a lot of it the script. I mean the problem that we have with gases in terms of interpreting the geographic model is that you’ve got this massive ore body and it’s quite a nice sketch in the presentation. It shows that the ore body plunges and as it get deeper the hanging will thus become quite important, in the hanging the satellite ore body will flow the sort of -– that remind true, when we remove the geological model that we use to integrate this place we found to be not appropriate, we’ve upgraded that model and we are using a valuation model. Technically what we were doing was undervaluing the effect of the internal wide with inner ore body. Because it’s very difficult to mine the ore body as selectively as the previous model required us to do and that we now have a realistic mining methods in relation to the evaluation model of these been a dropping grade, you know, we can't select the ore mining as shop these with the previous model required us to do.

As a result of that the gold is still there, but it’s more diluted than it was in our previous interpretation of the model and this has affected the plants. The only other thing to say about these is that although they contribute significant goals they’re quite difficult to mine through because you have to actually drill the ore body to define where these hanging bodies flows off, and this flows down the lake of mining towards the big ore body at the bottom of the push back.

Victor Flores - HSBC

So then this is a short-term problem rather than a long-term problem?

Mark Lynam

No, push back 5 and push back 6 would have the same effect. Of course we understand the geological model better now and we are better able to forecast what prospect 5 or prospect 6 will be, but the same hanging wall is about those two push back.

Victor Flores - HSBC

Okay, thank you, I will say good-bye, and let a few other forecast questions, thank you.

Mark Lynam

Thank you Victor.

Operator

Thank you very much Mr. Our next question comes from Heather Douglas of BMO Capital Markets. Please go ahead ma’am.

Heather Douglas - BMO Capital Markets

Hi good afternoon, everyone. Just have a parallel -- a bit more on Victor’s questions on Geita, can you quantify what the potential of this grade evaluation will be on your reserve grade at the end of the year? You sort of mentioned on the medium term yield of 3 grams per ton implies grade of 3.8 and right now the reserve grade is 4.23, am I doing the math right or is there something I'm ignoring?

Mark Lynam

You know, the numbers are as we forecast them, you are right, we will be able to determine the result guide by the end of the year which is when we publish the reserve we are in a planning process at the moment for value I think that’s what the reserve situation that will be, and we would like to confirm these numbers through our business planning process before we actually publish the reserve figures.

Heather Douglas - BMO Capital Markets

Okay, so that’s being -- you’re not going to tell…

Mark Lynam

You got a very good indication in terms of the yield, you know.

Heather Douglas - BMO Capital Markets

My second question is of South Africa, a couple of years ago there was talks that the government wanted to review the overall income tax formula for the South African gold producers and then also more recently, there’s been some news on the royalty though, can you give us any update?

Mark Lynam

Heather, it’s probably, it was largely expected that the -- would be published for public comment at the end of June. I think that coming out -- I mean our government works -- with the cabinet meetings and I think it was the June 26, it was anticipated the draft bill would be published. What was stated at the cabinet press conference and you can read into what you would like to read, is that the finance minister had decide to hold back the publication of the draft in order that he could better consult the other ministerial colleagues.

It’s now expected and the indication was that there would be a months’ delay and that’s all we consult, I mean all I would ask you that is that I am reasonably optimistic that the South African government will not make significant changes to the text receiving for mining. I think they are becoming well aware of the competitive nature of resources -- entry and actually with some important -- the test rights, such -- where Steven very significantly put. So we don’t know that the initial indication, the 3% relatively on revenue full growth. If this change coming my expectation is results should change -- what I mean -- government will do.

Heather Douglas - BMO Capital Markets

Okay, thank you.

Operator

Thank you very much, our next question comes from Terence Ortslan of TSO & Associates, please go ahead.

Terence Ortslan -- TSO & Associates

Terry Ortslan here. You mentioned about the EBITDA ratio -- moving forward, what the ideal that they -- capitalization for -- that we think you will be configuring the balance here on?

