AngloGold Sees Gold At $1,600

Mark Cutifani, CEO of AngloGold Ashanti

Gold prices could reach US$1,600 an ounce by the end of next year, AngloGold Ashanti (AGA), the world's third-largest producer, has told Reuters.

'We think the direction for gold looks like it could continue to be quite strong on the upside,' said at the Reuters Global Mining and Steel Summit.

'You could say we should breach US$1,500 next year and we use (an increase of) about US$100 an ounce a year on the supply side to give a sense of where the market goes over the long term,' he said.

'Basically I'm saying towards the end of next year, we should hit US$1,600 based on those numbers.'

The metal hit a record high of US$1,440.40 an ounce on March 7, supported by its status as a safe haven from risk and inflation as unrest in the Middle East has spurred oil prices higher. Japan's nuclear crisis has also supported prices.

The metal held steady last Thursday, March 17, as it drew support from the spreading turmoil in the Middle East and talk of extended loose U.S. monetary policy after lackluster home sales data.

Continued fighting in Libya, where western forces have failed to dislodge Muammar Gaddafi's armour, calls for the ouster of Yemen's president and Palestinian rocket strikes on Israel that have heightened geo-political uncertainties in the region.

'Gold is expected to remain firm, as there is a lot of geopolitical uncertainty and money printing going on,' said a Singapore-based trader, referring to the looser monetary policy adopted by Japan's central bank after the earthquake hit nearly two weeks ago.

'But there is strong resistance at US$1,440/US$1,445 level, so we'd need a good headline to break through,' he added.

Spot gold inched up US$1.14 to US$1,437.34 an ounce, after hitting US$1,440.90 in the previous session, which was just off the record high of US$1,444.40. US gold was little changed at US$1,437.70 an ounce.

Technical analysis showed that spot gold may gain further to US$1,450 per ounce, according to Reuters market analyst Wang Tao.

Gold prices were also being supported by a record low in US home sales in February, which fanned speculation that the Federal Reserve might extend its US$600 billion bond purchase programme. Concerns that the economy would be flooded by cheap money add to gold's allure as an inflation hedge.

AGA stands on the brink of an earnings explosion as it enters its new financial year free from the restraints of a gold hedge, having also paid in full for the cost of having the hedge book removed.

The company completed a hedge elimination strategy in October, spending US$2.64bn during the financial year to remove the positions of a final 3.2 million ounces (moz). This was the culmination of a process which started in March 2008, when the group had almost 12 million oz committed under its hedging programme.

Releasing quarterly and annual figures for the periods to end-December in last month, AngloGold reported a headline loss of US$1.7bn for the full year. When adjusted to exclude the cost of restructuring the hedge book, headline earnings came in at US$787 million.

Analysts believe the additional earnings derived from having full exposure to the gold price with no further penalties payable for the closure of the hedge will propel AngloGolds profitability significantly, without even accounting for any production increase.

'The hedge book was their poison pill. I won't be surprised if in the next year they double headline earnings,' said Stephen Roelofse, an analyst at Metropolitan Asset Managers, speaking to Reuters.

At a presentation of the groups results, CEO, Mark Cutifani, said the group would use its additional earnings and cash flow to up dividend payments, invest in growth projects and improve its debt position.

It declared a final dividend of 80 South African cents per share, up 14 per cent on 2009s dividend, contributing to a full-year dividend of 145c/share. The groups net debt position was US$1.3bn.

If you take into account (AngloGold) is the lowest cost gold producer in South Africa, you should see a lot of benefit coming through in the next year, given the favourable gold price environment, said Imara SP Reid gold analyst Percy Takunda.

The companys production estimate for 2011 is 4.55moz to 4.75moz (4.52moz in 2010), at a total cash cost of between US$660/oz and US$685/oz (US$638/oz last year). It expects to lift production to between 5.4moz and 5.6moz over five years from the groups current operating and exploration portfolio.

AngloGold has set up its balance sheet in such a way that developing these (growth) projects wont be as expensive as they used to be, said Takunda.

He added that an additional endorsement of Anglo should be drawn from hedge fund billionaire John Paulsons interest in the company.

Paulson & Co bought 12 per cent of AngloGold in 2009, after Paulson labelled Cutifani an outstanding leader. Miningmx/GB