With prices rising as much as 21% last August, gold looked like it was bouncing back last year from the slide that it has endured since 2013. Donald Trump's election put an end to that, though -- from the election to the end of December, the price of gold fell nearly 11%.
In the midst of this volatility, however, shares of AngloGold Ashanti (NYSE:AU), a global leader among gold stocks, climbed more than 40%. Let's dig into the company's performance in 2016, and see what we can expect in 2017.
Although it hasn't reported its fiscal 2016 earnings yet, management, on the company's most-recent conference call, affirmed its gold production guidance: between 3.60 million and 3.65 million ounces. If the company's gold production falls within this range, it will represent the second consecutive year of declining production. For fiscal years 2015 and 2014, the company reported gold production of 3.95 million ounces and 4.4 million ounces, respectively.
Unlike its accuracy in forecasting its gold production, the company has been less precise in estimating its all-in sustaining costs (AISC) for fiscal 2016. Whereas AngloGold Ashanti had previously guided for AISC between $900 and $960 per gold ounce for fiscal 2016, the company provided a revised estimate -- between $980 and $1,010 per gold ounce -- in its latest earnings presentation.
Despite the lower gold production and unexpectedly high AISC, the company has reported some bright spots through the first nine months of FY 2016. For one, the company reported free cash flow of $239 million -- a significant improvement over the $19 million outflow that it reported during the same period in 2015. And strengthening its balance sheet, the company reported $1.97 billion in net debt as of the end of Q3 -- approximately a 14% reduction over the $2.29 billion that it had at the end of Q3 2015. Further demonstrating the company's improved financial condition, the company, which reported a net debt to adjusted EBITDA ratio of 1.54 at the end of Q3 2015, now has a net debt to adjusted EBITDA ratio of 1.26.
Eye on the future
There aren't many significant growth catalysts on the horizon for AngloGold Ashanti in the coming year. But that's not to say that the company doesn't have some things to look forward to.
This past December, management reported that the Tropicana mine -- located in Western Australia -- which had been expected to report a decline in gold production is now expected to reverse course. Management is now forecasting the mine to increase its average annual gold production to a rate between 450,000 and 490,000 gold ounces beginning in the second half of 2017. Depending on the results of the Long Island Study, production may increase even further.
Further demonstrating the company's pursuit of organic growth, AngloGold Ashanti is expecting to complete a pre-feasibility study by the end of 2017 at its Gramalote project in Columbia. Currently, the location has an attributable resource of 3.475 million ounces. Successful completion of the pre-feasibility study would result in a resource-to-reserve conversion. A pre-feasibility study is also expected to be completed at La Colosa -- another project in Columbia -- by the end of 2017. Like Gramalote, successful completion of the pre-feasibility study would result in a resource-to-reserve conversion. La Colosa has a current resource of 28.5 million gold ounces.
A golden valuation?
We've looked at what's behind AngloGold Ashanti and what's ahead, so let's turn our attention now to its stock. Extending the 41% rise which it rode through 2016, shares of AngloGold Ashanti are up 24% since the start of the new year.
But are shares getting ahead of themselves? In terms of its price-to-sales ratio, the stock is trading at about 1.4 times sales on a trailing-twelve-month basis according to Morningstar -- slightly higher than its five-year average of 1.3 times trailing sales.
Considering only one valuation metric seems insufficient, so let's see how the stock is valued from another perspective: price-to-book. Currently, shares are trading at about 2.0 times book value according to Morningstar. Like the stock's valuation in terms of trailing sales, its valuation in terms of book value is slightly richer than its five-year average of 1.8 times book value.
To provide even more context, let's consider it alongside its peers -- companies that also have strong presences in Africa.
|Company||Price-to-Sales (ttm)||Price-to-Sales 5-yr. Average||Price-to-Book||Price-to-Book 5-yr. Average|
|Gold Fields Limited (NYSE:GFI)||1.1||1.1||1.0||1.1|
|Harmony Gold (NYSE:HMY)||0.9||1.1||0.6||0.6|
|Randgold Resources Limited (NASDAQ:GOLD)||7.1||6.5||2.4||2.7|
Of the companies in this peer group, AngloGold Ashanti is the only one that trades at a higher valuation in terms of both sales and book value compared to its five-year averages. There doesn't appear to be much of a value here; Mr. Market seems to have priced this stock fairly.
Although shares of AngloGold Ashanti had a great run in 2016 and continue to prosper in 2017, there doesn't seem to be a compelling thesis for investment. And though shares may continue to rise in 2017, it seems more likely than not that they will eventually come back down. Granted, the company has succeeded in shoring up its balance sheet and appears to be headed in the right direction in terms of generating free cash flow, but there are plenty of gold-mining stocks to choose from -- stocks much more intriguing than this one.