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Tide turning for SA gold counters Posted: Wed, 16 Jan 2008 [miningmx.com] -- IT’S BEEN a frustrating time for gold equity investors, in particular, those holding shares in South African miners, which have badly underperformed the metal over the past year. However, there are now some indications that may be changing. But the reality is that while gold continues to hit new records above the previous top of $850/oz set in 1980, the performance of some gold shares seems leaden-footed. Despite their gains over the past week, heavyweight South African gold shares such as AngloGold Ashanti, Gold Fields and Harmony sit well below their 12-month highs, let alone their all-time highs reached several years ago at much lower rand gold prices. This gold bull market is very different to its predecessors, where gold shares typically outpaced the rising gold price due to the gearing of their earnings to it. It’s disappointing to see Gold Fields sitting currently around R115 compared with a 12-month high of R152.50 – even if it’s recovered from below R100/share over the past fortnight. There are a number of reasons for that, with an important one being the introduction of gold exchange traded funds that allowed investors to buy directly into the metal. But gold’s 30% rise last year actually looks pedestrian when compared to the kind of capital gains that used to be made on gold shares and which still can be made – given you pick the right share. The best example is London-listed Randgold Resources (RRS), which nearly doubled from £10.17 to £19.80 last year. Most of that move came in October/November, when RRS accelerated away from around £12 in response to the strengthening gold price. Now that’s what a gold share is supposed to do in a bull market and there are a number of good reasons why RRS has outperformed its peers. Apart from its strong operating profile, RRS has enhanced and not diluted shareholder value. In particular, it’s held back on the issue of new equity for asset acquisition and expansion, although it took advantage of its soaring share price in November to raise funds. RRS issued 6.8 million shares at $35.25 (around £17.60) to raise a total of $240m to fund its developing Tongon gold mine. Destroying value A panel of fund managers at last year’s Denver Gold Forum roundly criticised the gold company CEOs present for destroying shareholder value. Frank Holmes, chief investment officer at US Global Investors, commented: “Last year the gold industry issued 20% more shares but gold reserves didn’t go up by 20% and production didn’t grow by 20%.” Other major drawbacks throughout the industry have been steep increases in operating costs as well as the capital costs of new projects that have run way ahead of ruling inflation rates. The end result has been that the gold producers have, generally, been unable to convert the rising gold prices they’re receiving into rising profit margins at their mines. South African gold producers have had additional problems, such as the safety issues that have come to the fore, with Government taking a harder line on fatality incidents and enforcing shaft shutdowns that have hit production. The labour intensive nature of the industry is also viewed as a risk, given that labour accounts typically for 40% of operating costs and South Africa’s legislation is viewed as pro-labour. All gold firms worth buying The good news is that may be changing as the gold price continues into record territory at around $890/oz – equivalent to around R195,000/kg. Says Cadiz fund manager Peter Major: “At these gold price levels, all the gold shares are buys – no matter how bad the managements are. The revenues coming in should overcome all the screw-ups.” Major has been neutral to negative on gold shares over the past year. He’s now changed his tune. “This gold price performance has me floored. It’s split from its link to the US dollar. We’ve just seen a $50 rise in gold while the US dollar/euro exchange rate has remained steady. "I can’t say gold is now moving on its own but I’m becoming more convinced by the day that these prices are going to stay up.” North American gold stocks have benefited from the stirring of renewed interest in gold shares ahead of South African gold companies. A number of better quality producers have hit new all-time highs, such as Agnico-Eagle. which reached $60,73/share last week from $40 in July, and Barrick Gold, which hit $49.44 last week from $30 in June. The South African producers still lag way behind but the hope is that they, in turn, will start to run as the magnitude of the revenues flowing their way is more widely appreciated. AngloGold Ashanti has shifted from R307.48 in mid-December to R335 currently, which is off a 12-month low of R254/share. There’s still a way to go to hit its 12-month high of R358.89. Click Here to subscribe to our daily newsletter
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