[miningmx.com] — SOUTH Africa’s major gold equities have all posted some gains on Wednesday – buoyed by the precious metal trading at record levels – but analysts remain doubtful over whether higher profit margins would translate into a sustainable price rally for equities.
The price of gold in rand terms have risen close to 30% since the beginning of the year. At an exchange rate of R6.90 to the dollar and a gold price of around $1,415 per ounce, a kilogram of gold would’ve earned South African miners R313,000 in January.
On Wednesday, with the precious metal trading around $1,760 per ounce and at an exchange rate of R7.09/$, a kilogram of gold was worth R401,000.
Yet, what most listed gold miners got to show for the margin increase are negative share price growth, with AngloGold Ashanti down around 4% for the year so far (R324 beginning January compared to R310 on Wednesday), Gold Fields down 10% (R120 compared to R108) and DRDGOLD being lower 4%.
Harmony Gold counts among a few exceptions; up 17% for the year so far. Its shares spiked during a rally late March and April when analysts pointed out the group could benefit from likely corporate action related to its Papua New Guinea assets.
A string of acquisition deals were also the catalyst for Gold One International’s price surge; with the company trading up 56% for the year-to-date.
In a market where gold looks likely to retain its popularity – Bank of America Merrill Lynch raised its 12-month forecast for gold to $2,000oz and Goldman Sachs to $1,860/oz – equities have to be considered to follow suit. Renowned US gold analyst Frank Holmes, CEO of US Global Investors said in commentary on Tuesday gold stocks have a history of performing well when the US economy hits a bump on the road.
“One area with potential is gold equities, which have lagged bullion significantly this year, pushing the gold-to-XAU ratio to second-lowest level in nearly 30 years in June,’ said Holmes.
“This lag sets the stage for a possible strong rally in gold equities relative to bullion once mean reversion to historical levels kicks in, just like it has done time and time again. Desjardins notes that one current catalyst for a rebound in gold stocks is increased profitability from rising gold prices and decreased input costs due to oil’s 28% decline of 2011 highs.’
Local analysts agree South Africa’s gold miners are likely to post significant earnings gains for the foreseeable future. AngloGold Ashanti last week posted record earnings of R2.3bn for the June quarter, declaring a 90 cents interim dividend. Gold Fields and Harmony would release results on Thursday and Monday, respectively.
However, questions remain over whether the gold rally would enable local miners to shake off the negative sentiment which has gripped the industry for some time, most notably due to issues related to security of tenure and nationalisation; the sector being perceived as a sunset industry as well as cost pressures and safety concerns.
“The industry acquired a bad name so investors voted with their feet,’ said Anglorand Securities analyst Louis Venter. “Fundamentally the sector would perform well, even (Village Main Reef’s) Tau Lekoa and Buffelsfontein would make a good profit at these prices.’
“Our miners are way too cheap, but it’s a confidence factor,’ said Abercrombie Investment Management’s Liston Meintjes. “You can speak to any portfolio manager they’ll tell you they’re not into gold shares.’
He said the negativity shouldn’t be a factor for the like of the big three, with all of them diversifying their portfolios in territories elsewhere. “That in itself could also be a problem because in effect they’re demonstrating their own scepticism about the local industry,’ he said.
Imara SP Reid gold analyst Percy Takunda pointed to local miners’ poor dividends, saying investors might wait to see if the gold rally translates into better payments to investors.
He said the investment alternatives of gold-backed exchange traded funds have also lured gold investors away from equities.
Meintjes concurred: “When people say they won’t invest in shares because they’re getting a nice return on NewGold (ETF’s), you can’t really argue with that.”