Srinivasan Venkatakrishnan

EBITDA ration, I didn’t understand the full question, if you are -- your question was in terms of the improvement of the net debt to EBIDTA ratio. We have improved in from 2.27 to about 1.1 times. In terms of net debt to capital and net debt to capital employee, we are in just bellow the 20% mark.

Terence Ortslan -- TSO & Associates

And a quick question, what you think the ideas was?

Srinivasan Venkatakrishnan

We are comfortable where we are, in terms of the ratio at present. It does allow us to leverage our balance sheet more if there is a suitable growth opportunity that presents itself and that was the intention of financial strategy anyway.

Terence Ortslan -- TSO & Associates

Great -- and then in terms of leaving your balance sheet gain sort of when the opportunity arises, what’s the -- what’s the threshold that you may entertain?

Srinivasan Venkatakrishnan

As I said you know we can grow in terms of leveraging in our balance sheet certainly up to where we were before of 2.27. We were quite comfortable at that position. The reason we had to raise equity which we did was to fund the growth line of projects which were coming through over the next three years. So if there is a value enhancing opportunity that presents ourselves there’s no reason why we can’t go above the two marks if we choose to do so.

Terence Ortslan -- TSO & Associates

Thank you, and on the exploration you’re obviously very active and you illustrated all of the stills that you have done, the JVs and -- could summarize for us in terms of what your net exploration costs may be this year and next year and what the gross numbers may given all those -- people that have spent money for you? Thank you.

Richard Duffy

Thanks, this is Richard Duffy. I think you can expect our Greenfield exploration spin in our own right, as AngloGold Ashanti to be around $40 million for the 2006 year. If you add to that our Brownfield exploration, you get up a number of around $80 million to $85 million for the year. What we’re doing particularly with the recently announced joint ventures in Columbia is taking advantage of the ground positions we have in Columbia and particular and bringing in partners who can help us to optimally explore the end. We probably -- this year would get about $5 million to $10 million of spin through partners and over time that would increase. So in terms of Greenfield exploration we have been looking to spend in total about $50 million, $40 million ourselves and about $10 million from partners. If you were also asking about our finding cost, we continue to target a cost of around $30 per ounce in terms of our Greenfield exploration to get to an inferred resource.

Terence Ortslan -- TSO & Associates

Excellent, thanks. I don’t know if came in late or not but I missed your customary gold market review and the highlights and the expectations -- or did I?

Mark P. Lynam

Terrance, Mark Lynam here. We didn’t speak at this quarter simply there already enough people talking and there was enough on the agenda. It is covered in the report to shareholders. We remain positive on the gold price, some very good investments demand going through. Yearly off take tails off a little, but through the ETS structure that we are seeing being generated and also to come out of the index fund is significant investment the man been generated for gold and we got positive after sometime we never have to give a number, an exact number to our view but we see its going forward as being volatile and quite positive.

Terence Ortslan -- TSO & Associates

Thanks a lot guys for your time, thank you.

Operator

Thank you very much sir. [Operator Instruction]. Our next question come from Barry Cooper of CIBC please go ahead.

Barry Cooper - CIBC

Yes I’m just wondering if you could elaborate a bit you mention that there was head way being made -- and obviously the decision for go ahead. Could you just elaborate a bit more on what is been done and what accomplishment been made and any chances that may be taking place.

Mark P. Lynam

Okay guys that’s what I heard, all I can elaborate now is the falling we put together the present team we have a very positive alignment meetings with the project team and the two major shareholders, Newmont and ourselves and we set to decide that for the team -– the team is working and putting together some of the key elements, we’ve contracted a design company in Chile and its progression well we just heard that a very brief of revisions on the last three months when the team was put together and we are expecting to have a normal revision. The company has started construction and some of the equipments have been ordered. I think this is –- a summary what’s going on that is nothing - outline that should be highlighted at this point.

Barry Cooper - CIBC

So there is no change in the scope of the projector or anything apart of what have been relate to us?

Mark P. Lynam

No nothing whatsoever and now the scope have been followed in by precision.

