More pain for investors
Shares continue to tumble despite buoyant price of the metal
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