[miningmx.com] — MACQUARIE Research has come out positively on Wits Gold which under new CEO, Philip Kotze, will be transformed from a passive proxy on the gold price into an actual operator.
Macquarie is clearly under no illusions about the risk inherent in Wits Gold but thinks these risks are priced into the stock. I’d be cautious. Developing a mine is no easy busy in a mature district such as South Africa, just ask Great Basin Gold.
Equally risk-ridden, is buying an old one which Macquarie alludes to and which has been speculated in the media. Business Day thinks Wits Gold may be after Evander Gold Mines. Exogenous factors always bully our gold miners – the rand and the gold price – making them price takers and subject to market whimsy, it sometimes seems. And that’s the case even with companies with strong assets such as AngloGold Ashanti and Gold Fields.
But to be a junior mining company wanting to build new mines while turning around old ones is doubling up your risk. It’s a bit like combining Great Basin Gold (Burnstone’s development troubles) with Village Main (betting on Blyvoor from DRDGold).
All that’s required is a southward turn in the gold price over the next five to ten years and companies like Wits Gold will struggle. Better to be exploring for gold in Africa where digging for resources is not like puffing on the embers of South Africa’s once great gold resources.
EXXARO’S GROWTH AMBITIONS
Kumba Iron Ore has hogged the limelight for the majority of 2011 with perhaps less attention than deserved given to one of Anglo American’s other empowerment creations, Exxaro Resources, which recently turned five years old.
Back in 2006, the company was worth R3bn, a not unsizeable market valuation, only that now the company is worth R70bn. According to CEO, Sipho Nkosi, Exxaro is aiming to be double that value again by 2020: “We will get to $20bn by 2020,’ said Nkosi in typically bullish, and possibly irreverant, mood.
He added: “Fred Gona [head of parliament’s portfolio committee on mining] asked me recently whether we were a takeover target. But that is not going to happen.’
Yet, how is a doubling in market capitalisation going to happen, particularly as the majority of the company’s worth, in valuation terms, is derived from its 20% stake in Sishen Iron Ore Company, controleld by Kumba Iron Ore?
In fact, Exxaro’s coal business comprises 34% of the company’s value while iron ore is worth 42%. The balance is from the mineral sands business which, by externalising it into Tronox, doesn’t fall under the company’s direct control either.
“I could see them doing that,’ an analyst said of their market value targets. “It would probably depend on the rand/dollar exchange rate,’ he added. Shorter term, analysts are positive on Exxaro Resources. According to Bloomberg News data, no analyst of some 12 surveyed has a sell on the stock while eight recommend buying it. But longer term, where will the growth come from?
Coal is a stable business. Unlike other commodities, and despite the global push for cleaner sources of fuel, coal demand from electricity utilities is steady. Even in developed economies with strong alternative energy policies, such as Spain, coal has a kind of tenure, a permancey as a “back-up’ source of fuel. Yet once Exxaro has completed the building of its Grootegeluk Mine Expansion Project, there aren’t a treasure of opportunities to expand its South African-based thermal coal production.
The key to Exxaro, one suspects, was hinted at earlier this year when it made a surprising, but unsuccessful $130m bid for Australia’s Territory Resources, an iron ore company with some coal exploration potential. Given that Exxaro is also in joint venture in coal with Anglo American in Australia, it would seem a push internationally is where Exxaro is headed.