Barry Cooper - CIBC

Right okay and then the second question relates to your hedge fund -- I was wondering if you could just simply things for me and tell me how you delivered into the hedge book I realize that done by $1.1 million on so that’s convulsion of a number of things just how much was deliver into the hedge book at what US dollars full price because the calculation that I have suggest that you should have lost more than twice as much as what you have reported i.e., something in excess of $80 million versus the $40 million that you are claiming?

Bobby Godsell

I’ll take that as a compliment and you know it’s –- we had many discussions on this its quiet a dynamic situation, I can’t quote you an exact number that we delivered, but what we did during the quarter --

Barry Cooper - CIBC

And reason for that you can’t because you don’t look at that way or you just don’t have it your fingertip?

Bobby Godsell

I don’t have it at my finger tips and you know the change in the hedge book either as a the result of delivering into some contract and we actively manage the position, we did go in and enter into contract to purchase gold and I think –- I don’t know if it time yet, in our disclosure table you see that we have got along goal position for this year. It’s a long dollar goal position which is the combination of the short ones at the beginning of the quarter, it’s now turn into a long at $680 and you will see that managed over the remainder of the year, but it’s a combination of delivers and purchases except that have made to reduction of 10% in the hedge --

Barry Cooper - CIBC

Okay, but still didn’t answer my question to why there is a $80 million or $40 between different your calculation and mine and I don’t think this is suitable sort of trying to -- into detail I’ll certainly take that offline with and we can discuss it.

Bobby Godsell

Okay, well maybe can count it -- what you call, how many you’ve delivered and what price although they can understand within the fantastic partner.

Barry Cooper - CIBC

Okay thank you.

Operator

Thank you very much. Our next question comes from John Bridges of JP Morgan. Please go ahead.

John Bridges - JP Morgan

Hi everybody, just like follow on from Victor’s question. I just wondered to what your extent your difficult of mining in these little spaces right into putting in the bigger equipment whether -- trade off going out there.

Bobby Godsell

The difficulties in mining the slices off a sanction of the growth down rate and you know we would have to reduce the size of the equipment very, very dramatically and beyond to the economic limits to really mine this place completely and effectively. So, it’s not really a match of the size of the equipment is particularly influencing on mining, the interpretation of what the places would and the size of space and as I said quiet importantly the amount of internal life associated with the places that is -- we you know we actually have not completely replied, the mining fleet -- the guy with the large mining fleet we still have the, you know, the old mining these days. So we do have flexibility in terms of turning around between large and small equipments. It’s our general plan at the moment is to, is to mine through the over burden with the big equipment and once we get into the (inaudible) to put the small equipment in because its -- you know, you can -- doing that. The other thing is that the satellite -- which are cost important grade fillers between the times that we mining but we do need some flexibility in terms of the size of the mining fleet in the smaller --

John Bridges - JP Morgan

Okay that was great, thanks a lot.

Bobby Godsell

Sure.

Operator

Thank you very much ladies and gentlemen. [Operator instructions] Our next question comes from Jason (inaudible) of ASP Advisors, please go ahead.

Unidentified Participant

Yes, good morning. With the recent action of Barrick with their overtures, I was just curious whether the projects and a long life projects have any interest is something that you would like to take a look at in the near future?

Bobby Godsell

You know, I just think generally we -- I’m keen to be unhelpful but we can’t speculate on the price deals. Richard maybe ready to be more helpful than I.

Richard Duffy

Yeah, overall I would first agree with Bobby but certainly say that -- you know, these are properties where Barrick is already involved and I think it’s also interesting it’s unlikely that we would pursue these.

Unidentified Participant

Thank you very much.

Operator

Thank you very much sir. At this time I would like to hand back to Charles Carter as we have no other questions in the queue. Thank you.

Charles Carter

I would like to thank participants for joining us on this Earnings Call and all of the slides referred to are on our website. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: AngloGold Ashanti Q2 2006 Earnings Conference Call Transcript (AU)
This Transcript
All Transcripts