Wednesday, February 14, 2007

AngloGold Ashanti Hedge Book Bites Investors

AngloGold Ashanti (NYSE:AU) reported improved Q4 earnings with production up 4% and slightly better cash production costs. The company forfeited approximately 6% of gold’s value on the table as they continued to produce to the hedge book that they are locked into. The negative valuation of the hedge book also continued to worsen.

In the conference call transcripts provided by Seeking Alpha the Treasurer Mark Lynam spoke competently but very briefly to the hedge activities and pointed out that over the next twelve months the actual received price will be 8-10% below anticipated spot prices as they continue to sell into the old and obviously unfavourable hedge book.

Not one analyst mentioned anything significant about the hedge book ands its drag on cash earnings. They all focused on the mining production and engineering side.

The press release that preceded the conference call contained this contradictory comment

“Commenting on the year, Bobby Godsell, AngloGold Ashanti's CEO said, "In sum 2006 was a year of production disappointments, competitive cost control and good reserve generation. In a year in which the gold price rose by 36%, our earnings have increased by 105%, clearly demonstrating the company's strong leverage to a rising gold spot price".

AngloGold Ashanti is not strongly leveraged when you automatically forfeit up to 10% of gold’s value right off the top. This company is not well understood by the analysts. With a market cap of approximately $13 Billion and approximately 1 million shares average daily volume for the past three months the shares seem to be rebounding somewhat. The analysts seemed to focus on micro issues of specific properties.

Methinks, when the analysts get it, the drum will beat much too loudly for reasons that the astute investor will have already figured out. The secret sauce will be when the hedge book stops being an impediment thereby allowing other positives to shine brightly.