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S.Africa gold shares offer value
Allan Seccombe
Posted: Fri, 09 Jun 2006

[miningmx.com] -- SOUTH African gold shares are starting to offer value, with the rand gold price moving down about half of what the dollar value has since the precious metal peaked at $730 a month ago, market watchers said on Friday.

“Gold equities have come off and have come into value territory,” said South Africa’s top-rated gold mining analyst David Davis from Andisa Securities.

The market had been signalling for some time that a pull back in the gold price was due and equities have reacted.

The gold share index on the JSE has come down 20 percent since gold hit a 26-year peak of $730 on May 12. This is slightly ahead of the 17% fall in the gold price since then. Gold has given up about $120 since then to trade at around $610/oz.
into value territory
The rand has worked to the local gold industry’s favour by weakening against the dollar, keeping the rand gold price at levels where mining companies make money. The rand gold price has come down just 10% since May 12 to R131,000/kg.

In 2004, the strength of the rand cancelled out any gains the companies might have felt from an increasing gold price and the sector underwent a restructuring exercise to cut costs. Hardest hit were Harmony Gold and DRDGOLD, which both shed thousands of jobs.

The international gold price has pulled back as the dollar has strengthened, interest rates in a number of countries and zones have been increased. On Thursday, the European Central Bank, along with South Africa and some Asian countries lifted rates, luring investment monies away from a volatile gold price into an alternative haven.

The oil price has softened to below $70 amid signs that Iran is willing to talk to the West about its nuclear programme and other political events in the Middle East.

Major gold producers speaking at a Reuters Global Mining and Steel Summit in New York this week sounded a bullish note for the metal.

"We think there's still a long way left in this run. You look at the investment interest that gold has generated, and as an industry we've made investing in gold modern with the Exchange Traded Funds," said Wayne Murdy, CEO of Newmont Mining Corp.

The largest producer of South African gold, Gold Fields, sees the pull back as a technical correction.

“Despite the recent correction we are firmly of the belief that the secular upward trend remains in place. It is quite clear that at the current moment there is a technical correction going on," Ian Cockerill, Goldfields' CEO, is quoted by Reuters as telling the summit.

Results for producers of South African gold should be strong for the June quarter, with Harmony, which has the most exposure to South Africa of the majors, seen turning around two years of losses to post an operating profit. The gold price averaged about R109,000/kg in the March quarter, but it could be up to R20,000 higher in the June quarter.
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“The South African mines, which have been coming off a low base in production after the Christmas holidays, should see increased output. This together with a 20% increase in the rand gold price will increase their revenues significantly,” said a gold analyst. “The quarter should be much better than the March one.”

The fall in South African gold shares has been exacerbated by foreigner investors pulling funds out of emerging markets, and gold counters being liquid, are amongst the hardest hit, said Mandla Mapondera from Old Mutual Asset Management.

“There is value beginning to show. Using some of the earnings forecasts that are coming out point to positive earnings throughout. The forward price earnings ratios are now showing from the high 50s to 80s are now in the mid-20s or so,” he said. “Once those earnings are more sustainable, it’s a question of seeing where do those ratings rest. Will they go further into the 30s?”