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Why This Mid-Cap Gold Stock Is Tanking (It's Not Gold Prices)

By Neha Chamaria – Aug 6, 2021 at 3:07PM

Key Points

  • An analyst downgraded AngloGold Ashanti stock after a weak earnings report and outlook.
  • The gold miner may not be able to restart an important mine until next year.
  • The gold stock looked promising until now, but there are better options out there.

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Production disruption at an important mine has forced AngloGold Ashanti to downgrade its full-year guidance.

What happened

Shares of South Africa-based gold miner AngloGold Ashanti (AU 2.59%) slumped on Friday, down 13.7% as of 1:30 p.m. EDT. At a time when most gold stocks are minting money off the rally in gold prices, AngloGold's second-quarter numbers released this morning left much to be desired.

Worse yet, the gold miner downgraded its full-year guidance, attracting an analyst downgrade on its stock right away that's further weighing down on the stock price today.

So what

AngloGold's gold production climbed 4% year over year, but its all-in sustaining cost (AISC) shot up 7% to $1,380 per ounce of gold. AISC is a key measure of cost used in the gold industry and includes most costs incurred during a period, from exploration to operational expenses and sustaining capital expenditures. AngloGold's Q2 AISC is among the highest in the industry.

A person with a coin in hand studying a price chart on a computer screen.

Image source: Getty Images.

Aside from COVID-19 restrictions that hit production, AngloGold had to suspend operations at its Obuasi mine in Ghana after a fatal accident in May. Unfortunately, the Obuasi mine is still under investigation, and AngloGold doesn't expect the mine to restart before the end of the year. Consequently, AngloGold expects a weaker year ahead. Here's what its revised guidance looks like:

Metric Original Guidance for 2021 Revised Guidance for 2021 Actual 2020
Production (thousand ounces) 2,700-2,900 2,450-2,600 2,806
AISC per ounce $1,130-$1,230 $1,240-$1,340 $1,037
Total capital expenditure (millions) $990-$1,140 $1,030-$1,190 $757

Data source: AngloGold Ashanti. 

Soon after the earnings announcement, analysts at RBC Capital lowered their price target on AngloGold stock to $20 apiece. The mid-cap stock is changing hands at roughly $16.50 a share as of this writing, but the pessimism was enough for investors to dump the gold stock today. 

Now what

The timing of the incident at Obuasi couldn't have been any worse. Just last year, AngloGold generated its highest free cash flow since 2011, and management tweaked its dividend policy to increase FCF-payout from 10% to 20%. It also decided to pay dividends semi-annually instead of annually starting this year. More importantly, AngloGold projected its gold production to grow at a compound annual rate of 5% between 2021 and 2025, driven largely by a ramp-up at Obuasi.

AngloGold's prospects could get a lift if it acquires Canada-based junior gold miner Corvus Gold with assets in Nevada as proposed. Yet with 2021 turning out to be a challenging year for AngloGold, investors may want to look at other top gold stocks right now to bet on gold prices.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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