CEO’s review

Fellow Shareholders,

The year under review was one in which we had to overcome significant challenges within a short space of time in order to successfully reposition the company. In 2013 we were faced with a gold price that, in an unprecedented manner, slumped by more than 25% in two stages, materially slashing our anticipated revenue.

At the start of that year, a weak outlook for the gold price had made it an imperative to address a cost base that had grown in the preceding years as we built internal capacity in anticipation of an expanded production profile and as a result, we had initiated some plans to address our total costs. However, the sheer speed and size of the first gold price collapse, which occurred in mid-April when the price dropped from about $1,560/oz to $1,370/oz almost overnight, not only led us to modify what was being planned as a general cost cutting exercise into a full blown business restructuring, but also significantly increased the urgency we placed on making the necessary changes happen.

We set about restructuring the leadership team and re-designing the organisation to streamline corporate roles and regional structures and to find unprofitable ounces that could sensibly be stripped from the production profile.

While doing this we had also to ensure that we did not compromise the building of our two new mines, Tropicana and Kibali, that was underway nor take any opportunistic shortterm gains that could come back to haunt us in the medium to long term.

We set about restructuring the leadership team and redesigning the organisation to streamline corporate roles and regional structures and to find unprofitable ounces that could sensibly be stripped from the production profile. We were also aware that market conditions were becoming less conducive to raising capital, which was troubling, given that we had a $732.5m convertible bond that was due for redemption in May 2014. The uncertainty over its refinancing cast a pall over our balance sheet and was undoubtedly a drag on the share price.

While there was a need to restructure the business to reflect the new gold price environment, this need also created an opportunity. As a CEO with a financial background taking over in a declining gold-price environment, I wanted a lean structure with exceptional leaders who had extensive resource industry experience managing the operating and planning processes of the business.

We achieved this by bringing our four operating regions under the management of two Chief Operating Officers. We then ensured the operations were provided firstly with technical and project support through another experienced resource industry operator in the role of Executive Vice President: Planning and Technical and secondly by a seasoned group of executives at corporate level covering finance, strategy, legal, sustainability, human resources and government relations. The team is cohesive and highly motivated and acquitted itself admirably in what was perhaps one of the toughest years that we can recall in the company’s history.

While we were hard at work revising business plans to deal with the new gold price, the market suffered another swift collapse, this time in June, when the gold price dropped from around $1,400/ oz to below $1,200/oz in less than a week. With the prospect of an end to the US Federal Reserve’s policy of quantitative easing and the looming spectre of rising interest rates, gold had become a casualty of the capital flight from the so-called ’risk assets’ that had been in vogue in the preceding years.

With the new executive structure in place, the team developed a simple, singular focus strategic objective for the organisation – to generate a sustainable free cash flow and returns while keeping our long-term optionality intact at a reasonable cost. This strategic objective was to be supported by focusing on:

  • The foundation of the business – people, safety and sustainability;
  • Ensuring our financial flexibility to weather the gold price storm;
  • Optimising all areas of costs – direct operating costs, overhead costs, non-mine site exploration expenditure and capital expenditure;
  • Improving the quality of our portfolio by bringing on stream our two new projects and removing marginal production from the mix; and
  • Preserving the long term optionality within the portfolio, in order to ensure that the cash generation remains sustainable.

A cornerstone of this approach was to commit fully to a more conservative planning regime that would assume a gold price of $1,100/oz for 2014 in order to ready our operations to withstand further gold price shocks. This was particularly notable given that, toward the end of 2012, we had run our 2013 business plans at $1,650/oz.

As we set about repositioning the business, the priority was to ensure that amid the volatility and uncertainty of a free-falling gold price, we protected our most important value drivers – the people who work in the business and the communities that host us.

Sustainability is a key driver for each of us in this team. That is to say, that safety, critical environmental stewardship projects and improving relationship with our host communities remain priorities. We are clear that there remains much for us to do in order to achieve our goal of zero harm but it is a point of pride that we recorded major improvements in safety – across all metrics – in 2013, more than halving the number of fatalities and greatly improving injury rates, while making a quantum leap in our environmental performance. In fact, in 2013, 80% of our operations set safety records with the company reporting its lowest ever number of environmental incidents.

We also focused on the balance sheet to ensure the flexibility of the business. In July, we successfully issued a seven-year bond, with an aggregate value of $1.25bn and bearing an interest rate of 8.5%. These funds allowed us to repay the May 2014 convertible bond earlier than anticipated and to set aside the surplus cash as a buffer against the extreme gold price volatility and weakness we had experienced.

