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SA golds went to sleep in Q3
David McKay
Posted: Fri, 21 Oct 2005
[miningmx.com] -- THE rand gold price was about 4.5% higher in the September quarter but the effects of strikes and an industry wage increase, as well as operational underperformance, will see South African gold producers turn out a relatively poor performance.
Up to six days were lost owing to strikes related to wage negotiations that eventually resulted in an average 6-7% wage increase. Roughly half of total costs for SA gold producers is related to labour costs.
“We believe that the financial results of all three major South African-based companies will come in well below expectations,” said Georges Lequime, a gold analyst for UK-based RBC Capital Markets.
Production is expected
to be down at AngloGold Ashanti (-2.7%), Gold Fields (-8%), Harmony Gold (-5%) and DRDGOLD (-2%). Western Areas has already reported higher production, but its hedge book, constructed for a much weaker dollar gold price, means the company derives 24% less than the spot price of gold.
Any gold producer with a hedge book will suffer. Barrick Gold has already fallen under criticism in the US while AngloGold Ashanti may deliver gold price received 20% beneath the spot price.
There was no relief for South African gold producers with output outside South Africa: “Costs at most of the non-South African mines will have been impacted by the higher oil prices over the quarter,” said Steve Shepherd, gold analyst for JP Morgan in Johannesburg. About 57% of AngloGold Ashanti’s gold output is derived from offshore.
Important questions will be asked of each gold producer this quarter. For Harmony, it will be why the company has failed to reach its self-imposed total
cash cost target of R75,000/kg. The company is expected to report cash costs of R88,500/kg for the September quarter.
“Although we expect the company’s operating profit to be boosted by 40% (off a low base) due to the improved gold price received, management credibility could be further damaged by the inability to address its high operating costs,” said Lequime.
Production at AngloGold Ashanti’s Obuasi mine, a key asset at the centre of last year’s successful bid for Ashanti Goldfields, is expected to disappoint. According to a company presentation at the Denver Gold Forum in September, Obuasi has a revised annual output of 400,000 oz of gold compared to previous estimates of 500,000 oz. Geita and Sunrise Dam will also produce lower volumes.
Gold Fields has already flagged its operational troubles. But there will be further questions about how the group hopes to meet its growth targets. Goldman Sachs continues to impose a discount on Gold Fields owing to
its relatively undiversified portfolio.
“We continue to see Gold Fields’ high exposure to the South African rand, coupled with the firm’s somewhat limited regional and technical diversification as a weakness,” said Alberto Arias.
The offshore mines of DRDGOLD will continue to underperform placing extra pressure on the variable nature of the South African mines. The company has announced plans to diversify into Africa as part of a plan to split the company along geographic lines.
However, South African gold stocks remain relatively well geared to the gold price which analysts say will remain solid. Gold is forecast to average $470/oz in the fourth quarter which, according to Goldman Sachs, gives Gold Fields 9% upside to fair value compared to AngloGold Ashanti to which is imputed a 5% increase to fair value.
“Harmony will continue to have negative cash flow which will affect the overall industry,” said Nick Goodwin, an analyst for T-Sec, a South
African stockbroker. “In the last quarter there was roughly a R700m negative cash flow across the board. This quarter we’re looking at –R300m to –R350m flowing out of the industry,” he said.
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