Anglogold Ashanti Earnings Call NUGGETS: Potential Improvement Q4, The Risking Issue

On Monday, Anglogold Ashanti Limited (NYSE:AU) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Potential Improvement Q4

Harry Mateer – Barclays Capital: Just looking through the guidance you provided and using the midpoint numbers for 3Q it would seem to indicate pretty significant improvement in 4Q this year both in terms of production as well as cash costs. I was just wondering, if you can walk me through what the big drivers are for potential improvement in the fourth quarter?

Mark Cutifani – CEO: Sure, Harry. Harry, normally we have a better second half somewhere between 5% and 7% compared to our first half, certainly that’s the average over the last four years. So it represents more available (phase time) in South Africa. We usually do better in Continental Africa, as we also get the same benefit of additional working days and Americas we generally do much better on the second half as well. So on average it’s about 5.6%, so it ranges between 5% and 7%. The other thing Harry, is we have got a couple of other little increments in there with the MSG purchase and the little bit of an increment that we will get of Mine Waste Solutions. So we think it’s still a reasonable number, it’s certainly a step up but we have got all the right things going and certainly we have seen that historically from the business. Venkat, do you want to add anything?

Srinivasan Venkatakrishnan – CFO: If I can add on the cost side, the big driver in the drop in costs in the fourth quarter is obviously ounces, but in addition to that what one has to bear in mind is the third quarter jump in cash cost is specifically due to winter power tariffs in a big way, so that would not reoccur in the fourth quarter and also we’ll have the full benefit of the margin on the 860,000 pounds of uranium which gets sold in the fourth quarter and that’s quite a big contributor to the cost. So we would see that that will make good contribution towards the end, Harry.

Harry Mateer – Barclays Capital: Then, I guess, leaving on from that apart from the seasonal effects, because that would — it would seem to imply that year-over-year 4Q will be the first quarter this year where your cash costs are down relative to 2011. So it’s more than just seasonality, is that fair to say?

Mark Cutifani – CEO: Yeah, it is. There’s a little bit more in there. You are right Harry. Interestingly, we were tracking our cost which is across the rest of the industry. Our cost increases in the last 12 months are running about two-thirds of the industry average. So, we are under the midpoint on cost increases and we are hoping by Q4 that we can demonstrate that we are in real terms maybe 2% or 3% versus an industry north of 10%. In fact the whole industry is up 18%. So we think during the course of this year, we can separate ourselves from the industry and really present a good story.

The Risking Issue

Terence Ortslan – TSO & Associates: Mark, great presentation, a lot of details. I think the world of mining has gone back to the somewhat few decades ago and risking on the geopolitical sense becoming more prominent. Can you go over a bit more about how do you intend to derisk some of the regressive regimes which are underway from a fiscal point of view as well as ownership point of view and this is going to become a major issue as we go on with respect to valuations and maybe multiples and so on including the Project Return Calculations. I sure was amazed to talk about – when you talked about the years to what was obviously seeing to return on cash flow in a certain projects in the Southern part of the Africa. The risking issue, the way you’re approaching it and where do you see the trouble point because I don’t think this is anywhere near ebbing at this moment in time. I think the tide is still rising?

Mark Cutifani – CEO: Terry, you’ve asked a big question, so I might take that in two or three parts if I can, and maybe I might take your mind back to, and I’m going to think 2006, 2007. In 2004, in Sudbury if you can remember how much pressure Inco was under in terms of its community relations work. We were heading in 2006, where we were looking at a strike and as a team we agreed that we would work in the community, be much more aggressive in our community engagement and work to see if we could get the community on our side. But 2006 we had the community on our side, we didn’t have a strike and in the next three years we saw a 40% improvement in productivity as we implemented the sort of forerunner to our Project ONE and we’ve really got the community of Sudbury behind us. That was all about Canadians engaging Canadians and changing the nature of the conversations. So, I think that experience is very instructive and it’s certainly being one that I have carried with me through AngloGold Ashanti and I’ve seen it from day one. If you look at our strategy sustainability will be the key in terms of the way we engage the local communities in terms of getting access to ground and ultimately getting access to resources. So, this whole sustainability push has been a key strategy for us for the last three or four years. We are actually being used by the United Nations to develop some of the new protocols on security and engagement approaches. We’ve actually launched the first Millennium Development site in Guinea as a forerunner to new developments through Africa and we’ve done a number of other things in other communities where we’ve previously struggled to improve the local community relations and get support for our developments. At the same time, I’ve also personally been quite aggressive around the conversations in Australia. I think it’s very negative for the industry to see what happened and quite frankly, I think it was quite negative of some of the industries major players to agree with something that everybody knew was wrong and you’ll see, there’s a presentation I gave about three weeks ago where I talked about mining’s contribution to the society, 11.5% GDP direct, 21% when you take services and support into account and when you take the products of our industry at 45% drive up for the world’s GDP. It was interesting how a number of players change the conversation. We’re already working with a few NGOs, Oxfam and others, looking at a new sustainability concept that we’ll be talking about at Northwestern University, Kellogg. We’re doing stuff here in South Africa, stuff up through Africa and in fact they’ve been taking some of those conversations to what we’ve done at Tropicana where we won a number of awards. So, the industry has to listen and work with local communities and start motivating in a different way and on a more unified basis to change the perception of the industry and the physical outcomes that are clear on the ground. So, we’re working on all of those fronts. I think in that context, we’re in a constructive conversation with the South African government. We have turned around the nationalization debate. We’ve kicked that for touch. We are now in a conversation about why I don’t think the resource-rent tax is the right outcome. What we are looking to do is work a better social development models which we have just tabled in South Africa that’s been really well received. So it’s a very complex issue. I think we as an industry have got to work on a number of fronts and I think we are backing what we are saying with people on the ground and new approaches in these new projects that we are developing and the fact that we have looked for so hard for a new sustainability (to lead) I think is also a testament to that commitment to making the difference and being in a different set of conservation. So far it seems to be working for us, Terry. Terry, I don’t know if that’s helping you with the conservation, but certainly that’s where I would start.