The bond coupon, higher than previous issues, reflected deteriorating investor sentiment toward emerging markets, the prevailing uncertainty over the trajectory of the gold price, scepticism over our ability to realise significant cost savings, continuing labour uncertainty in South Africa and a question mark over our ability to bring two new mines into production on time and on budget. That we were able to raise this quantum of funding, despite the uncertainty, signalled confidence we could correct course and chart a plan to generate sustainable free cash flow. To allay any lingering fears that we could breach our banking covenant of 3 times net debt to EBITDA, we successfully petitioned our banking syndicate to temporarily relax that limit to 4.5 times for two testing periods.

I am happy to say that the confidence of our lenders in our abilities was well-founded and is reflected in an improved set of cost and operating results for the full year. Together, these events helped ease market concerns and set the stage – together with the other improvements effected in the business – for a re-rating in our valuation toward the end of the year.

With safety and the balance sheet receiving the requisite attention, we continued to focus on operational improvements, optimising overhead and operating costs and also ensuring capital expenditure appropriate for the new environment. The company was well structured for significant growth when, because of the changed gold market, contraction and cost containment was critical. So the next order of business was to optimise overhead and operating costs, as well as capital expenditure to fit within this new environment but not strangle our opportunities for future growth.

Detailed organisation plans were drawn up to look in detail at the cost and functional output of every role in our global corporate structure with the aim of eliminating duplication and unnecessary spending. This was a difficult but essential process that saw us part company with hundreds of our colleagues, as well as scores of contractors and consultants, while clamping down on all manner of avoidable spending. All told, with some 40% of corporate roles removed, along with the associated expenses, we have reduced our corporate cost from $291m in 2012, to $201m in 2013 and are projecting expenditure of $120m to $140m in 2014. The rationalisation of the corporate cost structure was critical if we were to demand from our operators – as we did – that they spare no effort in reducing costs at mine and country levels.

Similarly, it was clear that the $460m we expensed on the global exploration programme and feasibility studies in 2012 was untenable in the new gold price environment. With gold trading so much lower, the business simply was not capable of generating sufficient cash to fund this sort of speculative effort and the market was not ascribing any value to it, regardless of the fact that AngloGold Ashanti had one of the best performing prospecting programmes in the gold industry for the past several years.

We targeted the newer “greenfield” exploration for rationalisation, with the view to focusing on those areas related to established projects where we believed we could get the ‘best bang for our buck’. These included Australia’s highly prospective Tropicana belt, the areas surrounding our Siguiri mine in Guinea and the Kibali mine in the Democratic Republic of the Congo (DRC) and our most promising tenements in Colombia. In addition, the initial success we have seen, coupled with the vital need to develop better extraction methods, led us to continue the work to develop new reef boring technology that could enable us to safely exploit the considerable unmined gold endowments in South Africa. The aforementioned actions ensured that while we cut the combined exploration and technology expenses to $296m in 2013 and forecast a further drop to between $150m and $175m in 2014, we maintained the long-term optionality crucial to the future of the business.

While exploration and corporate costs were coming under the microscope, we began the process of realising about $500m in cost and efficiency improvements from our direct operating cost base over a period of 18 months. This was also a painstaking process that required a multi-disciplinary team of in-house experts to scour our portfolio for opportunities and then work with site general managers to ensure that these opportunities were properly defined, owned, planned and project managed. This level of detail was crucial to ensuring that the gains could be locked into our planning and budget processes.

We ended the year ahead of schedule, having realised about 25% of our total target given the speed of our intervention. We recognise it gets harder as the target is approached but the success and commitment to date gives us confidence that the balance can be achieved by the end of 2014. Needless to say, we are already looking beyond this project to a range of initiatives to further optimise our cost base. These improvements are reflected in our unit cash costs, which dropped from a strike-affected $862/oz (pre-implemention of IFRIC 20) in 2012 to $830/oz in 2013 and are anticipated to fall to between $740/oz and $790/oz in 2014.

We will continue to evaluate our portfolio in a strategic and dispassionate way and we will focus on production that is profitable and carries a respectable margin.

With the cost trajectory heading in the right direction, it was also clear that we needed to improve the overall quality of our asset portfolio. Our new Tropicana and Kibali mines were successfully brought into production in September ahead of schedule and within budget, while our expanded US asset at Cripple Creek & Victor was on track and was midway through its expansion at the end of the year.

