M a r k e t N e w s

Miners Find South African Gold Recovers Its Luster

Posted on : Saturday, 27th August 2016

 JOHANNESBURG—After years battling depressed prices and cost-cutting, South African gold miners are regaining their shine.

Over the past two weeks, the country’s top four gold producers have announced soaring profits and dividends, reaping the benefits of yearslong restructuring and a 25% jump in the benchmark gold price this year.
The rise has been leavened by weaker currencies in South Africa, Brazil and Argentina, as well as Australia, which also helped reduce local costs such as wages and electricity and reap healthier profits for gold sold abroad in U.S. dollars.
Sibanye Gold Ltd., South Africa’s biggest gold miner by output, was the latest to report bumper profits, up 85% to 333 million rand ($23.5 million) on Thursday, underpinning a brighter outlook that has several major miners now on the hunt for acquisitions.
The glittering results are the latest sign of a turnaround for South Africa’s long-beleaguered gold-mining industry, which has been beaten down by years of weak prices and rising costs.
“South African gold producers have had their heads down in recent years, while they worked to reset costs and lighten their balance sheets,” said Roger Baxter, chief executive of the Chamber of Mines of South Africa. “They are now seeing the benefits of that effort reflected in significantly stronger cash flows, as the gold price has started to tick higher.”
South Africa dominated global gold production in the 20th century, but in recent years, it has dropped from the world’s top producer to seventh place as the cost to run old, deep and labor-intensive mines soared. Many of South Africa’s gold producers have expanded their operations overseas, including the No. 3 producer in the world, AngloGold Ashanti Ltd., which now gets just a quarter of its production from its home market.
Diversification appears to have paid off. Shares in AngloGold have climbed 137% this year, Harmony Gold Mining Co. shares have surged 245% and those of No. 8 producer, Gold Fields Ltd., which spun off three aging South African mines in 2013 to create Sibanye, are up 91% year to date. Sibanye shares are up 154% over the same period.
At the core has been a recovery in the gold price in South African rand terms. Gold has gained a quarter in value this year as investors buy the metal as a safe-haven asset, while the rand has weakened 9.2% in 2016 as economic uncertainty wracks South Africa amid stagnant growth.
Following the U.K. vote to leave the European Union on June 23, “the gold price has increased almost $100 an ounce and is approximately $250 an ounce higher than our planning price for 2016,” Nick Holland, chief executive of Gold Fields, said last week.
Gold Fields declared its biggest interim dividend since 2012 on a profit of $121.2 million during the six months to June 30, from a profit of $2.2 million a year earlier. Sibanye raised its interim dividend to 85 rand cents, from 10 rand cents in 2015.
Harmony Gold declared a dividend for the year ended June 30 for the first time since December 2012 after swinging to a full-year profit of 949 million rand last week—a turnaround from a year-earlier loss of 4.54 billion rand. Harmony also reduced net debt by 54% to 1.08 billion rand at June 30.
Now, the company is looking to make acquisitions to increase production. “We’re not going to get it right by normal organic growth,” said Harmony Gold Chief Executive Peter Steenkamp. Harmony will likely target acquisitions in its home market of South Africa, the rest of Africa as well as Papua New Guinea, where it currently operates, Mr. Steenkamp said. Harmony will also continue to return cash to its shareholders, he added.
But analysts and investors say caution is key as these companies ramp back up.
“I think the tricky part is whether [the companies’] constrained costs can remain under control: Things like exploration, expansion projects and acquisitions: those may start creeping back onto the radar now,” said Meryl Pick, manager of the 606 million rand Old Mutual Gold Fund at Old Mutual Investment Group in Cape Town. “The risk is that they start making questionable investment decisions. That is my concern, and that is been the cycle in the past.”
Still, the companies are in far better positions than they have been for years as they emerge from the gloom that has recently plagued South Africa’s gold industry. Gold Fields restructured in 2012 and 2013 to create Sibanye, leaving less than 15% of its production in South Africa, while Harmony Gold wrapped up a restructuring in 2015. AngloGold shareholders rebuffed a proposed capital raise and restructuring in 2014 that would have split off the company’s international assets from its South African ones. Since then, the company has reduced its debt by over $1 billion by mothballing unprofitable assets and slashing overhead expenditure.
AngloGold said last week that it will reassess whether to reinstate its dividend at the end of this year, with shareholders potentially getting a cash payout in 2017. The company last paid a dividend in 2013. AngloGold reported a profit of $52 million in the six months to the end of June, compared with a loss of $23 million during the first six months of 2015, despite a 7.1% slide in gold production from the same period a year earlier.
“The key here is not to be carried away by the volatility in the gold price,” said AngloGold Chief Executive Srinivasan Venkatakrishnan.

Source : www.wsj.com
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