Terence Ortslan – TSO & Associates: I think the market is generalization everybody’s risk profile, instead of derisking company-by-company. I think I always encourage each company to talk about this topic because it’s not mutually inclusive, in fact every company can actually stand out and say, here is what we are doing, do I use it to describe right now, which is at the ground level derisking the projects and derisking the existence within the countries instead of going to the center – the Capital City of the country and try to make a deal, investment agreements and so on and so forth. I think that both sides have to be well covered. You are very multinational, international, I think there are issues whereby I think people have to approach and analyze this Company per se. Example, Colombia, let’s talk about that for a second before we may sign-off. How are you approaching that to derisk the project, it’s a great project, world class, lot of ounces. There are some ground level issues and I glad (Charles) got to take in the objectivity of joining you on that on the Colombian front. How are we going to see this project resolve itself in terms of derisking and getting this critical path as soon as possible?

Mark Cutifani – CEO: One other thing, you made a good point, let me to add to your point, one of the interesting things about AngloGold Ashanti, as we’ve been growing our international base, we are now operating across 10 countries. That will increase to around 12, so we are starting – we are the most global of the gold miners, so we’ve got natural geographic diversity in our asset base. We are hitting towards about 30%, within three years, we’ll be down to less than 23% in terms of our South African contribution. So our geographic diversity is becoming an advantage to us in this tougher world, that’s one. Two, our technical diversity, we’ve got open cut, we’ve got underground, we’ve got a number of different operating types, and with the team that we have, very versatile and working of jurisdictions and we are learning from each other and that’s been a core element of our Project ONE. Three, the actual mining operations and the actual size of the operations, no one asset, no one, two or three assets is so important to us that it blows us away if we have a problem. So, that diversity is starting to manifest in a way that’s quite advantageous to us. Now, we’ve had to put Project ONE in a different way of running a mining business bringing our business process restructuring to manage some of that complexity. But we now see that as advantage with the improvements that we are sharing across the group, and having worked for Rio Tinto for 12 years, of understanding geographic commodity diversity, how you build and run a business in that diverse type situation has been very much up our alley and certainly has helped us improve. Having said that, if I then go to Colombia, and we are putting those practices into play. In terms of Colombia, we took the deliberate step to go back one step after we got feedback regarding how our exploration activities had upset preferably in Colombia. We don’t want to get ourselves where we put $2 billion or $3 billion in one asset and then have to stop the asset midway through. We will be sure that we’re ready to go, because you must have the local community on board. So, we have gone from 5% approval rating to a 60% approval rating, lots more to do. Charles and the team have got lots of challenges, but interestingly at Gramalote, which is our second development we’ve already actually sorted through individual deals for 90% of the el Bautismo miners around that site. We expect in the next three months to finish that work off, whether it’s working within the asset, whether it’s going into a contract operation supporting the business, some have wanted to retire, but taking the time to deal with the issues at a personal level is how you make a difference. So, we’ve got right support from Gramalote, we’ve got improving support of at Colosa, Quebradona is probably more like a Gramalote in terms of local involvement, so we’ve learned a lot of lessons. The other thing that a couple of people have heard me talk about is understanding where many of these groups stopped to get their motivation from and what we’ve learned for example with the Catholic Church is that a lot of the funding and global support for some of the work that’s done is actually put together in central areas or central organizations for example in the Vatican. It’s time we started to engage the leaders of this work into how we can make a different contribution as mining, and I know that sounds a bit facetious, it may be a bit far-fetched, but in fact we’re finding solutions in places that you’d never before and go and have a look at what we’ve done with the hospital in Mongbwalu. The Catholic Church is now running the hospital. We’ve got a great deal with them where we have upgraded, supported and we’ll support them physically, but they are actually running the hospital and the relationship with their NGOs and their other partners from that community has certainly gone a long way. So, there’s a lot we can learn as an industry that haven’t thought about and that’s where we got to go. We’ve got to come up with new solutions and some of those solutions are coming from interesting places.