SOUTH African gold shares may be in for sticky start this year with the metal’s price forecast to be range-bound whilst mining inflation and pressure on companies to grow their operations raises costs.
Arnold van Graan, an analyst for Nedbank Securities said in a recent report that gold was “in a strange place” as the prospect of inflation provided some upward pressure but a reduction in stimulus initiatives were simultaneously holding it back.
The metal would trade range-bound at the $1,800 per ounce level, he said. Set against this, Johannesburg-listed gold shares would feel the impact of higher all-in sustaining costs (AISC) – a trend that began last year.
“Cash costs, AISC and AIC (all-in costs) have risen sharply in recent quarters on the back of Covid-19-related expenses, supply-chain disruptions and other sector-wide inflationary pressure.
“We expect cost pressure to rise further, fuelled by sector-wide input and labour cost inflation, and expect operational headwinds to lead to further margin erosion,” he said.
Gold companies were also shifting their focus towards growth with the spotlight fall on merger and acquisition activity again.
“Where producers do not have adequate growth opportunities in their portfolios, they could turn to M&A,” said Van Graan. “This could see capital allocation being shifted away from dividends to growth capex and M&A.
“These dynamics could continue to weigh on gold company valuations, and we are still of the view that the equities would underperform the gold price.”
Gold industry merger and acquisition activity last year totalled $21.3bn, the second highest ever in which an estimated 38 million ounces were acquired in 44 deals, according to research by Bank of America last week.
It added that more M&A was on the cards in the sector this year.
“Can it continue in 2022? It needs to, in our view. companies that don’t replace reserves risk (severe) derating and are likely to be consolidated(on the cheap) in our view,” said the bank’s analyst Michael Jalonen.
Van Graan said he was “not a buyer” of gold equities at the moment. “We also believe there is another quarter or two of downside in equities before the cycle turns.”
Nedbank Securities was neutral on gold but downgraded Pan African Resources and DRDGOLD to underweight from neutral whilst being overweight on Sibanye-Stillwater and AngloGold Ashanti with the latter benefiting from the restart of its Obuasi gold mine and potential impact of its new CEO, Alberto Calderon.