How The Elections In Mali Will Impact AngloGold Ashanti

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 |  About: AngloGold Ashanti Limited (AU), Includes: ABX, GG, GOLD
by: MassifCapital

Now that all the presidential votes have been counted and a winner declared, the impact of the recent elections in Mali on mining firms will become clear. We believe that although a good news story, it is unlikely a political event that will affect foreign mining firm operations, or any firm's bottom line. This election is the perfect example of a political event that improves a country's overall investment environment without creating the kind of political ramifications that will affect foreign firms in a tangible way.

On July 28, Mali held a relatively calm, and as one EU election monitor noted, "serene" presidential election. This is good news, especially for a country that is currently playing host to a French force hunting down militant jihadists in the north and underwent a military coup last March. According to Stratfor, a private intelligence firm, no notable attacks have occurred in the country since April. The calm of the initial round has since been followed by a peaceful presidential runoff on August 11.

During the runoff, approximately 6.9 million eligible voters participated, electing former Malian Prime Minister Ibrahim Boubacar Keita to the post of President. The election was the first in Mali since 2007 and took place approximately a year after a coup, led by the military, toppled the previous government that had been accused of complacency in regards to the rebellious, Tuareg north.

Throughout both stages of the election, voter turnout in northern regions of the country was lower than expected. It is difficult to determine the cause of this outcome, as it could be the result of threats by Jihadists, which did not materialize, or, as we believe, the result of the populations' Tuareg roots. The Tuareg population has long refused to recognize the government in Bamako, the capital and largest city of Mali; the Tuareg are also a people that live a largely traditional nomadic, pastoralist lifestyle, making voting and census taking etc, difficult.

Regardless of the low voter turnout in the North, the very healthy overall turnout in the more populous south and the peaceful nature of the election countrywide will lend credence and legitimacy to both the winning candidate and the process in general. Peaceful elections should prove a boon for the nation, the people, and foreign investors, as Mali is the site of numerous high value-mining operations. Mining operations have not been unduly affected by military operations to date but, as would be expected, there was cause for concern on the part of numerous foreign mining investors when French-led military operations started.

Mali is already Africa's third largest gold producer, with an output in 2012 of 1.25 million ounces, and a peaceful social and political transition could lead to rapid growth in the gold mining sector. Growth in the gold mining sector will be essential for the Mali economy in general as it accounts for roughly 75% of export earnings. Because of this fact, the previous government made significant moves to improve the environment for foreign mining investment, making several changes to the country's mining laws. The principal change of interest to investors is the option for increased local participation in the exploitation company that amounts to an option for locals to purchase an additional 5% on top of what is owned by the state. Changes to the mining law also expedited the permitting process. These moves differ greatly from other African mining laws changes that have tended to increase government participation and could be viewed as discouraging foreign investment (see Guinea and Sierra Leone). From our perspective, these changes make Mali a more attractive investment opportunity for mining firms

Not only will a peaceful election and speedy, timely transfer of power set the stage for a return of US aid to the country, but an EU-led donors group has agreed to provide the nation with $4.3 billion in aid if the interim government lives up to promises outlined in the political stabilization roadmap agreed to by the EU and the interim government of Mali.

For those interested in taking advantage of this positive noncommercial risk development, there are several mining firms traded on US, Canadian and Australian exchanges with exploratory or well developed operations in Mali and primed to take advantage of future calm, including Randgold Resources (NASDAQ:GOLD) and AngloGold Ashanti (NYSE:AU), the latter of which we will discuss in more detail below.

Review of AngloGold Ashanti

· AngloGold has an above average gold production cost -- Total Cash Cost or TCC of $898/oz -- due to its significant operations in South Africa, and significant noncommercial risk due to its operations throughout Africa.

· AngloGold produced 4 million ounces of gold in 2012, making the company the world's third largest gold producer.

· In an attempt to reorient its gold mining operations away from South Africa, AngloGold has invested in several promising mines in Australia and South America, but production will not be significant for several years.

Based in Johannesburg, South Africa, AngloGold Ashanti is the third largest gold producer in the world with operations in eleven countries on four continents. The company is the result of a 2004 merger between Anglo American and Ashanti Goldfields. The firm operates six underground mines in South Africa as well as several mines in Central and West Africa that make up the largest share of is producing assets. Additionally, the firm has working mines in North America, South America, and Australia.

AngloGold's South African assets are significant, and some have been in operation for more than a century. AngloGold's South African operations are also expensive gold producers with both significant labor issues, because of the somewhat militant South African mining unions and the ongoing hikes in power rates by national electricity provider ESKOM, resulting in continued mining cost inflation. AngloGold currently has a Total Cash Cost (TCC) of $779/oz in South Africa.

AngloGold's Mali operations (three mines, all joint ventures) and the firm's other Central and West African operations are essential to offsetting declining production in long lived South African assets, yet, AngloGold's Central and West African assets all have high noncommercial risk due to the region's history and regime stability. Of additional concern is the high cost of production at all Central and West African operations; AngloGold has a TCC ranging from $728/oz to $1451/oz at the firm's three mines in Mali and an average TCC of $883/oz throughout Central and West Africa. The peaceful transition of power in Mali does foreshadow an improved investment environment, but this is unlikely to positively affect AngloGold in the near term. As the election went smoothly, it can be safely termed a political event with little impact on the firm's strategy or operations within Mali.

Based on both mining jurisdiction stability and the cost of production, AngloGold's operations outside of Africa are attractive. Regardless of the potential of these assets, AngloGold must contain costs if it is to return to profitability. As of Q2 2013, AngloGold operations had a TCC of $898. By comparison, Barrick Gold (NYSE:ABX) has a TCC of $552, GoldCorp (NYSE:GG) has a TCC of $646/oz in Q2-2013. On June 27th, the World Gold Council issued a guidance note on Non-GAAP metrics, specifically TCC (or All-in Costs) verses All-In-Sustaining Costs. Not many firms have switched to the AISC measure, but at least 13 US firms have. The average difference between AISC and TCC for the 13 US firms we found to have reported AISC was $340. If that holds true, then AngloGold's sustaining cost per oz. is likely north of $1240, a cost per oz. that is likely unsustainable given the soft outlook for gold.

Over the last year, AngloGold is down 60% and has posted losses each quarter of this year in addition to suspending the firm's dividend. Partially because of the firm's poor performance, but also because of the difficulties of operating in South Africa, several investors, including John Paulson, have suggested the firm should divest or spin-off its South African assets as GoldFields (NYSE:GFI) recently did. If the firm were to do so, it may unlock significant value, as has occurred with Gold Fields. The South African gold producers are currently engaged in discussions with the National Union of mineworkers, the union that employs 64% of the South African gold sector employees. However, the negotiations have not yet yielded a positive outcome. AngloGold looks likely to have more difficulties on the horizon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.