Hedge fund mogul and major AngloGold Ashanti Limited (ADR) (NYSE:AU) shareholder John Paulson is not happy about the share sale and spinoff proposed by the company yesterday. On Friday, September 12th, Paulson said he is against the plan because it will clearly destroy shareholder value.

AngloGold Ashanti

The company’s plans announced yesterday seek to transfer $1 billion of debt to a newly spunoff firm and pay off another $2.1 billion in AngloGold debt. However, shareholders such as John Paulson , whose New York-based fund owns 6.6% of AngloGold Ashanti Limited (ADR) (NYSE:AU), could block it. According to data from Bloomberg, that would leave AngloGold, the world’s third-biggest miner of the metal, with debt levels exceeding 100% of its equity.

AngloGold plans if share sale and spinoff approved

According to AngloGold spokesman Stewart Bailey, the company plans to use the proceeds of the share sale to either buy back bonds in the market or pay off bank loans of $430 million, “or a combination of both,”  Bailey also noted the proposals for the rights offer and the restructuring need the approval of 75% of shareholders

AngloGold regulatory filings indicate the firm will also pay back 35% of its $1.25 billion of bonds due in July 2020, as called for in the terms of the sale.

“The rest of the bonds will be tenders in the market,” Bailey continued. “There’s a range of options and we haven’t decided what we’re going to do.”

Statements from analysts

“The main risk is they still need shareholder approval for a rights issue,” explains Jon Brager, a credit analyst at Hermes Fund Managers Ltd., a firm that manages assets including AngloGold Ashanti Limited (ADR) (NYSE:AU) bonds. He went on to say that if the vote doesn’t pass, “they’ll have to come with a new plan and in the interim the bonds can trade down.”

Another consideration is that an international company could require higher capital spending on its mines than the assets AngloGold will retain, putting more strain on cash flows, noted Charl Malan, a mining analyst at Van Eck Associates Corp. in New York. “The cash flow generation is in South Africa,” Malan continued. “It is not international.”

However, Brager also noted that there should be consensus among investors that AngloGold Ashanti Limited (ADR) (NYSE:AU) has to lower its debt levels, even if not all agree on the proposal put forward by the company. “Everyone knows new capital needs to be put in,” he said. “There is little risk of nothing being done.”