Gold miners slump after January surge
The wind beneath the wings of South Africa’s gold shares in January was indiscriminating with AngloGold Ashanti, Gold Fields, Siba nye Gold a nd Harmony Gold receiving an uplift amid expectations of slower-t hanexpected world economic growth and rand weakness.
February, however, is proving to be a crueller month with investors wi t hd ra w i n g more se l e c t i v e l y, especially from Harmony Gold and Gold Fields, which have both recently delivered bad news to the market.
In the case of Harmony, its troubles have been brewing for a while and now appear to be intensifying.
Its net debt rose by a staggering R1bn i n t he t hree months t hat comprised the December quarter and the expectation is that debt will pile higher – to R2.2bn – by the end of the June quarter, according to a report by Adrian Hammond, analyst for Standard Bank Group Securities.
“About 30% of production is free cash negative, 10% is cash neutral a nd t he r emainder i s marginally cash positive,” he said. Kusasalethu, Harmony’s f lagship mine, is expected to produce a prof it i n t he March quarter but this could be unseated i n t he event of a strike, especially as the Association of Mineworkers and Construction Union (Amcu) is a growing force at Harmony’s operations.
What’s more, t he deteriorating nature of its balance sheet means that the company may not be able to fund its Golpu project in Papua New Guinea at the current gold price unless it opts for more debt or sells assets.
That may be necessary and must surely put Harmony Gold into the position of a potential merger and acquisition partner, something Sibanye Gold’s Neal Froneman has been talking about lately.
Asked to comment on Sibanye Gold making a bid for Harmony, or some assets, corporate affairs head at Sibanye, James Wellsted, said: “Neal has previously mentioned that the next step in creating value in the industry is to consolidate.
“By doing t hat you can remove si gnif i cant overhead costs which exist in corporate salaries, corporate offices and replicated services such as HR, payroll and accounting,” he said. Wellsted declined to comment further.
JP Morgan analyst Allan Cooke believes that at a rand gold price of R450 000/kg, Harmony has significant l everage especia ll y as 90% of it s production is in SA. Yet the market doesn’t seem to agree at present. The stock is down 16% since the beginning of February even though the rand gold price has increased to just under R460 000/kg at the time of writing.
Gold Fields is also weaker, down about 18%, since 12 February after it announced its South Deep mine west of Johannesburg would not break even in 2016 as planned. The mine accounts for only 10% of production but it s si g ni fi c a nt re s er ve s a nd resources are the key to Gold Fields keeping production, and all-in costs, under control for the next 10 years. Strategically, it’s an important asset.
Bear in mind that the share prices of Harmony Gold and Gold Fields raced up 62% and 25% respectively during Januar y while AngloGold Ashanti and Sibanye Gold were 28% and 40% stronger over the same period. Interestingly, AngloGold Ashanti and Sibanye Gold have retained their respective value in February although it’s fair to say that both companies have yet to report December quarter figures.
I n t he l ong t er m, AngloGold Ashanti still faces challenges. Its Kibali mine i n t he Democratic Republic of Congo i s proving to be a cash generator of note, but its issues remain at home in SA where analysts think its operations face a restructuring and re-capitalisation.
“Neal has previously mentioned that the next step in creating value in the industry is to consolidate.”