What a difference three quarters of a year can make. In April this year, the South African gold industry was characterised by the cacophonous strains of a sector strangled by a strong rand and rising input costs and about to breathe its last. It had just announced that production output from last year had fallen to 308 tonnes — its worst level since 1930.
But this week the cries have diminished and the industry has suddenly been buoyed by a rosy outlook. The reason for this change in fortunes is, of course, the gold price. On Thursday it reached a 24-and-a- half-year high at $519,01 an ounce. The outlook is great news for gold producers, but it seems workers will have to wait before they can claim their share of the good times.
This week, the Gold Index was up by more than 40% for the year.
An analyst, who asked not to be named and who had predicted the $500 price in April, says the rise will certainly allow miners to breathe a bit more easily. At Wednesday’s level of $512 an ounce and an exchange rate of R6,30, the rand price of gold is R102 000 a kilogram — marginally above the magical R100 000 a kilogram regarded as the minimum point of viability for local producers.
The price rise is widely attributed to the weakness of the dollar and the demand from Asia and the Organisation of Petroleum Exporting Countries (Opec), neither of which is likely to change soon.
The dollar’s weakness stems from persistent deficits in its trade account and its budget. The euro is not a natural haven either, with various crises afflicting its major economies. China is in its relative infancy as a capital market, which leaves gold as an investor haven.
All this is good news for local producers. David Hall, an analyst at Merrill Lynch, expects the major South African producers to enjoy the best time they have had in ages.
Since September gold has stood at R100 000 per kilogram, there have been no strikes in this quarter and production problems have been resolved, which leads Hall to believe that margins will improve significantly. He expects cash margins at Anglo Gold Ashanti to improve by 6% (to 42%) for the December quarter. Gold Fields and Harmony are expected to lift cash margins from lower bases by 16% and 17%, to 29% and 23% respectively.
Based on the September-quarter results, Hall describes Anglo Gold Ashanti as ”the best of a weak bunch”. His recommendation is a buy for Gold Fields and Harmony and a neutral on Anglo Gold.
Another analyst, who also declined to be named, said the current price might prompt companies to revisit projects that had not seemed viable all that long ago. ”It all depends on how long they believe the current price will hold,” he said, adding that it was ”not inconceivable” for gold to fall to $450 an ounce in the next three months.
Harmony, for example, has already said that a decision on its Target North mine in the Free State will be made in 18 months.
The analyst believes there are ”four or five projects” Harmony can revisit, but warns that projects such as Poplar Mine in Evander, Mpumalanga would probably need a price of R108 000 per kilogram.
Price prospects also look good. UBS Warburg has raised its forecast for the 2006 average price from $435 an ounce to $455 an ounce — and even that seems conservative.
At the recent Denver Gold Show, M Murenbeeld and Associates, a wealth management firm based in Dundee, British Columbia, had a much more bullish outlook. It forecast a gold price of between $381 an ounce and $565 an ounce, to yield a weighted average of $502.
Moferefere Lekorotsoana, head of publicity and information at the National Union of Mineworkers, says workers see no joy in all of this. ”The benefits from a strong gold price or weak rand are enjoyed by shareholders and senior executives,” he says.
Lekorotsoana notes that at the recent wage negotiations the idea of workers sharing in what he calls ”a windfall” was mooted. But, he says, that was nothing more than an attempt to make workers lower their wage demands. Although talk of laying off workers has died down, Lekorotsoana has not heard any management team speak of declaring a moratorium on retrenchments.
In the meantime, the yellow-metal bull run continues apace.