Gold majors' earnings may fall 80%

Ines Schumacher | Mon, 08 Jun 2009 15:56
[miningmx.com] -- MAJOR South African gold companies could suffer an 80% drop in quarter-on-quarter earnings unless the gold sector experiences a major upturn in the dollar price of the metal or a weakening of the rand, RBC Capital Markets said.

RBC has increased its gold price forecast and predicted the rand would move stronger against the dollar. This translates to a weaker rand-gold price, which will significantly decrease South African gold companies’ share valuations.

“We suspect the dramatically reduced forecasts will come as much as a surprise to the market as it did to us when we did this exercise,” RBC said in its commodity assumption revision published on 5 June.

AngloGold Ashanti earnings could drop 78% quarter on quarter (q/q), Gold Fields could see earnings down 77% and Harmony Gold could deliver an 87% earnings plunge. RBC expects DRDGOLD to make a small loss after its record cash earnings in the previous quarter, which would result in a 138% earnings fall.

RBC estimates a 25% reduction in earnings expectations for the major companies over the next 12 months. Their net asset values may decline by an average 35%.

“This sector will now need either a sharp increase in the gold price (in dollar terms) or a weakening of the rand to deliver meaningful upside from current levels,” RBC said.

RBC increased its gold price assumption for 2009 to $925 per ounce from $850/oz. Its assumed rand/dollar exchange rate strengthened to R9.00 from R9.90. This translates into a rand-gold price of R267,657/kg, down from an earlier forecast of R270,551/kg for 2009.

The longer-term drop is more pronounced, with the rand gold price falling from an estimated average of R348,678/kg to R305,435/kg for 2011.

“The previously recognised ‘value gap’ relative to the gold price has now virtually been closed,” RBC said.

In the short term, RBC sees the potential for the traditional northern hemisphere “summer doldrums” pullback in gold prices, fuelled by a decrease in physical demand.

“We are also concerned about the recent run-up in gold, viewing much of the move from $900 to $980/oz as being speculative-driven,” RBC said.

RBC forecasts sales of gold-backed exchange-traded funds (ETFs) since it views recent interest as short-term investing rather than longer-term investor demand.

In the longer term, RBC expects gold to hover at around $1,000/oz later in 2009 or the beginning of 2010. “The increased financial liquidity around the world, we expect, will eventually prove inflationary, and positive for gold prices,” RBC said.

SA gold companies

RBC said metal prices in rand terms do not support share valuations. “All we can do in a situation like this is to indicate the fundamental valuation ‘gap’…and to illustrate the ‘least at risk’ shares as preferred vehicles for investors willing to accept this risk,” RBC said.

RBC’s major gold share favourites remain AngloGold and DRDGOLD, while Great Basin Gold, Pan African Resources and Simmer & Jack are its junior picks.

AngloGold is favoured because of its relatively low-key presence in South Africa, whereas DRDGOLD gets a nod for its well-geared exposure to the rising gold price.

Simmers seems a reluctant pick after RBC said: “Its current share price implies a P/E rating to some 21x to 2010E which is actually pretty high for a stock with an uninspiring track record of delivery.”

RBC is disparaging of Central Rand Gold’s management, as it said the junior gold firm might be taken over by a larger company if its uncertainty and non-delivery persist.

“We would have to become more bullish on the gold price outlook (in rand terms) for us to remain very positive on this sector for much longer,” RBC said.