The gold price is thought to have l i mited downside si nce it s $220/ounce drop in mid-April, a view partly bolstered by the likelihood that the US will continue to assist its economy by buying bonds, known as quantitative easing.
There’s also the regular occurrence of surprise US economic data that reminds us the world’s largest economy is still not out of the woods. The contraction in the US manufacturing sector earlier this week is an example.
So if $1 400/oz seems a reasonable gold price going forward, then at the current rand/dollar exchange rate South African gold companies can expect a gold price received of R436 352/ kg. That’s only 6% less than the gold price received by Gold Fields in the December quarter before the gold price was heavily assaulted, some would say.
That’s t he powerful effect of t he rand’s weakness. It would be folly for gold companies to plan on the highly liquid currency markets, but it sure does take the sting out of the last few months.
For instance, the weakness in the rand – by some 16% in the last 12 months – has helped pay for the 8% increase in electricity tariffs SA gold companies are expected to shoulder this year (excluding the winter tariff, only temporarily in place for several months, but which is also 8%).
Quite whether increased labour costs, which comprise more than 50% of gold mining cash costs, will be covered by rand weakness is the big unknown in charting the future investibility of gold shares. It’s unlikely on the evidence of the National Union of Mineworkers’ (NUM) initial demands, which ask for as much as 60% for entry-level workers, which translates into a blended acrossthe-board increase in the high teens.
Even without assistance f rom t he r and, t here’s a growing view t hat gold companies may come back into vogue; selected stocks of certain quality, at least. The relief will be welcomed. The SA gold i ndex shed 27% since the beginning of the year, and 8.4% in the last month-and-a-half when the gold exposure specif ica l l y t hrough exchange-traded products was liquidated.
Since the onset of rand weakness, however, the gold index has gained 12% with Harmony Gold, among others benef iting. According to SP Angel, a UK stockbroker, the shift from ETFs to equities ironically assists gold companies, especially those offering high yields among other qualities.
The view is supported by Macquarie Research in a note dated 28 May: “In a relatively benign gold price environment (f rom here), and given t he underperformance of the equities relative to the metal globally, we believe that there are four key reasons why gold equities (in this case SA majors) offer more upside than ETFs: dividends, growth, valuation and leverage,” it said.
According to the stockbroker, the best SA gold stock offering for dividend yield is Sibanye Gold whereas AngloGold Ashanti provides a growth and valuation investment case partly given the underperformance of its share price, and based on the fact the company intends adding 500 000oz in production, and possibly cutting the same amount of less profitable ounces.
AngloGold Ashanti is also considered one of the most defensive gold stocks of the SA suite given it has the lowest exposure to SA. Gold Fields, meanwhile, presents a growth and dividend play option
although its success turns on making South Deep perform, while Harmony Gold is the leveraged play given its near complete exposure to SA, Macquarie Research said.
Rand weakness, however, brings with it problems. Imported consumables such as explosives or steel, petrol and diesel (to a limited amount) will all face heavy cost increases in about six months’ time. A downgrade by any of the ratings agencies also make it more expensive for SA gold companies to raise capital. They aren’t alone, however. The World Gold Council is considering introducing a new cost metric for the world’s gold miners called All-In-Sustaining Costs (AISC), which when extended by BMO Capital Markets to include tax and greenfields capital spend, sees only 5% of the world’s gold miners producing gold at costs that fall below the spot gold price (75% fall below the spot price of gold in the World Gold Council’s metric, however).
Both the World Gold Council and BMO Capital Markets don’t believe all gold companies ref lect their costs accurately and that more f iscal discipline is required. Although BMO doesn’t identify any SA gold shares that would benef it f rom such discipline, it ’s worth remarking that AngloGold Ashanti is 33% below its level a year ago whilst Harmony Gold is no less t han 55% weaker.