AngloGold Bonds Revive Paulson Spinoff Call: South Africa Credit
AngloGold Ashanti Ltd. (ANG)’s bonds have plunged as the world’s third-biggest gold producer is weighed down by its South African operations, reigniting calls from investors for the miner to spin off its assets in the country.
Yields on AngloGold’s dollar debt due in July 2020 surged 117 basis points since being sold on July 25 to a record 9.59 percent on Aug. 7, according to data on Bloomberg. It’s the most-traded dollar emerging-market security over the past 10 days, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The average yield on dollar bonds of emerging-market metals and mining companies rose 18 basis points, JPMorgan Chase & Co. indexes show.
AngloGold, South Africa’s biggest gold miner by production, hasn’t heeded calls to spin off assets in the continent’s largest economy, which is beset with strikes and higher costs, adding to margin pressures caused by a 20 percent drop in the metal’s price in 2013. Gold Fields Ltd. (GFI) put most of its South African mines in a new company in February, a strategy that John Paulson, whose hedge fund is an investor in AngloGold, has said the company should copy.
“There has been talk for some time for both these miners to bring their South African assets separately to the market,” Cornel Bruhin, who manages $260 million of emerging-market bonds at MainFirst Schweiz AG in Zurich, said by phone yesterday. “Gold Fields has done it and it would be credit-positive for AngloGold.”
The company’s stock has declined 50 percent this year, compared with a 34 percent drop for Gold Fields, which kept higher-growth mines in Ghana, Peru and Australia and the less labor-intensive South Deep operation in South Africa.
“Gold Fields is not as exposed to South Africa risk as AngloGold is,” Dion Bate, a Johannesburg-based analyst at Moody’s Investors Service, said by phone. “As a result Gold Fields is much less exposed to South African wage negotiations and potential strike action.”
Paulson, who made $15 billion for investors of his firm Paulson & Co. in 2007 by betting against U.S. subprime mortgages, said in February AngloGold’s then share price could rise by as much as 68 percent if it split its South African businesses from units outside the nation. The company has 21 assets in 10 countries, including six deep-level and surface operations in South Africa.
“Paulson & Co. is fully supportive of new CEO Venkatakrishnan’s plan to enhance shareholder value through both operational and strategic alternatives,” the company said in an e-mail yesterday. Chief Executive Officer Srinivasan Venkatakrishnan’s focus will be to cut costs and growing output by completing expansion projects, it said.
Stewart Bailey, head of investor relations for AngloGold, declined to comment.
Gold rallied for a fourth day yesterday, reining in AngloGold’s bond yields. The rate declined 13 basis points, or 0.13 percentage point, to 8.91 percent.
AngloGold raised $1.25 billion of debt last month. The bonds maturing in July 2020 have an 8.5 percent coupon, the highest on record, and the proceeds will be used to repay debt due in May next year. The company’s credit rating was downgraded one step to junk by Standard & Poor’s on July 17, while it was marketing the bond to investors. Moody’s cut its assessment to the lowest investment grade five days earlier.
“That was when the bond market was going to potentially close up on us and then that avenue may not have been open,” Venkatakrishnan said by phone on Aug. 7 “My former role as CFO has taught me -- when you see a window, grab it. There’s no certainty four months down the line.”
The ratings companies cited the lower gold price and the threat of prolonged strike action as AngloGold negotiates wages with employees, as reasons for the downgrades.
To combat higher costs and the decline in gold, AngloGold is cutting capital expenditure, exploration and laying off 40 percent of the 2,000 employees in its corporate office. The company also suspended its dividend on Aug. 7.
“With the new issue coming, they just announced plans to cut capex and close unprofitable mines,” said Bruhin, who is considering buying AngloGold debt. “If they do that they can maintain their leverage ratios at reasonable levels.”
The rand, used to pay workers, is down 15 percent this year against the dollar, in which gold is priced. The rand is the worst performer among 16 major currencies versus the dollar in 2013 and weakened 0.7 percent to 9.9533 by 1:21 p.m. in Johannesburg.
The risk to AngloGold bonds comes if the U.S. economy continues to improve, causing investors to sell gold, according to Bruhin.
“With a weaker gold price and stronger dollar, you’ll need to see what leverage and profitability AngloGold has left,” he said. “There are some question marks next to that.”
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