The Platinum – Bond Trade

 

By: The Financial Lexicon

(October 2012) If you actively follow the precious metals market, you are likely aware of the workers strikes hitting the mining industry.  In particular, AngloGold Ashanti, the South African headquartered gold mining giant has had operations affected by the strike, as roughly 35,000 of its workers are participating.  On Wednesday, the strike finally reached the point that S&P decided to take action, placing AngloGold Ashanti debt on “CreditWatch with negative implications.”

In the press release, S&P noted the following:

  • “The CreditWatch placement reflects an increase in country risk for AngloGold in light of continuing strike action in South Africa, and the possible implications of increasing social tensions for the mining industry.”
  • “The CreditWatch placement also reflects a potential rise in the company’s unit cash cost, which we already consider to be comparatively high.” The company’s unit cash cost was $801 per gold ounce in the second quarter of 2012, up from an average of $728 in 2011.
  • “The current strikes caused AngloGold to idle its South African gold mining operations on Sept. 25, 2012. AngloGold’s South African operations contributed 43% of EBITDA and 32% of gold production in 2011.”
  • “AngloGold is undertaking a sizable capital expenditure (capex) plan, which we understand amounts to $2.0 billion-$2.5 billion per year. If unchanged, this would translate into substantial negative free operating cash flow (FOCF) in the coming years.”  But keep in mind that the company could always decide to reduce its capital expenditure should gold prices fall.
  • “We aim to resolve the CreditWatch placement by the end of December, after meeting with management and gaining further insight into the company’s ability to reduce its exposure to country risk or better manage its cash cost.”

After reading those highlights from S&P’s press release, it probably doesn’t leave a lot of readers feeling all that great about the company.  But keep in mind that the major reason for the placement on “CreditWatch with negative implications” is the strike in South Africa.  If you believe the issue will ultimately be resolved, there may be an opportunity in AngloGold Ashanti’s stock, which has been lagging its competitors since the company halted its South African gold mining operations on September 25, 2012.

On the other hand, if you feel more comfortable further up the capital structure, you might consider AngloGold Ashanti Holdings Finance’s (a principal subsidiary of the parent company) senior unsecured notes.  Even if you prefer to wait until S&P makes a final determination about whether to downgrade AngloGold Ashanti’s debt to junk, keep these three bonds on your radar screen:

  • August 1, 2022 maturing, 5.125% coupon note, CUSIP 03512TAC5, currently asking 100.457 (5.064% YTM)
  • April 15, 2020 maturing, 5.375% coupon note, CUSIP 03512TAA9, currently asking 103.941 (4.742% YTM)
  • April 15, 2040 maturing, 6.50% coupon note, CUSIP 03512TAB7, currently asking 98.413 (6.626% YTM)

Another idea besides solely purchasing the bonds is to pair a bond position with a position in physical platinum.  South Africa is a major producer of platinum.  In 2011, the country produced 72.4% of the world’s platinum and held 95.5% of the world’s reserves of platinum-group metals.  If there will be an ongoing, ever-present threat of mining disruptions in South Africa, that should be supportive to the price of physical platinum.  While this would not be a perfectly neutral pairs trade, it is certainly something to consider.

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