SA gold producers could report 70% to 80% earnings growth in next 12 months

A SUSTAINED higher gold price and producer currency depreciation is expected to result in share earnings growth of between 70% and 80% for South African gold producers.

This is according to a report by Renaissance Capital published today which forecasts an 11% increase in the dollar gold price. The gold price would average $2,000/oz during 2021 the report says.

“We believe the sector’s earnings growth is largely driven by margin expansion due to higher gold price expectations and aided by weaker producer currencies,” said the report’s authors. Assuming all-in sustaining costs as disclosed this year, free cash flow margins could double for the sector, it said. This was assuming a $400/oz increase in the gold price from 2019 to current spot levels of around $1,800/oz, it said.

According to Renaissance Capital, share earnings growth for Gold Fields between the 2020 and 2021 calendar years could be 81%. Sibanye-Stillwater, which also produces platinum group metals (PGMs), could generate growth in earnings of 74% followed by Harmony Gold at 71% earnings growth.

Shares in South African gold mining companies have been on the march this year as economic disruption created by the COVID-19 pandemic and the consequent central bank stimulus efforts have sent investors to gold, renowned for providing safe haven characteristics in times of geopolitical and economic uncertainty.

The World Gold Council said on Tuesday that investment in gold-backed exchange traded funds (ETFs) rose for a seventh consecutive month in June.

ETF purchases totalled 104 tons, equal to investment of $5.6bn, taking global net inflows for the first half of 2020 to 734 tons ($39.5bn). Investment this year is also higher than the multi-decade record level of central bank net purchases seen in 2018 and 2019 and could absorb a comparable amount of about 45% of global gold production during the first half, the council said.

The share prices of gold firms in Renaissance Capital’s coverage increased an average of 30% year-to-date. Harmony Gold and Sibanye-Stillwater have under-performed the average, however, whilst shares in Gold Fields and AngloGold Ashanti have gained 38% and 29% respectively.

Commenting in a note on June 28, Standard Bank Group Securities analyst, Adrian Hammond, said the prospects for Harmony’s share price had improved owing to the completion of a $200m rights issue to part fund the $300m purchase of Mponeng and Mine Waste Solutions from AngloGold.

Hammond added that Harmony had also “done well” relative to its South African peers in ramping operations up following the five week hard lockdown implemented by the South African government in an effort to combat the spread of the COVID-19 disease.

JP Morgan Cazenove said in June that the perception Gold Fields was heavily skewed to South Africa had unnecessarily crimped its valuation. “Despite a $6.7bn market capitalisation, Gold Fields’ multiples remain at a deep discount to global gold peers,” said JP Morgan Cazenove in its report.