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AngloGold Ashanti: Illegal Mining Activities Persisting at Obuasi

- By Alberto Abaterusso

At Obuasi mine, where AngloGold Ashanti Ltd. (AU) runs Ghanaian operations, illegal occupants are persisting in extracting gold from the property, despite an order from Ghana's Mineral Commission to clear out the site from illegal mining activities.

It seems that the basis of the Ghanaian government's failure to vacate the property is political. The majority party is afraid of losing about 18,000 potential supporters, which is the number of illegal miners that are occupying the property. AngloGold Ashanti has been unable to effectively operate the mine for the last 10 months.

"The government is unlikely to act ahead of presidential election on Dec. 7 for fear of alienating potential voters, Emmanuel Kwesi Aning, a director of academic affairs and research at the Kofi Annan International Peacekeeping Training Centre in the capital, said in a Oct. 11 interview."-Bloomberg

Obuasi is located in the Ashanti Region of Ghana, approximately 37 miles south of Kumasi.

Source: commons.wikimedia.org

The company extracts gold mainly from underground mines, to a depth of 0.93 miles, and has a capacity of 360,000 tonnes per month.

If it is true that the Ghanaian government is reluctant to vacate the property due to the upcoming election on Dec. 7, this means investors will have to wait before the company can restart mining operations at Obuasi.

Every day, the mine inactivity causes a drop in the production of gold, approximately 18,000 tons per day of processed mineral. In the first half of 2016, AngloGold Ashanti already experienced a decline in the production of gold due to unforeseen challenges at Obuasi and other mines.

The company could report higher earnings due to:

  • The higher gold price, which rose 1.5% year-over-year (from an average of $1,204 per ounce in first half 2015 to an average of $1,222 per ounce in first half 2016).
  • Weaker operating currencies in Brazil, Australia and Argentina.
  • Continued focus on controlling the cost across its entire portfolio of operations.
  • Interest savings of $33 million, after the repurchase of 8.5% bonds with a face value of $779 million due in 2020.

At the moment, AngloGold is trading at $13.82 per share and gained 95% year to date. The stock has been down trending since early August, when it reached its 2016 highest price at $22.65. This has not happened since August 2013.

The Enterprise Value/EBITDA is 6.30 and Price/Book (mrq) is 2.15

Disclosure: I have no positions in AngloGold Ashanti.

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This article first appeared on GuruFocus.