The strengthening of the rand and falling output herald “nasty” times ahead for South Africa’s gold mining industry. Three of the four largest gold producers this week reported an earnings crash, while the largest, AngloGold, predicted a rough six months ahead.
Harmony Gold and Durban Roodeport Deep joined AngloGold in showing the bruises inflicted by a bolstering currency in the quarter to March.
On Wednesday AngloGold reported a 41% fall in earnings a share, from 460c a share to 272c a share, against the 351c a share expected by analysts.
This was accompanied by a 43% fall in net profit to R547-million for the quarter. The price Anglo received for its gold during the quarter rose from $314 to $344, while its costs rose more sharply, from $173 to $210.
Compounding the difficulties was the appreciation of a range of currencies against the dollar, most notably the rand. The group experienced the strengthening of local currencies in seven of the eight countries in which it operates.
AngloGold CEO Bobby Godsell said he expected the the problems to continue, but noted: “We do, however, anticipate a gradual recovery in the fourth quarter.”
Godsell added that AngloGold, the world’s third-largest gold miner, producing six-million ounces last year, would not defer its planned expansion projects. It would merely “revise its planning assumptions and defer capital expenditure”.
A Johannesburg-based analyst noted that lower grades of ore had also hurt AngloGold.
AngloGold management also noted that at current levels of around R7 to the dollar, the rand would not have a significant effect on employment. The company has a 56% exposure to South Africa.
Harmony Gold, which earns 84% of its income in South Africa, felt the heat from both a stronger currency and a drop in output. Most glaring was a 1,5-ton drop in production as a result of six lost days during the Christmas holiday period.
Harmony reported an earnings per share decline from 262c to 130c a share. Operating profit fell by R285-million to R478-million, R125-million of the
decline was because of the rand’s 13% appreciation against the dollar over the period and R142-million was attributed to public holidays.
Harmony received R94 687 a kilogram, down from R100 171 the previous quarter. Costs increased by 7% to R73 150 a kilogram, which Harmony attributed directly to lower output
The Chamber of Mines puts the average exchange rate over the quarter at R8,34 to the dollar. The average gold price was $352,39 an ounce while miners would have received, on average, R94 606 a kilogram.
Different houses receive different prices mainly because of their hedging structure. Harmony CEO Bernard Swanepoel warned of possible retrenchments of up to 10 000 workers if the currency retained its strength. He believed, however, that Harmony was “well geared to deal with strength of the rand”.
Swanepoel pointed to the Masimong project in the Free State that was producing higher grades and achieving lower costs. The Freegold Joint Venture, with Patrice Motsepe’s ARMGold, reported a R58-million decline in operating profit, bringing Harmony’s 50% share to R141-million. Harmony noted, however, that at cash costs of $232/oz, it remained the most profitable asset in its portfolio.
The bad week began with Durban Roodeport Deep reporting a net profit fall from $22,5-million to $3,2-million. An analyst has been quoted as suggesting that the company was blaming the rand for poor operational management, arguing that Durban Roodeport Deep had too many marginal assets and “should be planning for more robust projects”.
The company’s chairperson and CEO Mark Wellesley-Wood announced plans to retrench 1 000 workers in its North West operations, which made a $2,4-million loss.
The coming quarter is expected, in the words of one analyst, to be “nasty”, with difficult wage negotiations in prospect and controversial mining royalties legislation expected to pass through Parliament.
“The wage negotiations are going to be tough,” Swanepoel said. “There is a perception among the unions of inflation loss, while we will argue for conservative wage increases.”
An indication of union attitudes came last week when the National Union of Metalworkers said it would demand wage increases of CPIX — inflation minus mortgage rates — plus 5%. Godsell indicated that he would like to negotiate a two-year agreement with “an increase in line with other major sectors”.
Heated debate is also expected around the royalties Bill. This week, Minister of Finance Trevor Manuel warned that the legislation was non-negotiable, with only the technical aspects to be discussed. The legislation currently proposes levying a 3% tax on revenue. An analyst criticised the measure: “At current margins, the royalty will put mines under pressure. This will actually destroy more jobs than it seeks to create.”
Swanepoel also objected to the proposed charge, stressing that it would raise the cost of mining in South Africa. If implemented as proposed, he said, Harmony would have to reconsider planned projects at the Nyala Shaft and Tshepong South, both in the Free State.
Godsell advocates a charge levied on profits, rather than revenue.
The World Gold Council painted a mixed but largely encouraging picture of gold demand and price behaviour for the year.
Speaking from London, Jill Leyland, the council’s senior economic adviser, confirmed that first-quarter demand was unlikely to be spectacular. This is because uncertainty in world markets has tamped the demand for physical quantities of gold, but bolstered its status as an investment haven.
The demand figures for the quarter are due in about three weeks.
Leyland also noted a trend in the Middle East where purchasers tended to hold off buying while the gold price was fluctuating and wait until it settled, even at a higher price, before buying again. According to the Gold Fields Mineral Service Survey, 3 427 metric tonnes were consumed in jewellery and electronics, dental surgery and holdings as bars for private investors worldwide.
Severe acute respiratory syndrome was also affecting sales in South-East Asia, said Leyland. The council’s market analyst, Rhona O’Connell, predicted a good demand from India as the wedding season approaches.
Last year the boom from this large market did not materialise because of a high rupee price and a monsoon that devastated crop and cash holdings.
From a low of $252,10 in July 1999, gold has powered to a high of $380.
A Reuters poll of analysts projects an average price this year of $342,61/oz, with a low of $300 and a high of $400.
On the JSE Securities Exchange the FTSE-JSE gold mining index closed on Wednesday at 1843,4, up 3,4% for the day and down just under 40% for the year. – Additional reporting by I-Net Bridge