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DRDGOLD Ltd. Message Board

  • ckmb54 ckmb54 Jun 7, 2004 7:51 PM Flag

    SA golds get thumbs down 1

    SA golds get thumbs downBy: StewartBaileyPosted: '07-JUN-04 16:51' GMT � Mineweb 1997-2004JOHANNESBURG ( -- South African gold shares rallied gamely on Monday up 3 % as the dollar gold price strengthened, but the day�s trade belies a sector for which most local investment professionals have a bleak forecast.The fact is that US investors are keeping gold shares relatively buoyant as they buy shares in sympathy with a rising dollar gold price. But a look at the rand gold price, which more-closely reflects the realities of operating in South Africa, paints a vastly different picture. On Thursday last week, the dollar gold price reached its lowest point in more than a year at R80,794/kg, which is 4 percent lower than the average gold price of R84,877/kg during the January quarter. That is not a pretty picture, but a glance at the longer-term trend is even more disturbing; while the dollar gold price has more or less retained its upward trajectory, the rand gold price remains moribund in a range between R81,000/kg and R85,000/kg. Those levels are well below what much of the industry needs to stay in business. And that may not get better anytime soon. Based on the past 18 months, the concept of a weak rand and a strong dollar gold price happening simultaneously is an alien one. The current combination of a rand strengthening in tandem with a rising dollar gold price, which negates much of the benefits of the latter, is keeping the local gold board in a suffocating bear hug. The gold index at 1,812 points is near its lowest levels in more than two years. One local analyst, who declined to be named, reckons that if the current climate persists, the index could sink as low as 1,300 points. As always, though, the forecast is prefaced with the caveat that severe macroeconomic or geopolitical disruption, which would stoke US investor demand for gold stocks across the board, could change that picture. But it is the more-bearish outlook, based on fundamental analysis, that is keeping local investors wary of a high exposure to the local sector. Steve Shepherd, analyst at JP Morgan, has advised his clients to favour the local platinum stocks over gold stocks. �Within South African resources, we prefer a low gold exposure and a neutral platinum exposure,� he says.
    That is not to say investors are keeping out of the sector altogether; the sector retains a degree of optionality given an uncertain macroeconomic picture, but it has given up much of its status as the preferred rand hedge. Anglo Platinum, for example, is �just as geared to the rand these days�, according to one resource-fund managers. �And there is a lot less risk in platinum,� he says. Nevertheless, among the gold shares, the industry heavyweights AngloGold and Gold Fields are preferred by most commentators, given the higher average grade of the their local operations. Gary Quinn, fund manager at Prudential Asset Management in Cape Town, says it would be harder for Harmony and Durban Roodepoort Deep, the number three and four producers, to engineer higher grades to weather the low margin storm.
    Quinn also believes the local gold board to be expensive at a price to earnings ratio of more than twenty, particularly in relation to the rest of Johannesburg�s rand-hedge shares. He says Prudential is underweight gold using a �straight valuation � rationale.
    �If you want a rand hedge, you should go somewhere else�there is just more value in the steel, platinums and among the diversifieds,� he says. He acknowledges that he gold sector traditionally attracts a higher valuation than most other sectors, but says that the chance of the rand weakening to a level that justifies the current price of gold shares, is just too small. �Most of the forecasts for gold shares have a weaker rand built in already, so even if the rand weakens by 10 percent, it would not help,� Quinn says.

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    • The cash costs of the local producers bear him out. Even without factoring in a wage increase of around 10 percent due at the end of this month - which will increase costs of local operations by somewhere around 5 percent - the situation looks dire.
      At the end of the March quarter, cash cost analysis show DRD and Harmony�s local operations to be underwater at the current rand gold price, while Gold Fields at R76,087/kg is making a paper-thin margin. Harmony showed cash costs of R82,852/kg and DRD, which has recently started mining only the highest grade areas of its local operations to boost margins, had cash costs of R81,398/kg locally. DRD has been rescued, however, by its Papua New Guinea operations, which turned in costs of an equivalent R45,400/kg, bringing the group-wide average to around R70,000/kg. It is DRD�s performance, as well as the more-profitable offshore operations of AngloGold � and to a lesser extent Gold Fields - that speak eloquently of the imperative for gold producers to seek more of their production from outside South Africa. It is also this that will give added impetus to Harmony to pursue its growth aggressively in Papua New Guinea, through its acquisition of Abelle. In the meantime, though, Harmony, along with all its South African peers, will have its hands full in trying to staunch the bleeding at its local operations. That task will be all the more testing given the increasingly-hostile reception that cost cutting efforts are being greeted with by local unions. Whatever the solution is, it will not be cheap or painless.

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