There's a silver lining for local golds
May 2, 2004
By Sherilee Bridge
Johannesburg - It would be tempting to shy away from gold stocks after this week's release of dismal March quarterly results, but the underperformance of South African gold shares over the past three months makes them cheap relative to their US peers.
Home to three of the world's five largest gold producers, South Africa's mining industry is barely surviving the 10.5 percent fall in the rand price received for its gold.
Merrill Lynch said that while local gold counters had traditionally traded at a discount to the North American counters, this discount narrowed sharply in October and disappeared at the beginning of 2004.
"We believe this ... reflected the market's unwillingness to believe in the long-term sustainability of the strong rand," the investment bank said in a research report last month.
This is good news for opportunistic investors looking to add gold stock to their portfolios. But at a mine level, reality has begun to bite.
Chamber of Mines figures show almost one-third of South African gold production is unprofitable at the current price of R85 000 a kilogram.
This was proved by Harmony Gold Mining, which on Wednesday kicked off the March quarterly reporting season by admitting upfront that the three months were the most painful of the past three years.
In a taste of the results still to come, Harmony posted a loss of R81 million, blaming a 16 percent fall in production and a 9 percent rise in cash costs.
AngloGold Ashanti echoed the production falls of its rival, saying production was about 11 percent lower than the previous quarter.
It reported a 59 percent fall in profit to R248 million in its first quarter.
While Harmony and AngloGold are the only two 1 million-ounces-plus producers to have reported back to the market so far, Gold Fields is not expected to dazzle when it presents its figures on Thursday.
Bloomberg's survey of analysts reveals that Gold Fields is expected to report an 18 percent decline in profit.
The trio have posted three of the four worst performances this year among the 40 biggest companies traded in Johannesburg, Bloomberg reports. AngloGold has plunged 28 percent, Harmony 25 percent and Gold Fields 23 percent.
"Overall, I think South African gold shares are starting to show some value after falling 20 to 30 percent since January," said Peter Townsend, an analyst at Barnard Jacobs Mellet.
But Townsend, quoted by an international news agency, warned that the companies still had some difficult times ahead.
Gold Fields has a 65 percent exposure to the rand, compared with AngloGold Ashanti's 44 percent exposure after its merger. Harmony earns up to 90 percent of its profit from its South African operations.
While the rand has gained 76 percent against the US dollar since 2001, the exchange rate remained little changed from January to March at an average of about R6.75, meaning local producers have missed out on the sunny sentiment towards the yellow metal.
Harmony rose 5c to R77.05 on Friday. AngloGold was up 19c at R221, and Gold Fields dropped R1 to R70.25. The gold sector fell 0.61 percent.
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