New CEO Mark Cutifani is not all talk. After months of openly expressing his distaste for AngloGold's massive gold hedge book, he announced plans during the company's quarterly results presentation on Tuesday to sell $1.6 billion worth of shares to cut the company's hedge book down by about 45%.
The company said it would issue about 69.4 million new shares next month under a fully underwritten rights offer, underwritten by Goldman Sachs Group Inc., UBS AG and Morgan Stanley. The shares will be sold for at least 172 rand each, a 35% discount to yesterday's closing price. Existing investors will be offered one new share for every four they hold.
During the quarter, AngloGold Ashanti [NYSE:AU] reduced its hedge commitments from 11.28 million ounces to 10.03 million ounces as it delivered into maturing contracts and hedge buy-backs. Cutifani said that the company's hedge book will be reduced to about 6.25 million ounces by Dec. 31, 2008, and completely eliminated over the next 8 years.
Matthew Turner, commodities analyst for VM Group, previously told RI that he expected AngloGold to do something additional to their delivery schedule, in 2008. In speaking with RI today, he confirmed this was much more than had been indicated so far.
AngloGold has the largest gold hedge book of any major, accounting for nearly 40% of global gold hedging at 26.8 million ounces at the end of 2007.
Source: Fortis Hedging and Financial Gold Report
About half of the company's hedges are due for closure within 3 years, with 2.3 million ounces due for delivery in 2008. However, Cutifani has consistently hinted that these sales would be closed early.
The announcement today followed statements in Dec. 2007, when Cutifani said he would lead the company to a hedge-free position to take full advantage of high spot gold prices. This followed statements made during the company's third-quarter headline earnings presentation.
For the quarter, the company received a price of $755/oz, 18% lower than the average spot price of $925/oz for 2008. Last quarter, AngloGold received only $687/oz, while the price averaged $787/oz. The gap in the received and spot prices is likely to be between 20% and 22% going forward, provided that gold trades in a price range of approximately $900/oz and $950/oz.
Cutifani said today it was very unlikely gold would return to forward sales prices of about $400 an ounce. He expects gold to rebound from the current spot price of $876.60 an ounce. On March 13, gold broke $1,000 per ounce after an impressive first quarter rally, after rising 32% in 2007.
The marked-to-market value of all hedge transactions making up the hedge positions was a negative $4.78 billion based on a gold price of $917.40/oz and exchange rates of R8.10/$ and A$/$0.91. This is up from $4.27 billion at the end of the previous quarter. As at 30 April 2008, the marked-to-market value of the hedge book was a negative $4.32 billion.
With forward sales impacting profits, the company reported adjusted headline earnings for the quarter at $105 million, or 37 cents per share, versus $18 million, or 6 cents per share, in the previous quarter, reflecting accounting adjustments and a higher gold price.
Output for the first quarter came in at 1.2 million ounces from 1.37 million ounces in the fourth quarter on power supply woes. In comparison, Barrick's [NYSE:ABX; TSX:ABX] gold production in the quarter was 1.74 million ounces, while Newmont [NYSE:NEM] sold 1.29 million equity ounces, putting AngloGold in the number three spot.
AngloGold's total cash costs came in at $430/oz, up 6% from the fourth quarter following the reduced production. The company expects cash costs jump 7.9% to $464 an ounce this quarter, with production of 1.22 million ounces. For the year, total cash costs are put between $440/oz and $460/oz on output of 4.9 to 5.1 million ounces.
Also on Tuesday, the company announced the addition of 12.9 million ounces of inferred resources at its 100% owned La Colosa project in Colombia. AngloGold has a first mover advantage in the Colombian Andes with a land position of some 37,500 square kilometres.
Shares of AngloGold spiked Tuesday in New York to $38.87, before easing back slightly to $38.31, up $3.50 or 10% on the day.