SA gold mines looking good

[miningmx.com] –ANALYSTS anticipate better production and higher revenues to be reported from the main South African gold groups in the June quarter when Gold Fields and Randgold Resources kick off the reporting season on Thursday.

Gold Fields has already set a bullish tone with its Stock Exchange News Service (Sens) announcement on June 29 that group gold production for the June quarter would be about 895,000 ounces, at the upper end of the guidance provided on May 7 this year.

The group added that all four of its operating regions performed well with attributable production rising 13% compared with the March quarter, while total cash costs and notional cash expenditure remained within guidance.

The main driver for the June quarter results was the higher rand gold price – up 8% to R289,300/kg (March quarter – R267,300/kg).

According to JP Morgan Cazenove analysts Allan Cooke and Steve Shepherd, the gold price averaged a record $1,195/oz ($1,110/oz) up $85/oz or 8% on the March quarter.

The average rand/dollar exchange rate for the quarter was slightly higher at R7.53/$1 (R7.49/$1).

The analysts said: “AngloGold Ashanti, Gold Fields and Harmony are anticipated to report higher gold production quarter-on-quarter.

“March quarter SA gold production is seasonally low due to the Christmas holiday break, while June quarter production is impacted by the Easter weekend and other public holidays.

“The SA royalty ( about 2% to 3%) introduced from March 1 will impact June quarter results, as will the Eskom power tariff increase of 24.8% from April 1 (affecting about 10% to 15% of SA cash costs).

“Nevertheless, a higher received gold price and improved production quarter-on-quarter are expected to boost June quarter earnings for the gold miners we cover.’

RBC Capital Markets analyst Leon Esterhuizen commented in a report published on July 25 that “we remain optimistic that reported performance from the SA gold miners will improve strongly over the next six months.

“This improvement, we expect, will be driven off much better volumes which could also see an amelioration in unit cost escalation.’

However, Esterhuizen sounded a note of caution on share price levels given the recent drop in the dollar gold price and strengthening of the rand during the traditionally quiet northern hemisphere summer holiday period.

This has knocked the gold price received by the SA mines back to about R275,000/kg currently from above R300,000/kg earlier in the current September quarter.

Esterhuizen said: “Going into the quarterly results and the second half, we would recommend being long Gold Fields relative to being short either AngloGold Ashanti or Harmony.

“Still, we fully expect all three to show increasing share prices on our increasing gold price forecast and on the basis of the second half of 2010 delivering much better production volumes.

“We caution, however, that we believe the consensus numbers to be very optimistic and could be due for some sharp reduction if the gold price does not increase strongly.’

Cooke and Shepherd have forecast June quarter adjusted headline earnings per share of 206c (up 63%) and an interim dividend declaration of 60c/share for AngloGold Ashanti.

For Gold Fields they forecast June quarter earnings “ex items’ of 139c a share (up 209%) with a final dividend of 100c a share to be declared.

The analysts reckoned Harmony moved back into the black with June quarter earnings of 14c (previously 32c loss) and would declare an annual dividend of 18 cents per share.

Esterhuizen is looking for 251c in earnings from AngloGold Ashanti for the June quarter, and has revised his 12-month target share price to R345 (previous target – R400).

For Gold Fields he forecasts 126c/share earnings, and dropped his target share price to R135 (R150).

Turning to Harmony, Esterhuizen commented that it “continues to struggle with its split personality in the sense that the long tail of marginal assets continues to battle, while the new projects and the Papua New Guinea (PNG) exposure continues to build up better numbers.

“Given the risks associated with cost increases in South Africa (electricity and labour being the main culprits), we expect the marginal assets to continue detracting from performance potential in the short term.

“Once the PNG production starts becoming a meaningful number and once the new growth projects in South Africa start to produce consistently good numbers, this would be much less of an issue.

“We only expect this crossover to take place in calendar year 2011.’

Esterhuizen estimated Harmony’s June quarter earnings at 47c, and has dropped his share price forecast to R90 (R95).

The writer owns shares in Gold Fields and Harmony.