Gold price surge loses its former glitter in SA
Massive production drop means it is ‘just a nice supporting act’
● A surging gold price used to mean boom times for the JSE’s mining sector and the South African economy. That was when the country accounted for most of the world’s production of the precious metal.
Now a record run in the gold price — which this week almost touched $2,000 (R33,800) an ounce as investors flocked to safe-haven assets amid anxiety over the US economy — provides a “nice supporting act” on the JSE, but hardly enough to really boost the market or sway the economy, said Sasfin Securities deputy chair David Shapiro.
SA’s gold mines make a marginal contributor to global gold production — just over 100t a year compared with the 1,000t it produced in 1970.
While the soaring gold price is good news for individual gold shares, the overall effect is somewhat diminished because the market capitalisation of companies such as AB InBev (about R1.59-trillion), Naspers (R1.37-trillion) and British American Tobacco (R1.32trillion) dwarfs large mining stocks. For example, AngloGold Ashanti’s market capitalisation is about R231bn.
“We haven’t seen any real rub off onto our market other than moving the gold shares. We’ve seen AngloGold and Harmony up but they don’t have the punch they used to have. They are not small but they are not big enough to compete with some of the other shares,” Shapiro said.
Nevertheless, gold mining stocks have had an extraordinary run. Since the beginning of the year DRDGold has surged about 240%, and some others are up more than 100%.
With a few exceptions, the shares that have performed the best, such as Harmony or DRDGold, tend to have larger South African operations, which have benefitted from a weaker rand.
Peter Major, director of mining at Mergence Corporate Solutions, said he can understand the run in Harmony because of its exposure to SA, but less so AngloGold, which no longer has any mines in SA.
Shares in AngloGold, whose CEO Kelvin Dushnisky resigned this week, have risen 75.2% so far this year. Bloomberg reported that Dushnisky was pushed to leave after shareholders asked for further investigations into a bonus paid by his former employer that he didn’t initially disclose, according to sources.
Major described the overall run in gold shares as “looney tunes”, saying “guys are buying emotion. Those kind of jumps by AngloGold and Gold Fields, at five and 10 times the jump of the gold price, that really shows you are in a speculative situation.”
In dollar terms, the gain in the gold price from a year ago is about 30% (in rand terms it is 50%) and does “not look like a bubble”, but the JSE gold index’s more than 180% surge over the same period indicated shares were “heading for bubble territory”, Major said.
While shareholders in gold mining stocks are benefitting from the rally, SA itself is “not benefitting from this like it used to”, he said.
“When SA was responsible for 60% to 70% of world production and averaged over 600 tpa [tons per annum] for over 60 years solid, then, when the price went up even by a penny, we benefitted.
“Now we are in an inexorable downward trend. Our gold industry is in a vortex and it’s been dragged down by excessive government and union legislation and policies.
“Today we produce 3% of the world’s gold instead of 50% or even 25%, even though we still have nearly 50% of the world’s known gold in our ground.”
Adrian Hammond, mining analyst for Standard Bank SBG Securities, said the rand gold price is “very positive for the gold producers in SA” such as Harmony, which has most of its operations here. “These sorts of windfalls should be enjoyed as much as possible in terms of their ability to generate profits and reduce debt,” he said.
But he cautioned that “South African gold mining is extremely tough. Does it mean SA production will rise? Probably not. If you want to add ounces to your portfolio you’ve got to spend capital, and motivating that sort of decision with shareholders is difficult. I do think they will spend more on capital, but the impact on production will be mixed.”
He said the downward trend will likely halt for a while as “the record rand gold price will allow for some more marginal ounces to come into the production mix”.
As for the incredible run in gold shares, Major said it would seem sanity is starting to prevail, with some shares coming off a little over the past few days even as the gold price is still hovering around the record highs.
“It’s been a great party. The neighbours have called the cops, the booze has run out. It’s time to get out,” he quipped.