Rand took industry to edge, and back

David McKay | Mon, 11 Jul 2005 17:00

[miningmx.com] -- THE rand is continuing to play havoc with SA’s mining industry notwithstanding its weakening to above R6.00 to the dollar. According to Peter North, a director of corporate advisor, QuestCo, making long-term rand assumptions for projects remains difficult owing to the currency volatility. "If somebody had told me the rand would be 6.88 to the dollar two months ago, I'd have said that was unlikely, but it appears that there has been a shift in market sentiment".

Anglo Platinum, which suspended projects worth nearly 600,000 oz/year in platinum on a stronger rand, is now suggesting a sustained period of weakening could see shelved projects dusted off. But no-one is promising anything. Harmony Gold CEO, Bernard Swanepoel, for instance doesn’t believe a stronger rand will lessen the impact of planned retrenchments, estimated at nearly 12,000. “We can’t make long-term investment decisions on a few weeks activity with the rand,” he says.

“In the eyes of many people, we were slow to respond to the rand. But I defend this because retrenchments is the last thing you should do,” says Swanepoel.

Harmony rival, Gold Fields, says it hasn’t been severely hit by the rand’s gains and there’s no major blood-letting to come. “We started preparing for a ‘stronger for longer’ rand in September 2003 when everyone else was sleeping,” says Ian Cockerill, Gold Fields CEO. “If we’d stuck with the same plan, we’d be in the same boat as Harmony”. This was the strategic decision to shift to selective mining rather than chasing volume, a change in attitude that was much criticised at the time.

Nick Holland, Gold Fields financial director, says that Project 100, a company cost-saving initiative, had saved R140m/year while Project Beyond, aiming at saving R200m to R300m, already had savings of R90m in the bag. Gold Fields has the best supply chain management, Holland insists. “There’s nobody in the industry that is as advanced in management of the supply chain. I challenge anybody to beat us”.

Gold Fields has based future estimates on a rand gold price of 85,000/kg in 2006 increasing to 87,000/kg in 2007. The rand gold price has averaged R84,257/kg so far this year. “Inflation is much lower so we’re not assuming the rand will weaken greatly. The current account deficit is a worry but the country’s foreign reserves are strong. The rand isn’t going to fall out of bed and we think R7/$ is a reasonable level,” Holland said.

Canadian stockbroker, RBC Capital Markets, has revised its weaker rand scenario to R7.00 by the year-end from R6.2 previously. By the end of 2006, the rand will be trading at R7.8 to the dollar, according to Tania Kotsos, senior emerging markets strategist at the stockbroker.

“Our bullish USD/ZAR view is largely premised on the diminishing real rate differential, the deterioration of the current account deficit, and import growth expected to remain strong over the next 12 months,” says Georges Lequime an analyst at RBC. SA’s platinum companies represent “... a more defensive way to play the SA rand leverage rather than the gold equities,” he says.

Impala Platinum has said platinum production in the second half of its financial year would be 4% higher; earnings would also improve over estimates in the first half of the year. But the gold companies are still not out of the woods. According to a report by Muneer Ismail, an analyst at Deutsche Securities, Harmony continues to burn R250m/quarter. Swanepoel says the ‘cash burn’ criticism levelled at Harmony misdirects attention from the capital spend that is taking place funding new projects. Harmony will be cash flow positive from August, he says.

Synonymous with yo-yos, rollercoasters and all other images of oscillation, DRDGOLD has probably taken the hardest battering from the rand. It infamously placed its North West province mines into liquidation partly hoping it would recover some of the R1bn it pumped into them. Ilja Graulich, DRDGOLD investor relations manager, says at R92,000/kg, the company’s SA assets are “more than at breakeven”. “The major question is what’s going to happen with wage increases. If they’re kept inflation-linked, the industry will survive,” he says.

DRDGOLD is outside the Chamber of Mines of SA (CoM) negotiations, currently underway with Solidarity and the National Union of Mineworkers (NUM). But the company is likely to join Frans Barker, chief negotiator for the CoM, in claiming that the mining industry is in its worse crisis for 44 years. According to Barker, more than 86% of the gold mines continue to work at an operating loss. Says Solidarity general secretary, Andrè van der Merwe: “The Chamber ... is now brandishing the loss of more than 40 000 jobs as a negotiating trump card”.

This is how the CoM intends to tackle an opening wage demand from NUM of 20%. Mining industry costs have increased 10% per year over the last two years. Over the same period, the gold price has increased a mere 4%. The CoM worries the SA gold industry is atrophying and has already observed that the country’s gold production sank to a 73 year low in 2004. Not since Britain left the gold standard and Bela Lugosi starred in Dracula has SA’s gold industry been so small. Solidarity’s Van der Merwe, who has asked for a 12% increase on behalf of members, believes it could be a long, cold winter.