AngloGold Ashanti – Peter Major warns off ‘All that Glitters’

AngloGold Ashanti has been through the mill in the last while, but yesterday it posted third quarter numbers which management lauded for beating their 'guidance'. Peter Major, mining analyst at Cadiz, who has never been shy to call a spade a spade tells Alec Hogg why you should stand back from the minutiae and get some perspective on the bigger picture when you're deciding to buy a mining stock – especially if the biggest driver is the fickle gold price! – CP

ALEC HOGG: Welcome back to Power Lunch. Anglo Gold Ashanti posted third quarter numbers this morning. The gold miner has posted a very small profit. Joining us, on the line, to unpack the numbers and to give us some more insights is Peter Major, Mining Analyst at Cadiz. Peter, the thing that jumped out at me was not any of the numbers but the point that they…the headline, the first headline, on sends, by the company, is 'we've beaten our third quarter guidance'. Now, guidance, I guess, is in the eye of the beholder because if you're a good manager you'll want the market to think you're going to come in lower that you're going to be producing, so they start talking about guidance (as a headline) is a little strange to me.

PETER MAJOR: Alec, you should be managing money out there, instead of half of the Fund Managers and you should probably be writing analytical reports instead of half the mining analysts. I agree with you 100 percent. By getting people so focused on these tiny, quarterly-by-quarterly moves, that's how they get sucked in and they make the wrong big decisions. Instead of saying, "Gee, I'm going to buy Anglo Gold because they beat an estimate that management was leading me to believe they were going to get three months ago." That shouldn't have any bearing on whether you buy or sell a share. You should be saying, "How has this share performed for the last year/the last five years/the last ten years," especially relative to a gold bullion or an ETF and don't even compare them to their bloody competitors.

If you can't buy-in a gold ETF where they all surrender, maybe that's the end of analyses right there, if you're a fund manager.

ALEC HOGG: Yes, most definitely, I guess, for me the big issue in the past quarter, and I'd love to get your insights into it is that rights issue that was proposed and then pulled.

PETER MAJOR: Yes, to me that is the second biggest issue with this company. The first biggest issue is, while you are buying any gold share if gold prices peak, after an amazing ten or a 11 year run, and now it looks like it is going to go down for the next three, four, or five years, while you are buying any gold share. The next point, if you are going to buy a gold share, and you buy Anglo Gold, you have to have good reasons for buying it. You have to have good reasons for buying it. You have to believe it's going to outperform its peers and the gold price and the importance of VenCap, who I think has done a really, good job in a very difficult company with all the debt and the wide disperse of operations, and all the problems run in the gold mines in South Africa.

I think he's done a great job of cutting costs, rationalising, I think he put together a good plan for unbundling South Africa, from the international, cleaned up the debt, and they get shot down by one of the big shareholders. He just made the wrong debt on the gold price a few years ago and the result is, because of the state that Anglo Gold is in, with all this debt that the gold price has beat it by a factor of 13 in the last five years. Now 13 means 1300 percent, so that's how dire a situation this gold company is in and VenCap is trying to clean it up and shareholders are [inaudible: 03:11].

GUGULETHU MFUPHI: Just on that, on the topic of management. Clearly it's self-evident that you're not a gold bull but you are confident in the measures that management has taken. Is a lot of this completely dependent on the market then?

PETER MAJOR: Yes, well what is the market? Do you mean the gold bullion price market, the group or do you mean the…

GUGULETHU MFUPHI: That's correct, Peter.

PETER MAJOR: Yes, almost everything is dependent on it because even the Rand can't counter it. If the gold price is going to fall down another ten to 20 percent, even the weak Rand is not going to help that because two-thirds of operations are now out of the country and they're totally dependent on the Dollar. This share is so dependent on the market, because of the 3.8 billion debt it is probably more so dependent than most of its peers.

ALEC HOGG: So it's a debt issue here. It's also a management issue and the one that you raised a bit of a flag about – the 13 times outperformance by the gold price… How then did Mark Cutifani, who ran this company, get promoted to run Anglo American?

PETER MAJOR: I've even been asking myself that Alec. I was one of Mark's champions. I think Mark did a fairly, good job. I think he took over a company, even in worse shape than the one that VenCap has got because when Mark took it over not only did they have a lot of debt but they had foreign gold sales from hell. They had a hedging program from hell, so Mark was able to borrow money and have rights issues, and get rid of the gold hedges, so yes, there's this giant, debt, millstone around VenCap's neck and around Anglo Gold's neck. Mark managed to get rid one of the big millstones. I think he cleaned up the company a little bit more. He got it a little more focused but you're right, he left with it only half-done and he didn't do it fast enough and quick enough. Poor VenCap inherited the position, after the gold cycle turned down, so you're right. Mark did have four brief years; he could have and should have done more, unfortunately.

ALEC HOGG: Well it will be interesting to see if he gets that opportunity. Here, at Anglo American, over the weekend in London, in the London Sunday Times speculating that Mick Davis, ex Financial Director of Eskom and now running, well his own new fund. Remember he also had Xstrata. He's trying to buy Anglo American. That was Peter Major, a Mining Manager at Cadiz.