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David Mckay

Gimme gold quarterlies

David McKay | Mon, 04 May 2009 11:07
[miningmx.com] -- PRESIDENTS come and go, rogue viruses unleash themselves, the Arctic is melting but there'll always be the gold quarterlies. Rock of ages.

My first job as a mining reporter was to cover Gold Fields of SA's 1995 December quarterly results, an enormously complex company I was sure would be the death of me. (What, it reports every three months?)

I now view my open affection for gold quarterlies as a sign of maturity. Gold quarterlies feel like home: a warm, glowy place. Well, after we're gone, gold quarterlies will keep trundling on. That's a great comfort.

The extra special good news is the South African gold sector is looking pretty warm and glowy too. According to a couple of analysts' research papers, March quarter headline earnings will be "significantly improved" compared to the December quarter. That's quite impressive because the March quarter is traditionally tripped up by fewer shifts worked, a function of the preponderance of holidays in January.

Market banks on more value

What's helped, however, is the gold price. The spot price has been 14% higher quarter-on-quarter (q-on-q), and 18% higher in rand terms, or the price received by the South African golds. That goes a long way to offset the lower production and, consequently, higher costs.

GFSA isn't around anymore but its prodigy, Gold Fields, is the first of the big three to post its results, on Thursday May 7. The others, Harmony Gold and AngloGold Ashanti, report on May 8 and 15 respectively.

Says RBC Capital Markets: "We are expecting significant improvements in profitability that should, in most cases, combine with increased production to deliver on average 60% increased earnings q-on-q." What's even more interesting is that the market thinks the sector is going to deliver more value.

But, and this is quite a big but, both RBC and Deutsche Securities observe forward price-to-earnings multiples on the gold companies is low. This suggests the market either thinks the gold price is heading for a bit of a bath, or the gold companies won't be able to keep the good performance going in the second or June quarter.

That can happen. South African gold companies have a knack of producing lumpy operating performances from one quarter to the next. Take Harmony Gold, for instance: a wobble at its Elandsrand mine can hurt the overall performance of the company.

The gold price is expected to weaken, but RBC reckons the second half of 2009 will be strong for the firms. "Given the current clearly low ratings of these companies, now could well be the best opportunity to build a good position in a sector that is known for the high gearing potential to a rising gold price," it says.

Anglo's Carroll taken to task

There's more pressure on Anglo American CEO Cynthia Carroll.

Having already received a bit of a tongue-lashing from her predecessor Tony Trahar for passing the dividend, she found herself publicly questioned by Barry Davison at the group's annual general meeting last week.

Davison, who cut a rather fearsome figure in his day, is the former chairperson of Anglo Platinum, now 79% owned by Anglo American. He feels the platinum firm has been going nowhere fast with production at its 1999 level. Remember that it was under Davison's watch that Anglo Platinum set itself a 3.5 million ounce/year target - one it never achieved.

It's both fair and unfair to take Carroll to task. She is Anglo's CEO but in Anglo Platinum, there seems to be a legacy of underperformance. For a company that controls 80% of the South African platinum sector, has had the best reserves, and more than R26bn pumped into stay in business capital over the last three years, it has performed woefully. As Davison observes, costs are nearly a third higher since 2005.

How long before current Anglo Platinum CEO Neville Nicolau goes the way of his predecessor Ralph Havenstein, who was only at the company a few years? And on the question of executive tenure, rumours that Carroll's position at Anglo American is under threat are bound to intensify if 2009 doesn't deliver a better year.

McKay is the executive editor of Fin24.com and Miningmx.com.

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