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Are Dividends Back on Table for AngloGold in 2016?

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Free cash flow generation

AngloGold Ashanti’s (AU) FCF (free cash flow) almost tripled to $108 million in 1H16, and 2Q16 was also the company’s third consecutive quarter of FCF generation.

The company mentioned that its FCF was impacted by negative working capital movements. These will likely unwind in the second half of the year. Notably, $28 million from gold and silver shipments from Argentina was delayed during booking during the initial days of July.

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What drove FCF?

The improvement in FCF was driven mainly by the continued cost cutting, improved efficiencies, and weaker currencies. Higher gold prices were the obvious tailwinds for FCF, but lower oil prices also acted as a tailwind for AngloGold’s costs, particularly in Africa and in Tropicana in Australia.

AngloGold also redeemed its outstanding $503 million 8.5% bonds due in 2020. By doing this, the company eliminated its highest-costing debt as well as a part of its interest payments. This should help the company to increase its FCF going forward.

The company meanwhile expects the positive FCF momentum to continue on the back of a seasonally stronger second half, particularly on the strength of current gold prices.

Question of dividend

As the company’s outlook on FCF generation remains bright, the obvious question about dividend reinstatement has come up. The management mentioned that they’ve previously maintained that they would like to get comfort around the sustainable levels of free cash flow. They think they are there, and the board will consider dividends at the end of the current financial year.

The management added that “from a management perspective, we certainly see dividends being a component on our capital allocation and, I think, certainly a component based upon free cash flow generation.”

Notably, other major miners (RING) (GDX) including Barrick Gold (ABX) and Agnico Eagle Mines (AEM) have also reported positive free cash flows due to firmer gold prices.

Now let’s take a look at analyst recommendations.

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