Shares of AngloGold Ashanti (AU), which are up 45% year to date, are among the best performers in the gold mining sector. However, most of the upside in AngloGold Ashanti shares came because the company was significantly undervalued at the beginning of the year. The company recently published its first quarter report, which revealed further decreases in production costs. Will this bring more upside for AngloGold Ashanti?

Costs will rise in the second quarter
AngloGold Ashanti reported that it first quarter all-in sustaining costs (AISC) were $993 per ounce. This is a slight improvement from the fourth quarter AISC of $1015 per ounce. The company stated that weakening local currencies contributed to the decline in AISC. As AISC are measured against ounces sold, the fact that AngloGold Ashanti sold 40,000 ounces of gold more than it produced added to the lower AISC number. However, these positive factors will not transpose to the second quarter.

AngloGold Ashanti is guiding that its second quarter AISC will be between $1,100 and $1,145 per ounce. Higher costs will inevitably put pressure on the company's cash flows. The first quarter of 2014 was marked by a return to positive free cash flow for the company, but AngloGold Ashanti could return to negative free cash flow as soon as the second quarter. The company expects an increase in capital spending, while production is expected to be between 1.02 million and 1.06 million ounces of gold, in line with the first quarter.

Kibali mine makes meaningful contribution
AngloGold Ashanti is starting to see the benefits from its Kibali mine in the Democratic Republic of Congo, which it owns together with Randgold Resources (RGLD -0.35%). The mine is expected to produce 550,000 ounces of gold in 2014, 45% of which is attributable to AngloGold Ashanti and 45% is attributable to Randgold Resources.

AISC at the mine were just $572 per ounce, as the mine started commercial production in the fourth quarter of 2013 and doesn't need much sustaining capital. Another growth project, the Sadiola sulfides project, is going through a feasibility study, and the decision on the project will be made in the second quarter. The Sadiola mine is situated in Mali and is jointly owned by AngloGold Ashanti and IAMGOLD (IAG -0.99%).

Malian mines were the worst performers in AngloGold Ashanti's portfolio, with Sadiola's AISC of $1,404 per ounce. Sadiola also puts cost pressure on IAMGOLD's performance. IAMGOLD reported first-quarter AISC of $1,198 per ounce, and high costs continue to negatively affect its shares.

While AngloGold Ashanti states that it prioritizes debt reduction, such a reduction could be a very slow process. The company amassed more than $3.5 billion of long-term debt. Although AngloGold Ashanti's capital spending will be lower this year following two years of heavy spending, gold prices are lower too. The return to positive free cash flow in the first quarter was mostly symbolic, and the company needs better performance to reduce its indebtedness.

Bottom line
AngloGold Ashanti has reached the point where the company seems fairly valued. There is still work to do on the cost front, which will allow the company to enjoy positive free cash flow and reduce its debt. Gold prices remain under pressure, and AngloGold Ashanti's upside looks limited without their help.