Sun rising on SA gold industry

[] — DESPITE its declining importance to the economy, gold remains a favourite vehicle for investors – or, at any rate, speculators – and the gold mine quarterly reports are always closely scanned for investment pointers.

On the whole, the September quarterlies were in line with expectations, although cost pressures led to earnings marginally below consensus forecasts in a couple of cases. Maybe analysts didn’t make sufficient allowance for the fact that annual wage increases kick in this quarter.

Clearly, the weakness of the rand has helped – the biggest benefits naturally going to those who have diversified least away from their South African bases. Implicitly, though, the miners are betting that the 20-year plus bear market in gold is over and are back in expansion mode.

AngloGold is probably the company that’s changed the least from the old mining house days, despite the merger of the old AngloGold with Ghana’s Ashanti Goldfields and the acquisition of other properties in the Americas and Australia. Its third-quarter headline earnings per share were flat at $0.51 against the consensus forecast of 56c. However, in rand terms there was an improvement from 334c to 367c. About half gross profits are now derived from South Africa.

Production was flat, held back by electricity supply problems in Ghana. Costs were well controlled, and though AngloGold Ashanti has a small, and steadily reducing, hedge book – an insurance in bad times that holds results back in good times – its average gold price received was $584/oz, only 6% below the average spot price due to hedging – selling gold in advance at fixed prices.

AngloGold Ashanti continues to look for new ventures, spending $25m during the quarter, notably in Australia, Colombia and Congo (Kinshasa).

At Gold Fields, costs rose by three times AngloGold Ashanti’s 2%. And though chief financial officer Nick Holland could cite plenty of reasons for that, including the effect of moves in the Aussie dollar, not all analysts were convinced. Results were also marginally below expectations but broadly, as at AngloGold Ashanti, it was on the whole a fairly uneventful quarter. South Africa contributed 53% of operating profit.

Of the big three, most interest centred on Harmony, which showed the first positive HEPS in more than three years. If it hadn’t shown a profit there might have been a shareholder revolution. As it is, even with a return to profitability Harmony admits it will still have to work hard to restore the damage done its image in recent years.

However, Harmony is also the most aggressively expansion-orientated of the three. Its big new underground mine in South Africa – Elandsrand – is coming into production, and good progress was made on other South African projects. It has big plans to re-treat old dumps at Evander, Randfontein and in the Free State.

Offshore, construction has started at last on the Hidden Valley project in Australia, and exploration in Papua-New Guinea continues to increase the scale of the Wafi-Golpu copper/gold prospect to the extent that CEO Bernard Swanepoel can talk of it as a $1bn to $2bn project that could be too big for Harmony to tackle on its own.

But the nature of the beast, with its early focus on turning round acquisitions in South Africa, have left Harmony late in the international field; only 10.5% of its profits are earned outside South Africa, though that can be expected to increase.

Other South African gold miners, such as Simmer & Jack Mines, DRDGOLD and Aflease Gold, not all of which had reported at the time of writing, are still very much in the development stage. And then there’s Western Areas, whose sole interest is in its South Deep project and for which Gold Fields is now bidding.

This is a horror story too ghastly to discuss at length here. But it certainly suggests that, whether Gold Fields succeeds in its bid or not – and Swanepoel, whose Harmony holds 29% of Western Areas, thinks the price too low, especially without a cash alternative – South Deep could do with a new management approach.

So what are the lessons of these quarterlies?

First, over the short run South African gold mines gain from a weak rand. For example, at Harmony, the US dollar gold price averaged $625/oz for the quarter, against $631 in June. But in rand it improved from R131,000/kg to R143,000/kg. However, as Holland warned, though most of its mines’ input costs are in rand, the benefits of a weak rand do tend to wear off after a while.

Second, all the groups stressed the importance of cost control. As Swanepoel said, Harmony – famous in the past for squeezing cost savings out of properties others couldn’t run profitably – has now had to apply the same medicine to itself.

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Third, this is no longer a dying industry. And, surprisingly, although all the groups have international ambitions some of the biggest investment opportunities are back home in South Africa. For example, Gold Fields is planning to spend R4.7bn at its long-established Kloof and Driefontein mines.

For investors who are bullish on gold, there’s therefore an interesting range of options. The “safe’ bets are AngloGold Ashanti and Gold Fields; a more leveraged, and thus more risky, play is Harmony; and for the real risk-takers there’s Simmers, Aflease Gold and the rest.

Which to go for? Well, the only one I hold shares in is AngloGold Ashanti. But then I’m just an old fogey who for decades didn’t even think gold a worthwhile investment at all.