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Is AU in a Strong Financial Position after Its 3Q16 Results?

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Reduction in net debt

AngloGold Ashanti’s (AU) net debt fell 14% in 3Q16 compared to 3Q15. A large part of this reduction was due to improvement in the company’s generation of free cash flow. 

The company redeemed its high yield bonds (HYG) in early August 2016. This redemption also reduced its net finance costs.

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Debt covenants

The company mentioned in its market update release that reductions in its net debt along with improvements in its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) had resulted in a net debt-to-EBITDA ratio of 1.26x. At the end of 3Q15, this ratio was 1.54x.

Note that AngloGold has a covenant of net debt-to-adjusted EBITDA of 3.5x under its revolving credit facility. Currently, the company’s debt levels are comfortably below this covenant.

The company has also sold non-core assets such as its Cripple Creek & Victor mine to Newmont Mining (NEM) to reduce its net debt.

Strong balance sheet

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), Barrick Gold (ABX), and Kinross Gold (KGC) have also reduced their debts 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.

Now let’s discuss Anglo’s free cash flow generation and dividends.

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