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Buy AngloGold Ashanti as Share Price Falls

- By Alberto Abaterusso

E.B. Tucker, an independent director of Metalla Royalty & Streaming Ltd. (MTA.V), told Kitco.com on Monday that while 2019 is expected to be very volatile for U.S. equities, gold will be one of the markets that will have the best performance.

The manager of the Canadian precious metals royalty and streaming company added that the yellow metal could increase to $1,500 per ounce in 2019, reflecting an over 17% upside from current valuations. The bullion closed 2018 reporting a cumulative average of $1,268.49 per troy ounce on the London market.

In such a scenario, I would consider an investment in the South African gold producer AngloGold Ashanti Ltd. (AU). In 2018, the stock outperformed the VanEck Vectors Gold Miners exchange-traded fund (GDX) by 30% at the end of an uptrend, which caused shareholders of company to gain 19%. Over the same period, the precious metal rose 1%.

AngloGold also produces silver, uranium oxide and sulphuric acid, but gold is the main revenue stream. The company manages 17 operations and three mineral projects in South Africa, Continental Africa, the Americas and Australia.

The Mponeng gold mine in South Africa, the Kibali gold mine in Congo, the Iduapriem gold mine in Ghana and the Tropicana gold mine in Western Australia should continue to deliver exceptional performances in 2019 as well.

Along with the optimization of South African operations, these mines posted 851,000 ounces in gold output in the third quarter of 2018 at a lower total cash cost of $722 per ounce versus $743 per ounce for the prior-year quarter.

The first boost to the share price should happen in February, after the miner releases fourth-quarter and full-year 2018 operating results. The company is expected to produce 3.45 million ounces of gold, which is the upper limit of the guidance range. The lower limit was set at 3.325 million ounces.

AngloGold will also continue to lower costs as the operating performance across the entire line of assets advances and fixed costs are spread over a larger base.

The positive effect from increased production and reduced costs will be amplified by the gold bull market. So the balance sheet, with net debt in primis, will only benefit.

The current net debt to adjusted earnings before interest, taxes, depreciation and amortization ratio will decline below 1.13 times. This will seal AngloGold Ashanti's success in improving financial flexibility.

In addition, the covenant ratio, which applies under the miner's revolving credit facility agreements, is already much higher at 3.5.

These catalysts can be acquired on the New York Stock Exchange for an average price of $12.6 per share as of Dec. 31. As illustrated in the chart below, the stock is not cheap because it is well above the 200- and 100-day simple moving average lines. The closing share price on Monday was also 78% above the 52-week low of $7.08 and 2.5% below the 52-week high of $12.91.

The average target price of $12.73 is just a few cents above Monday's closing price. Therefore, I would wait for a significant weakness before buying shares of AngloGold Ashanti.

Disclosure: I have no positions in any securities mentioned in this article.

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This article first appeared on GuruFocus.