More pain for in­vestors

Shares con­tinue to tum­ble de­spite buoy­ant price of the metal

Finweek English Edition - - Nothing Sacred - BREN­DAN RYAN

JUST WHEN YOU THOUGHT it was safe to buy into heavy­weight gold pro­ducer Gold Fields, the group has pro­duced an­other shocker that has sent its stock tum­bling to new 12-month lows be­low R70/share. It’s no com­fort that Gold Fields finds it­self in good com­pany at those lev­els. An­gloGold Ashanti also hit a new 12-month low be­low R220/share in trad­ing last week, de­spite turn­ing in a far bet­ter op­er­at­ing per­for­mance than Gold Fields dur­ing the June quar­ter. The one gold com­pany cur­rently get­ting it right is Rand­gold Re­sources (RRS).

RRS shares at their cur­rent level of £24 are still more than dou­ble the 12-month low of £10,40 – al­beit that they’ve pulled back from a high of £28,38/share. Sadly, SA in­vestors can only get at RRS us­ing their for­eign in­vest­ment al­lowances, as the share doesn’t trade on the JSE.

Gold Fields floored the mar­ket when it re­vealed fur­ther safety-re­lated is­sues that will knock pro­duc­tion. It seems no an­a­lyst saw that com­ing. In the March quar­ter the is­sue was the need to cut back on pil­lar and rem­nant min­ing but Gold Fields will now close its pro­duc­tion shaft at its Kloof mine for six months to re­place a large sec­tion of the shaft’s steel­works. That will cost Kloof 3t of gold in lost pro­duc­tion over the pe­riod. The Kloof shaft in ques­tion is 40 years old but Gold Fields has a num­ber of shafts in op­er­a­tion of sim­i­lar vin­tage, which raises an ob­vi­ous ques­tion: What con­di­tion are they in?

JPMor­gan an­a­lysts Steve Shep­herd and Al­lan Cooke com­ment: “Our over­weight rat­ing re­mains un­changed but we fear rerat­ing may be de­layed un­til the safety au­dit that the group has com­mis­sioned has been fi­nalised and a clean bill of health is con­firmed for all op­er­a­tions.”

In sharp con­trast, An­gloGold Ashanti’s SA mines per­formed well, with in­creases in pro­duc­tion across the board, apart from Great Noligwa, which had a 10-day stop­page due to safety in­ter­ven­tions.

An­gloGold Ashanti’s safety cam­paign is also pay­ing off hand­somely, with the group’s fa­tal­ity rate down 75% since last Novem­ber and the June quar­ter be­ing the first in its his­tory to be fa­tal­ity free. Man­age­ment rounded off its good op­er­at­ing per­for­mance by re­port­ing the group’s mines were run­ning at full pro­duc­tion on less than 94% of its pre­vi­ous power sup­ply from Eskom.

The main rea­sons for the poor per­for­mance of An­gloGold Ashanti’s share price seem to be the re­main­ing hedge po­si­tion – 6,54m oz with a neg­a­tive marked-to-mar­ket value of R25,1bn at end-July – and the over­hang of 16% of the eq­uity owned by An­glo Amer­i­can, which in­tends sell­ing its shares. RBC Cap­i­tal Mar­kets an­a­lyst Leon Ester­huizen rec­om­mends in­vestors wait un­til most of the hedge re­struc­tur­ing has been com­pleted be­fore in­vest­ing in the stock.

June quar­ter re­sults from RRS un­der­score why it’s out­per­formed its peers. It con­tin­ues to push up pro­duc­tion and prof­its in a con­sis­tent man­ner. Gold pro­duc­tion quar­ter-on-quar­ter was up 11% at its Loulo mine and, sig­nif­i­cantly, 10% at its Mo­rila mine, where RRS has taken over man­age­ment from part­ner An­gloGold Ashanti. Net prof­its are up 12% quar­ter-on-quar­ter and 96% for the six months to end-June from the pre­vi­ous com­pa­ra­ble pe­riod.

RRS is pre­dict­ing a steady rise in gold pro­duc­tion to 600 000oz in 2010 and 800 000oz in 2012 as Loulo goes un­der­ground and the group’s de­vel­op­ing Ton­gon mine comes on stream.

Per­haps the most use­ful de­vel­op­ment this quar­ter was the in­clu­sion by Gold Fields CEO Nick Hol­land of a “no­tional cash ex­pen­di­ture” (NCE) cost of pro­duc­tion. That’s ef­fec­tively an “all-in” cost that in­cludes all cap­i­tal ex­pen­di­ture. That’s the way SA’s mines used to re­port their earn­ings be­fore they adopted the var­i­ous in­ter­na­tional ac­count­ing stan­dards.

Great ad­van­tage is that you get an all-in cost of pro­duc­tion that can be com­pared to the gold price re­ceived to de­ter­mine a real profit mar­gin. Gold Fields’ NCE cost in the June quar­ter was US$869/oz against a gold price re­ceived of $895 – which il­lus­trates just how tight mar­gins are de­spite the high gold price. The group is tar­get­ing an NCE of $725/ oz to $750/oz by the March quar­ter of 2009.

High­light­ing real pro­duc­tion costs. Nick Hol­land

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