Topic: Synergism & Portfolio Management – The Key Ingredients To Anglogold Ashanti’s Profitability And Sustainability

The recent announcement by AngloGold Ashanti of its inability to meet its expected production target for the year due to operation-related stoppages and hedge book wind up expected in 2014 gives credence to the significance of synergism and portfolio management in mergers and acquisitions in the mining industry. Now, the merger between AngloGold and Ashanti Goldfields in April 2004 to form AngloGold Ashanti can be propitious with respect to increased market share, economies of scale and scope coupled with reduced cash operational cost and expected increased profits. However, dilatory inherent operational problems can be retrogressive to its productivity, profitability and sustainability. The company's 21 operations worldwide excluding its exploration and joint venture programs in Columbia, the Democratic Republic of Congo(DRC), Australia, Russia, China and the Philippines has the potential for sustainability of increased productivity, revenue and market share augmentation if the mechanics of synergism and portfolio management are explicably and meticulously applied. Synergism is a program of action by the company with the objective of creating value and cost savings through synergy and optimization of its entire operations. The program would permit it to attain three bases of synergy and optimization namely leveraging of its core competencies, sharing activities across its entire operations and building of its market power. In retrospect, the two companies that formed the merger each predominantly had its unique skills and knowledge. In fact the merger was the merging of two cultures, values and unique levels of expertise to produce a company with outstanding credentials. Ashanti Goldfields brings its core competencies which includes but not limited to highly skilled workforce with a wide range of diversity and expertise, technological expertise in the area of mineral processing having built the largest bio-oxidation plant in the world. AngloGold on the hand brings to the table its core competencies which includes but not limited to technical competency in deep level mining especially in the use of refrigerated air in underground mining in the tropics (providing superior advantage in deep-level mining), outstanding management and a strong balance sheet. The leveraging of these competencies across its entire operations in addition to sharing of related activities are determinants of cost savings. If carried out effectively, it would lead to reduced operational cash cost and cost advantages which are sustainable over time. In default, it can result in operational stoppages as well as increased production cost as has been experienced by the company. AngloGold can also achieve synergy through pooling of its negotiating power with its suppliers and also vertical integration of its activities all synonymous with increased market power. Vertical integration should be a viable strategy for the company if it wants to control its production cost. Mining activities like exploration, ore mining and transport should be vertically integrated if the administration cost of running these activities is less than the transaction cost (which includes negotiation cost, contracting, monitoring and enforcement costs). Ashanti Goldfields in the past outsourced its exploration and mining operations to companies such as MBC (Mining & Building Contractors), Stanley Mining & Exploration and BCM (Bayswaters Construction & Mining) with the objective of reducing production cost. Now, with the merger and increased company size, such political-prone gestures should be refined. The core activities of the company's operations are exploration, mining and mineral processing. Now, much as the company would want to outsource its exploration activities, core activities like mining and mineral processing should be vertically integrated for effective synergism. The driving force here may be cost but the overriding factor should be synergism which can reduce cost immensely.

In addition to synergism, portfolio management should be pursued by the company. As at December 2008, the company had proven and probable ore reserves of 74.9 million ounces and capital expenditure of $1,201 million. Portfolio management would involve three types of restructuring activities namely asset restructuring, capital restructuring and management restructuring. Asset restructuring should be aimed at reducing its asset base and consequently assets turnover through the discontinuity of less productive or unproductive operations and the sale of such assets. Another way, the company can reduce its assets base is through increased joint ventures, strategic alliances or partnerships instead of whole ownership or acquisitions. This in another sense reduces the company's assets exposure to political risk in the countries in which it operates. Capital restructuring should seek for the change in its debt-equity mix favoring equity financing over debt financing. Equity financing is more feasible through the robust issuing of stocks to investors now that the gold price is on the upsurge and the company is listed on the exchanges in New York, Australia, JSE Limited(Johannesburg), Euronext Paris, Euronext Brussels and Ghana Stock Exchange. Instead of having its primary stock exchange listing on the JSE limited, the company should seek to diversify its primary stock exchange listing into the more competent exchanges market for increased market power and size for its stock issuance. Of course this would depend on the company's credit rating which in turn is a function of its debt ratio (solvency). Capital restructuring should also seek to address their inherent capital intensity problem which is a function of the relationship between its fixed or real capital and its factors of production predominantly labor. There is the perception that the use of sophisticated machinery increases capital intensity and subsequently labor productivity. Thus, the company may be tempted to use more of its capital in buying expensive machines instead of more labor. Unfortunately, they may be tempted also to reduce labor so as to improve the capital to labor ratio thereby increasing capital intensity. Unfortunately, the answer to its productivity problems lies in its ability to reconcile its huge capital and limited labor through synergism concurrently optimizing capital intensity and labor productivity. Next, with the increased company size is increased management size and cost. It is not only labor cost and overtime cost that escalates the company's operational cost but also management cost. This is a very dicey issue in most companies including AngloGold Ashanti. However, changes in the composition of the senior management team, organization structure including reporting relationships are inevitable if cost reduction is to be a priority. Somehow, vertical and lateral reduction in organizational levels and extent may be needed. Perhaps, an evaluation of the revenue per person based on the assumption that employees form the core of the company's profitability and so high degrees of efficacy and profitability is positively correlated with high revenue per person. All in all, portfolio management by the company would fine-tune synergism providing the driving force for increased productivity, reduced cash operating cost, increased revenue and profitability and most importantly sustainability for the life of its mines all over the world. The strategies outlined in this article are not only applicable to companies in the mining industry but also to other industries where consolidation, mergers and acquisitions are prevalent.

Source : Charles Horace Ampong [ MSc (Eng), MBA (Finance) ]

GLG Councils Consultant