[miningmx.com] – JP Morgan Cazenove has lowered its gold price forecast for 2016 and turned even more negative on prospects for most South African gold miners as a result describing the sector as being “mired in crisis’.
According to analysts Allan Cooke and Abhishek Tiwari the benefit of a weaker rand/dollar exchange rate on SA gold mine revenues will not be enough to offset the impact of a string of negative factors hitting the mines.
In a recently-published major research report they commented, “This FX (foreign exchange) boost to SA gold mine FCF (free cash flow) margins isn’t enough to counter the many challenges that SA gold producers continue to face.
“Labour instability, Eskom’s power crisis, high input cost inflation, safety stoppages, declining productivity and persistent regulatory uncertainty in South Africa are threatening the viability of around 40% of the country’s gold mines, in our view.
“With the prospect of increasing job losses in the local mining industry, the government, unions, and miners have been forced to confront the mining crisis as they attempt to agree ways to avert mine closures/restructuring.
“But yet another stakeholder agreement will not be sufficient to prevent the inevitable decline should gold prices remain at current levels.’
The analysts added that at a spot gold price of $1,106/oz “about 40% of the gold mining industry is not washing its face after stay-in-business capital expenditure. And this cost base is before the next wage increase from July 1, 2015 that will likely hike cash costs by around 5% or $50/oz in our view.’
JP Morgan’s latest assessment on gold is that the price will average $1,050/oz for the fourth quarter of 2015 giving an average of $1,145/oz for 2015 overall. JP Morgan expects the gold price to drop a further 9% to an average of $1,040 next year – about $60/oz below the current spot price of around $1,100/oz – mainly on expectations of a stronger dollar.
Turning to the Mining Charter and the issue of “once empowered, always empowered’ the analysts believe it could be years before there is resolution between the Chamber of Mines and the Mines Minister.
This is despite the fact that, “there appears to be willingness by both parties to reach an agreement on the matter rather than rely on a court process.’
Cooke and Tiwari commented, “should the issue be resolved through talks between the industry/Chamber and the Mines Minister/DMR (Department of Mineral Resources) we think it likely that this alternative may also be a long route to regulatory certainty for the industry since any resolution found would have to find its way into the SA mining act and the Mining Charter.
“Existing mining law would need to be amended through a parliamentary process. Since mining law amendments that have been proposed by the DMR have been pending for some three years, we suspect that the resolution of the “once empowered, always empowered’ problem may take a while longer, perhaps years.’
The analysts added that “gold company strategy has been influenced accordingly’ by all these risks.
They pointed out Gold Fields had unbundled its legacy SA gold mines in 2013 and that, “AngloGold Ashanti showed its intent to separate its SA gold assets from the rest of the group a year ago while Harmony management recently indicated that it, too, is considering separating the group’s SA mines from its Papua New Guinea assets.’
