AngloGold Ashanti reported troubling second-quarter results, as the firm continued to experience substantial yearover- year cost inflation while suffering from lower gold prices. EBITDA plunged almost 60% to $288 million from $701 million on a year-over-year basis. This excludes the impact of almost $3 billion in impairments and write-downs resulting from a lower gold price assumption of $1,100 per ounce.

The company has taken several steps to preserve cash (including reductions in operating costs, corporate costs, exploration expense, and capital expenditures as well as suspension of the dividend) and has two lower-cost mines coming on line in the back half of the year. However, as the company sits on the higher end of the industry cost curve, it must address its cash costs per unit to see an improvement in operations, especially in a lower gold price environment.

AngloGold produced 935,000 ounces of gold during the quarter at a unit cash cost of $898 per ounce. This represented a production decrease of 13% and unit cash cost increase of 16% from the prior-year quarter, though sequential production rose 4% and costs remained relatively flat. The firm’s cost optimization plans helped mitigate some of the expected cost inflation in the quarter, as cash cost came in under $900-$920 per ounce guidance.

The company is guiding cash costs of $860-$890 per ounce for the third quarter and $815-$845 per ounce for the year. Although new mines coming on line are lower-cost on average and the company is citing improved operations at certain mines and favorable currency exchange, analysts are skeptical of the company’s ability to reach its full-year guidance for cash costs, as first-half cash costs of $896 per ounce would imply a dramatic reduction in the fourth quarter.

On a positive note, the company’s new projects have progressed during the quarter. Kibali is expected to have first gold poured in October of this year and Tropicana is ahead of schedule with first gold expected in the third quarter. The mines are expected to contribute 550,000-600,000 ounces in 2014 at an average cash cost of about $700 per ounce. While these additions should improve AngloGold’s production and cost profile, the company needs to address its current portfolio in order to stem cost inflation.


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