December 13, 2004
David McKay
miningmx.com
miningmx: What are the risks to a weaker dollar? For example, could China float its currency, or might we see the central banks intervene to support the dollar?
Kelvin Williams: There have been official sector interventions before. There has been the Plaza Accord (signed on September 22, 1985 to make the Japanese yen stronger, and the dollar cheaper), and you’ve seen in some of the analysts’ comments recently that there’s some appeal for a second Plaza Accord.
On the whole, it’s not a convincing scenario. America in some respects has isolated itself a little bit in recent months in foreign policy issues, and there’s probably less willingness to solve their deficit problems by collusion. There’s also the fact that much of the adjustment has already been made and is hurting in some places. I think it will play its way out. Whether the dollar has got another 10¢ to go against the euro or whether it’s a further 15¢.
miningmx: Just to allude back to your question: what about the RenMinBi (Yuan) value?
Williams: One can only observe that if the RenMinBi is revalued, it will be because of political decisions. Having consciously kept a pegged currency - whether it’s for political reasons or for what other reason - to move away from that requires conscious decision. You don’t just say: ‘well I’m going to float it on Tuesday,’ you consciously understand the consequences. There may well be behind-the-scenes political discussions aimed at both currency exchange rates and consequently trade which might lead to a decision on the part of Beijing to allow the RenMinBi to drift up.
If it does so, it would most certainly take the pressure off the euro and for gold. If it does, then I think we would have to take a view that gold would have to get on its own. It would then have to stop relying on the euro exchange rate to be its trigger and, quite honestly, I think there’s enough uncertainty in economic circumstances and global interaction to keep interest in gold even if the dollar did stabilise against the euro.
miningmx: As part of the World Gold Council (WGC), do you believe AngloGold Ashanti has created a competitor for itself in the exchange traded fund (ETF), StreetTRACKS? Surely investors either buy equities or the ETF?
Williams: We’ve had this debate several times in-house, in the WGC. We can’t, and we don’t see it that way. The gold equity market is a small market anyway and those who are taking direct gold positions are taking them in much more the currency risk diversification mode or portfolio diversification mode than they are as an equity investment. So the equity investment still offers characteristics that simply aren’t there in gold. Quality of assets, quality of return, focus of management, short term, long term regional risk, so I think it is quite a different category.
miningmx: Shouldn’t gold producers be hedging in a rising market on the basis that it makes more sense to lock in prices on the way up rather than on the way down?
Williams: You ask one of those universal questions about human nature. Just go back to fundamentals. If you were to ask us on the broadest, most catholic view on hedging, it is exactly that: we hedge for revenue management. We don’t see how you can put in place billions of dollars worth of assets, and then allow the revenue outcome to be fixed by market forces completely out of your control. Insofar as you cannot influence the traded price of your metal, then what you can at least do is select in the market the pricing for your metal, for some of your metal, in order to secure cash flow, the ability to pay dividends, the ability to fund and complete capital expenditure programmes, and so on.
AngloGold Ashanti has been a consistent dividend payer and has been the highest dividend payer in the gold mining industry. Therefore, this revenue management thing is something that we are more aware of as an important part of our business. This, however, is at odds with, we think, a minority interest in the gold equity shareholder constituency. These are the people who would like gold equities to play the role they played 30 years ago which is to simply to be options on the gold price.
Now it’s true that that’s what they were 30 years ago. That was an exciting time; it was a time when the gold price was being deregulated, the gold market was being deregulated, there were lots of uncertainties, and it was a very leveraged way of playing on the gold price. But we see in our constituent shareholders, a lot more fund investors who like to see a managed approach to the risk, and who want some of the price upside, but also want the cash flow dividends. So, we do still see a role for hedging.
miningmx: Now we come to the question that if that’s the case, why don’t you sell some stock at 450/oz?
Williams: I think if we had new projects that would have their value significantly enhanced by a fixed price now, or by a price programme such as hedging, we would do it now. In the meanwhile, what we would like to do is to take the existing activities and operations and give them as much benefit as possible from the higher gold price at the current cycle.
In big picture terms, we would be inclined to strip the hedge off for the next couple of years in the belief that the price would go higher or will stay in this kind of trading level. So we don’t have to hedge and we can benefit from the higher spot price, but make sure that we don’t lose sight of the long term benefits of managing our hedge book. It’s a very long speech I’m afraid, but your point is certainly correct and we have been asked by directors from time to time: ‘is this a price at which you should continue taking some new price contracts’. It does cause us to look at it and say, well yes, but not at the moment.
miningmx: On the rand and the gold price: do you ever see that relationship being decoupled?
Williams: Let’s say first, it’s not anymore a rand-dollar relationship; a rand-gold relationship. It’s certain that some of the commodity prices play a role in the rand’s strength. But you can see from those index graphs, that the rand has gone a great deal further than any kind of weighting in relation to platinum or gold prices.
Will the stronger rand ease? Our own planning approach has been to put into our business plans a ‘stronger for longer rand’ assumption. It’s publicly stated by both the South African Reserve Bank and, to a lesser degree, by members of cabinet that the value of the rand is not their primary concern.
The SA Reserve Bank takes a much more black and white view by saying its concern is only inflation. It says whatever happens to the exchange rate is not its concern. In fact, if you look at the inflation rate target, it is much happier with the stronger rand because it’s shielded South Africa from a $50 oil price. So I think one must set aside the Reserve Bank as being a party likely to address the economic consequences.
I think that the Minister of Finance (Trevor Manuel) probably recognises that for a developing economy, with a very large unemployment percentage in its economically active population, a strong rand at this stage is probably not best for the society or the economy. What he, the South African government, or the Reserve Bank could conceivably do to help ease that position, whether it’s with the exporters, or the manufacturers, or the motor car exporters to Africa, or the metal producers, is a moot point.
We all know that governments are able by signals in speeches or public circles to indicate what their view is about the strength or weakness of the currency. This would not be uniquely South African if they had to do it. We’ve had the Europeans do it, and had the Americans do it by saying they think the dollar is too strong, or the yen is too strong. Certainly, the Reserve Bank could more aggressively increase it’s foreign exchange holdings. There are a number of things.
But I think as managers of the South African asset, AngloGold Ashanti’s approach has been that we have to knuckle down and try and make the bed that we’ve been given to sleep in. I would say simply, in conclusion, that the South African management has done an absolutely sterling job of controlling rand costs on the basis that they’re not going to be relieved or saved by a weakening currency. They’re going to have to manage it in a strong currency regime.
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