[miningmx.com] — TWO developments affecting South Africa’s gold industry struck me as highly significant during 2011, although I have to add that the lacklustre market reaction so far seems to indicate they were perhaps not so important.
Those were the move in the rand gold price above the R400,000/kg level, as well as the R3.9bn purchase of two highly marginal gold projects from unlisted Taung Gold by Hong Kong-based Wing Hing International.
Wing Hing has subsequently been renamed Taung Gold International and South African mining entrepreneur Neil Herrick has been appointed the CEO designate charged with developing two new gold mines.
I’ll start with the gold price which – at levels above R400,000/kg – has opened up profit margins on SA gold mines last seen in the early 2000’s, which was also the last time SA gold shares performed meaningfully.
It’s a hugely important development because above R400,000/kg everybody is profitable. Should gold pull back to below R350,000/kg though, a number of high-cost mines will be back “in the dwang’ as Village Main Reef CEO Bernard Swanepoel put it recently.
Most investors’ attention is focused on the dollar price of gold. However, as SA gold mines get paid in rands, the rand/dollar exchange rate is just as important as the actual bullion price.
The rand has been so strong for so long that the plunge over the past two months from below R7/$1 to as weak as R8.35/$1 – caused by the Eurozone crisis – caught everyone by surprise.
At one stage the rand gold price was as high as R450,000/kg and, even at the current low gold price of around $1,590/oz, the rand gold price still sits around R417,000/kg at an exchange rate of R8.15/$1.
That’s crucial because it validates the assessment on SA gold shares made by JP Morgan Cazenove analysts Steve Shepherd and Allan Cooke in September when they described the sector as being “dirt cheap’.
The JP Morgan analysts got their predictions wrong on both the dollar gold price ( they were looking for $2,500/oz by end-2011) and the rand exchange rate which they said would be stronger against the dollar.
But the end result was still the same – a higher rand gold price would average R382,571/kg in 2011 and R450,000/kg plus for 2012 and 2013.
On that basis the analysts reckoned SA firms were way undervalued and JP Morgan’s top picks were Harmony – then trading at R99 – and Gold Fields which was then trading at R122.
Both shares subsequently rose with Harmony reaching a 12-month high of R116 while Gold Fields traded as far north as R145. But, as I write today, Harmony has dropped to R95 while Gold Fields is back to R126.
Either investors are running scared or there are players in the market who know something that neither I nor the JP Morgan analysts have heard about yet.
For what it’s worth, I repeat the following relevant quip: “If you can keep your head while all those about you are losing theirs – then clearly you have not yet heard the latest rumour’.
Now let’s consider Chinese investment in marginal – make that highly marginal – South African gold assets which must be, of course, linked to predictions on the future gold price.
I was gob-smacked when I heard about the Wing Hing deal because the Chinese were paying R3.9bn for assets that the vendors had picked up less than a year previously for R300m from Harmony.
As far as I’m concerned this has to be the most surprising development in the SA gold sector since Anglo American took the unprecedented step of merging all its Free State gold mines into one operation called Freegold back in the late 1980’s.
The two mines in question are Jeanette in the Free State – where Anglo American sank the shafts in the 1950’s but never opened the mine – and the decommissioned 6 shaft at Harmony’s Evander complex plus the nearby undeveloped Twistdraai project.
Aside from the costs involved there appear to be far better prospects that the Chinese could have gone for with that kind of budget, both in terms of operating mines and projects that could be developed.
There is huge cynicism in the gold sector over the viability of these two projects but Herrick not only maintains these are viable but that he will have them operating at cost levels below those being achieved currently by any other gold mine in the country.
Time will tell but what is significant is that the price paid by Wing Hing appears to be a one-off so far.
When DRDGold put its Blyvooruitzicht mine up for sale JP Morgan Cazenove put a value of between R325m and R500m on it, but Swanepoel struck the deal to buy it for just R150m.
What has happened in the past when the rand gold price has run like this is that mining costs have also taken off and, after a lag, removed much of the new profit margins.
Maybe that’s what investors are expecting to happen again. I guess we’ll find out in due course.
