Gold shares face rule-book test

Finweek English Edition - - INSIDE - David McKay davidm@fin­

Hav­ing all but averted a strike by fol­low­ers of the As­so­ci­a­tion of Minework­ers and Con­struc­tion Union (Amcu), the SA gold sec­tor can now meet its date with des­tiny; a chal­lenge that has been a decade in the mak­ing.

By De­cem­ber 2014, time is up for SA gold com­pa­nies – and the min­ing sec­tor in gen­eral – seek­ing to meet the 26% em­pow­er­ment guide­line set down 10 years ago by Gov­ern­ment in the form of the min­ing char­ter.

“While lo­cal gold min­ers main­tain that they have com­plied with its pro­vi­sions (all are in pos­ses­sion of new or­der min­ing rights), the mines min­is­ter didn’t agree at all back in 2010,” ac­cord­ing to a re­port by JP Mor­gan an­a­lysts Steve Shep­herd, Al­lan Cooke and Ab­hishek Tiwari.

That was when the min­eral re­sources depart­ment (DMR) au­dited the re­spec­tive score­cards for the five-year dead­line in 2009 and found that in­stead of 26% em­pow­er­ment that many com­pa­nies claimed, they were far be­low that – some as lit­tle as 16% or lower.

At least one min­ing com­pany, Lon­min, is still work­ing to­wards its em­pow­er­ment goal. In Jan­uary it said that it was work­ing on an em­ployee share own­er­ship plan in or­der to com­ply with leg­is­la­tion.

There’s also the un­cer­tainty of the tax re­view or­dered by fi­nance min­is­ter Pravin Gord­han in June last year – the Davis Tax Com­mit­tee – that may re­sult in ad­di­tional ‘costs’ for the sec­tor. Tougher health and safety stan­dards, backed up by Sec­tion 54 notices that al­low the DMR to shut min­ing shafts, add to the dif­fi­cult cir­cum­stances out­side of min­ing that face our gold min­ers.

“SA min­ing law and tax­a­tion con­tin­ues to evolve in a way that raises reg­u­la­tory un­cer­tainty in our opin­ion,” the an­a­lysts said. “Threats to se­cu­rity of ten­ure, of higher tax­a­tion and, per­haps, more puni­tive mea­sures to en­force safety and health stan­dards, make for a long list of chal­lenges for min­ing ex­ec­u­tives,” they added.

“And th­ese is­sues may come to a head dur­ing a cri­sis pe­riod for the in­dus­try, cer­tainly from a labour re­la­tions per­spec­tive.”

The chal­lenges are just reg­u­la­tory, how­ever. Ac­cord­ing to David Davis, an an­a­lyst for Stan­dard Bank Group Se­cu­ri­ties, SA’s gold shares made a free-cash mar­gin, on an all-in sus­tain­ing cost ba­sis, at about $1 331 per ounce. While ad­vances have been made on the cost front, a fresh round of cost-cut­ting is in­evitable.

“We be­lieve that the ini­tial sav­ings have come from cost com­po­nents which are rel­a­tively easy tar­gets such as re­duc­ing cap­i­tal costs,” said Davis. The next se­ries of cost sav­ings would come in more omi­nous form of “fur­ther right-siz­ing or op­er­a­tions and a re­duc­tion in pro­duc­tion”.

Mines that might be vul­ner­a­ble to such dras­tic steps are An­gloGold Ashanti’s Obuasi, Sun­rise Dam and Kopanang mines i n Ghana, Aus­tralia and SA re­spec­tively. The Ghana mine of Da­mang owned by Gold Fields was vul­ner­a­ble (Gold Fields has al­ready sug­gested this) as well as its South Deep mine – a con­cern­ing de­vel­op­ment given the cen­tral­ity of the op­er­a­tion to Gold Fields’ growth pro­file. Up to seven gold mines owned by Har­mony Gold are vul­ner­a­ble, in­clud­ing Kusasalethu, its f l ag­ship op­er­a­tion while Sibanye Gold, al­though cash gen­er­a­tive, may look to con­duct surgery at its Beatrix mine.

James Well­sted, Sibanye Gold’s cor­po­rate af­fairs head, begs to dif­fer: “An­a­lysts seem to work on a dol­lar gold price sce­nario only and dis­count the ef­fects of the rand, which has weak­ened against the dol­lar.”

The rand gold price is, at the time of writ­ing, around R450 000/ kg and could be well sup­ported at R430 000/kg, ac­cord­ing to the JP Mor­gan an­a­lysts.

Har­mony Gold’s ARM (African Rain­bow

Min­er­als) Mine

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