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What Could Lead to a Free Cash Flow Upside for AU Going Forward?

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Free cash flow generation

AngloGold Ashanti (AU) announced a significant rise in its FCF (free cash flow) to $161 million in 3Q16. This rise was before the $30 million one-off cost incurred by the company for the early repayment of its high yield bonds (HYG).

Compared to 3Q15, AngloGold increased its FCF by $211 million in 3Q16. Even compared to 1H16, AngloGold generated 49% more FCF in 3Q16, making 3Q16 the company’s fourth consecutive quarter of FCF generation.

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What drove FCF?

The improvement in AU’s FCF was driven mainly by the company’s continued cost cutting, higher gold prices, and the timing of the proceeds received from its shipment of metal to Argentina. AngloGold’s CEO, Srinivasan Venkatakrishnan, said in the company’s 3Q16 market update, “We generated strong free cash flow in the third quarter, taking this year’s cumulative free cash flow to more than quarter of a billion dollars, further reducing debt.”

The company has eliminated its high-cost debt as well as part of its interest payments. This should help it to increase its FCF going forward.

Question of dividends

As the company’s outlook on FCF generation remains bright, the obvious question of dividend reinstatement comes to investors’ minds. While the company didn’t address this question in its 3Q16 results, during its 2Q16 earnings call, its management mentioned that it had previously said it wanted to get comfortable around sustainable levels of free cash flow. Management thinks it’s there, and the board will consider dividends at the end of the current year.

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

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