[miningmx.com] — ONE would like to be encouraging of the appreciation in South African gold shares. The gold index is up 10% this month and there’s firm evidence there’s more to come. The index is still 4.5% lower than in January even though the rand gold price is 17% higher. That would suggest it’s not too late to get into gold shares, if that’s your poison.
Yet South African gold shares don’t tend to enjoy quite the boost from a buoyant bullion price that international peers enjoy. Merrill Lynch analyst, Bruce Alway, wrote recently of the “South African discount’ applied to Johannesburg’s gold shares as if the term was widely accepted in the same way the old “gold premium’ used to be applied.
And to be honest, you can see why.
Strike action and the subsequent above inflation wage increase that will almost inevitably follow; rand strength; the threat of power stoppages, and even long range risks such as nationalisation and class action suits from silicosis-related legal claims (not deemed an immediate threat by Moody’s, incidentally) constrain “our’ gold shares.
Although, it’s not all doom and gloom. Says Alway: “Most of these issues are not new and therefore, largely reflected in the “South African discount’. Furthermore, with rising resource nationalism a global, not just a domestic issue, on a relative basis the country discount should not dramatically widen in our view’.
Liston Meintjes, an asset manager for Abercombie Asset Management believes the time has come for gold shares in Johannesburg. “I’d definitely be going for them,’ he says, although he too recognises there’s a lot of noise surrounding our gold producers that North American or Australian producers don’t have to tolerate as much.
According to HSBC, the big names in gold shares – the likes of Newmont Mining, Barrick Gold and AngloGold Ashanti – have been discounting a much lower gold price, about $1,300/oz compared to the current levels. “We see potential near-term rerating of up to 20%, particularly for the larger cap names with further upside beyond that,’ said Patrick Chidley, an analyst for the bank.
Says RBC Capital Markets in a recent report: “Most senior golds are 10% to 20% below their 52-week highs, with AngloGold Ashanti, Gold Fields and Kinross Gold having the greatest upside to their 52-week highs’.
MOJO LOST
Have a heart, therefore, for DRDGold. At a current share price of R3.30, it is weaker than before gold ran through $1,600/oz, the only gold stock listed in Johannesburg to be so affected. The company recently sought financial assistance for its Blyvoor underground mine and has bought property from AngloGold Ashanti’s neighbouring Savuka to help build its case for that mine’s survival.
“I think the Savuka deal takes our chances of getting IDC (Industrial Development Corporation) finance several notches higher,’ says Niel Pretorius, DRDGold’s CEO of how the company may bail out Blyvoor. But he concedes to being mystified by the weakness in the share. “It could be the market doesn’t understand the meaning of our recent guidance,’ he says commenting on a company announcement last Friday in which it said production in the 2011 financial year would increase 10%, while costs would be only 8% higher.
DRDGold also announced capital would increase 70% in the 2011 financial year, and Pretorius thinks the market believes it’s throwing good money after bad; that the capital will end up in Blyvoor, which is as old as most mines get in South Africa. The capital, in fact, is going into DRDGold’s gold recovery assets which are stable and profitable.
“It’s an old mine,’ says Meintjies. “I don’t want to be invested in old gold mines, no thank-you’.
DRDGold needs to get rid of Blyvoor which analysts think will improve the company’s valuation. Pretorius says a group of Chinese investors will be in the country to “kick the tyres’ either at the end of this month or the next. “We don’t want to own that mine,’ he says. “We will sell it’.
What’s the problem at DRDGold? It’s lost its mojo; certainly the stable shareholder base which would normally follow the share and read fundamental analysis about the firm has gone. Pretorius, one suspects, is going to have to act decisively about where the company is headed.
Incidentally, all the bullishness about gold shares hasn’t stopped the market piling into gold-backed paper. According to a recent report by UBS, Gold ETF holdings surged 1.98 million ounces to an all time high of 70.93 million ounces in the week to July 18. Funds like iShares, ZKB, Julius Baer, and UBS-IS Gold are at all time highs.
It warns, however, that gold is trading in the over-bought region which could see it settle back to $1,590/oz. If not, look to 1,628/oz for the next level.
