[miningmx.com] – THE wind beneath the wings of South Africa’s gold shares in January was undiscriminating with AngloGold Ashanti, Gold Fields, Sibanye Gold and Harmony Gold receiving an uplift amid expectations of slower-than-expected world economic growth and rand weakness.
February, however, proved a crueller month with investors withdrawing more selectively; especially from Harmony Gold and Gold Fields which delivered bad news to the market.
In the case of Harmony, it’s troubles have been brewing for a while and now appear to be intensifying.
Its net debt rose by a staggering R1bn in the three months that comprised the December quarter and the expectation is that debt will pile higher – to R2.2bn – by the end of the June quarter, according to a report by Adrian Hammond, analyst for Standard Bank Group Securities.
“About 30% of production is free cash negative, 10% is cash neutral and the remainder is marginally cash positive,’ he said.
Kusasalethu, Harmony’s flagship mine, is expected to produce a profit in the March quarter but this could be unseated in the event of a strike, especially as the Association of Mineworkers & Construction Union is a growing force at Harmony’s operations.
What’s more, the deteriorating nature of its balance sheet means that the company may not be able to fund its Golpu project in Papua New Guinea at the current gold price unless it opts for more debt or sells assets.
That may be necessary and must surely put Harmony Gold as a potential merger and acquisition partner of which Sibanye Gold’s Neal Froneman has been talking lately.
Asked to comment on Sibanye Gold making a bid for Harmony, or some assets, corporate affairs head at Sibanye, James Wellsted, said: “Neal has previously mentioned that the next step in creating value in the industry is to consolidate.
“By doing that you can remove significant overhead costs which exist in corporate salaries, corporate offices and replicated services such as HR, payroll and accounting,’ he said. Wellsted declined to comment further.
Froneman was similarly evasive in talking about specific targets at the firm’s December quarter figures last month.
JP Morgan analyst Allan Cooke said in a report earlier this year that at a rand gold price of R450,000/kg, Harmony has significant leverage especially as 90% of its production is in South Africa.
Yet the market didn’t agree in February. The stock fell 16% even though the rand gold price had increased to just under R460,000/kg in the month.
Interestingly, Harmony is up 3.38% amid rand weakness. The rand lost more than 1% on February 27 following news of a wider than expected January trade deficit. The concern is that the current account of the balance of payments would fall under more pressure and make South Africa vulnerable to capital outflows.
Gold Fields was also weaker from mid-February after it announced its South Deep mine west of Johannesburg would not break-even as planned in 2016.
The mine accounts for only 10% of production but its signficant reserves and resources are the key to Gold Fields keeping production, and all in costs under control for the next ten years. Strategically, it’s an important asset.
The share prices of Harmony Gold and Gold Fields raced up 62% and 25% respectively during January while AngloGold Ashanti and Sibanye Gold were 28% and 40% stronger over the same period.
Sibanye Gold retained most of its value in February whereas AngloGold was under pressure down about 9% from mid-February.
Long-term, AngloGold Ashanti still faces challenges.
Its Kibali mine in the Democratic Republic of Congo is proving to be a cash generator of note, but its issues remain at home in South Afirca where a restructuring and re-capitalisation are not completely off the table.
