Gold min­ers slump af­ter Jan­uary surge

Finweek English Edition - - IN THE NEWS - BY DAVID MCKAY

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.”

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