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How Has Purchasing High-Yield Debt Helped AngloGold?

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Nov. 20 2020, Updated 3:22 p.m. ET

Reduction in net debt

AngloGold Ashanti’s (AU) net debt fell by 32% in 1H16 over 1H15. A large part of this reduction was due to the sale of its Cripple Creek & Victor mine to Newmont Mining (NEM). The mine sold for $820 million, and the company used the funds to buy a part of its high-yield bond (HYG), which led to a fall in its net debt.

AngloGold’s focus on cost management and the resultant free cash flow generation is another reason for the reduction in debt.

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Repurchasing high-yield debt

The reduction in net debt also led to a fall in the interest expenses for the company. It saved $34 million in interest in 1H16, as compared to the first half of 2015, as it repurchased ~62% of its high-yield bonds. The company also stated that on August 1, 2016, it redeemed the remaining balance of the high-yield bonds from cash on hand and by drawing on some facilities. This should further reduce the interest amount by $40 million on an annualized basis.

Debt covenants

According to the company, its reduction in net debt led to the fall of its net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio to 1.44x compared to 2.02x at the end of March 2015. This is in line with the company’s target of maintaining the covenant ratio of 1.5x throughout the cycle. The company’s current ratio is below its covenant of 3.5x under its revolving credit agreement and provides ample headroom.

After the company’s repurchase of its high-yield debt, its balance sheet seems to be in a strong position. It has sufficient undrawn facilities, strong liquidity, and long-dated maturities. Other gold companies such as Newmont Mining (NEM) and Barrick Gold (ABX) have also reduced their debt considerably over the past two to three years.

Notably, investors have been worried about AngloGold’s high leverage, but the company’s recent efforts and future outlook could do much to calm these concerns. Gold’s (GLD) (IAU) high price and the weaker South African rand are obvious tailwinds toward a lower financial leverage position for AU.

Now let’s discuss dividends.

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