[miningmx.com] — South African gold share investors have seen minimal benefits of the recent gold rampage coming their way.
Main reason is the strength of the rand, which surged to a near three-year high against the US dollar. But the “South African discount” has also been prominent, well-fuelled by rising unease among investors overseas about the uncertainties in SA’s mining regulatory regime and the on-going debate about nationalisation.
The dismal performance of SA gold shares was summed up in the September quarter gold company review by Australian financial institution Resource Capital
Research (RCR), which reported the performance of SA’s gold stocks over the past six months, had been “shocking” because they consistently underperformed the rise in the physical gold price.
RCR added that the performance of the Canadian gold sector had been “subdued”, but that Australian gold shares had “outperformed strongly over the past six
months”. Australia, it should be noted, has also suffered from the strength of its currency against the US dollar.
The bottom line is that SA’s major gold shares have been locked into a tight trading range over the past two years despite a near 40% rise in the US dollar price of gold.
At $1,360/oz and an exchange rate of $1/R6,87 the rand gold price received by SA’s producers is around R300 393/kg. That’s 6% down on the R318 000/kg the gold mines got in March 2009, when gold was at $990/oz and the greenback bought R10.
Now factor in 18 months’ worth of inflation on mine working costs, which have jumped way ahead of the general trend in SA’s consumer and production prices
indices. Reasons are the above inflation increases in major cost items, such as steel, electricity and labour. So it’s unsurprising South African gold equities have been marking time or actually going backwards.
In late January 2009, Gold Fields shares traded at around 8520c, while the high for the previous 12 months had been R137,40/share. Currently, Gold Fields is trading at R109 but the high for the prior 12-month period was R116/share.
AngloGold Ashanti shows the same pattern. In January 2009 its price was R243 and its previous 12-month high R349/share. Currently, the share sits at around
R327 against a 12-month high of R347.
In both cases both groups are now in far better fundamental shape than they were 18 months ago. Gold Fields has sorted out a string of production and safety issues on its SA mines and re-established a growing production profile. AngloGold Ashanti has similarly dealt with various operating problems and closed out its hedge book.
Harmony and DRDGold have lost ground, with Harmony shares dropping from 9525c in January 2009 to around 8140c currently and DRDGold falling from 549c to 372c/share over the same period.
By comparison, London-listed Randgold Resources – which mines all its gold in West Africa – has risen 60% to £65 over the past 12 months.
OFFSHORE SOURCES
Reason for the dismal performances by Harmony and DRDGold is that both source all their production from South African mines while AngloGold Ashanti and Gold
Fields mine substantial quantities of gold outside SA.
A striking feature from the presentations the CEOs of all the SA gold groups gave to the Denver Gold Forum in September was the priority they placed on growing their non-SA gold production.
Gold Fields currently receives 55% of the 3,5m oz/year of gold it produces from its SA mines. Its growth strategy is to increase production to 5m oz by 2015, at which stage SA will account for only 40% of total output due to its expansions in West Africa, South America and Australia.
AngloGold Ashanti is targeting an additional 1m oz/year of production over the next five years, of which only 50 000oz will come from SA. Beyond that five-year horizon AngloGold Ashanti is looking for up to another 1,8m oz/year in new production – all of it from South America and the rest from Africa.
Harmony is pushing a major expansion in Papua New Guinea at its Wafi/Golpu operation, while DRDGold is moving cautiously into Zimbabwe.
Let’s put all this in context: the greatest unmined resource of gold in the world is actually still to be found in SA on the Witwatersrand geological formation – despite the fact it’s been mined continuously since 1886. The problem is that most of that gold sits at depths of between 3km and 5km.
To get at that gold involves investing north of R12bn over a seven-year period in sinking twin vertical shafts and opening up workings before investors can hope to see any return on their outlay.
Current economic realities mean that’s simply not going to happen – even before you factor in issues such as the possible additional cost of subsidising a 26% black empowerment partner through vendor financing arrangements.
Recent new developments in SA – such as Gold One International’s Modder East mine and Great Basin Gold’s Burnstone mine – are sited on relatively shallow
deposits. Now bring in the uncertainties associated with nationalisation post-2012 – when the ANC will deliver its judgment on the issue – and post-2014, when the current empowerment legislation again comes up for review.
TOO MUCH AIRTIME
DRDGOLD CEO Niel Pretorius explains it as follows, justifying the group’s move into high-risk Zimbabwe: “Essentially, the costs are limited to capital put into the venture and – while we may never end up with more than a 50% holding – ultimately 50% of an $800 margin is better than 100% of a $300 or $200 margin and the risk associated therewith. What we’ve done over recent months in Zimbabwe is – at very low cost – doubled the size of our footprint.”
While Pretorius reckons the nationalisation debate “is simply being given too much airtime by the media” reality is that fund managers in both the United States and Britain – a number of them previously favourably disposed towards SA – are deeply concerned by what’s going on here.
One gold company CEO – who requested anonymity – says he was stunned to be told by fund managers in Edinburgh during a recent road show “we’d rather put
our money into Zimbabwe or the DemocraticRepublic Congo”.
As for gold? General assessment is it’s going to carry on up, although temporary setbacks – such as the recent retreat from the $1 365/oz level – are inevitable and to be expected.
Let me quote the latest assessment from my preferred gold “guru”: Dundee-Wealth Economics chief economist Martin Murenbeeld.
He comments: “Other than the inconsequential fact October is a seasonally weak month, there isn’t anything really negative on the horizon for gold.”
Murenbeeld lists nine main reasons for gold to continue rising, ranging from central bank buying of gold to sovereign debt problems and currency wars. His
conclusions are that a $1 300/oz plus gold price is consistent with what’s going on in other markets and, crucially, gold isn’t in a bubble because it’s still “cheap” in terms of other financial assets.
Sadly for SA’s gold bugs, the consensus prognosis about the rand is it’s going to continue on its firmer track against the US dollar.
– Article first published in Finweek. Ryan holds shares in Gold Fields and Harmony.