Randgold Resources, our partner at Kibali, did a laudable job in meeting deadlines in the DRC and our world-class team in Australia was magnificent in completing a textbook project at Tropicana, our first new mine outside of South Africa in almost two decades.

The new blood in the portfolio was complemented by the disposal and closure of older, higher cost assets. Early in 2013, we announced the closure of Yatela in Mali and we also commenced the process of selling our Navachab mine in Namibia. An agreement was reached in February 2014 to sell, subject to certain conditions, the latter to private equity firm QKR Corporation, based on an enterprise valuation of $110m, plus a future royalty stream.

The continued improvement of performance at our Obuasi mine in Ghana, continues to receive the close attention of management. This is a large, high-grade deposit with significant potential, but has been a perennial underperformer given a range of legacy sustainability and operating issues that have created a drag on performance in recent years. Development of a ramp decline from surface to higher-grade underground mining areas started in 2013 and continues to advance in tandem with a series of safety, environment and community projects. The aim of the ramp decline is to allow development of the appropriate infrastructure to mechanise operations and de-bottleneck the mine, currently constrained by an outmoded, labour intensive mining method and also ageing and suboptimal vertical hoisting infrastructure. We continue to review all options for this asset, including the best way bring the project to completion and to ensure Obuasi’s long-term viability.

Turning to longer-term optionality in the overall business, our reef-boring technology, which I mentioned earlier as a project we will continue to fund, made very good inroads in South Africa at the test site at TauTona. The long-term objective here remains to safely extract all of the gold, only the gold, all of the time, by boring out the ultra-high grade reef and leaving behind the waste. We successfully reduced the boring time, improved our backfill capability, adapted drills to meet specific reef requirements and extracted some 40kg of high-grade, gold-bearing reef safely from 18 holes. During 2014, production sites are to be set up at four of our South African mines.

Elsewhere within our portfolio, our exploration efforts were refocused to selected targets in key gold belts while we withdrew from 13 countries which did not fit our value criteria.

In looking over our achievements for 2013, it is clear that we made good strides in meeting those key strategic objectives aimed at generating sustainable cash flow improvements and returns, so as to better reward our shareholders. It is our aim that every action we undertake in our business will continue to be driven by our values and this strategic goal of improving retuns. To ensure this approach is integrated into the very core of our business, the management and incentivisation of our leadership will be linked directly to these criteria.

While 2013 was a year of improvement, we are not complacent about the challenges that lie ahead and we remain highly motivated to continue to lift the performance of the business. What this means in practice is that – notwithstanding the production growth that we saw in 2013 for the first time in almost a decade – we will not focus on growth for its own sake. We will continue to evaluate our portfolio in a strategic and dispassionate way and we will focus on production that is profitable and carries a respectable margin.

We will also guard against complacency, regardless of the fortunes of the gold price and will keep a tight rein on costs and capital allocation, to ensure we generate meaningful returns and – if the gold price surprises on the upside – we retain the flexibility to reap the cash windfall and return value to our shareholders.

Before concluding, I must pay tribute to eight of our colleagues who passed away as a result of workplace accidents during the year. While we continue to strive to achieve our goal of zero harm in the business and have made significant progress to this end, each of these fatalities is keenly felt by me, the executive team and our colleagues throughout the business. I would like again to offer my condolences to their families and friends and commit to further improving our safety performance across all operations.

The executive team joins me in thanking Mark Cutifani for his efforts over the years at AngloGold Ashanti and wish him the very best in his current role at Anglo American. I also thank Tony O’Neill for his support during his tenure in the company and for assisting me with the transition into my current role.

On behalf of the executive team, I thank our outgoing Chairman Mr Tito Mboweni, who helped oversee the transition of leadership at the company. We welcome and look forward to working with our new Chairman, Mr Sipho Pityana, as we navigate through both the challenges and opportunities that 2014 has in store for us.

Finally, I would also like to give heartfelt thanks to our Board of Directors, our executive team and all of our colleagues at AngloGold Ashanti for their unwavering support. This is the team of people across the globe who have helped weather the storm in this most difficult of years.

We have always said that ‘People are the Business’ and that remains as true today as it ever was. Thank you everyone at AngloGold Ashanti for reinforcing our culture of loyalty, responsibility and ingenuity and for your unstinting effort and steadfastness in re-establishing a future for our company that is as bright as ever.

Srinivasan Venkatakrishnan
Chief Executive Officer
18 March 2014