The biggest beneficiaries of the rising gold price in the past couple of years have been exchange traded funds, not gold shares, as currencies and rising costs have stifled miners' profitability, especially in SA.
But when the gold price surged 8% in the first two weeks of this month , the rand remained stable, earning SA gold miners a substantial R357621/kg. Gold shares responded: AngloGold Ashanti gained 13%, Gold Fields 10% and Harmony Gold Mining 15%.
Ross Norman of Sharps Pixley, a dealer in London, says gold and other hard assets have benefited from economic woes and he believes there is scope for the price to move higher. He maintains gold could reach US$1850/oz this year.
James Moore of Fast Markets in London says gold, in line with all other financial markets, is likely to experience a busy, volatile few weeks, with sovereign debt issues at the forefront of trading sentiment. A default by the US would attract more investors towards gold as they lose faith in paper money and seek more tangible assets. In the near term he considers $1650/oz could be reached.
On a longer-term view, ABN Amro/VM Group forecasts in its latest Metals Monthly that gold could average $1585/oz this year. It says the crucial factor will be US economic growth indicators. If the US jobless rate creeps back towards 10% and house prices slide further, there is likely to be further policy stimulus. News of a third round of quantitative easing would prompt another gold rally.
So whether the US defaults on its debt or applies more stimulus, both scenarios seem positive for gold price gains.
Though SA gold miners should enjoy a higher price in the September quarter, which is also traditionally a strong quarter for production because there are fewer public holidays than in the first half of the year, there's uncertainty over a threatened strike over wage negotiations.
This would not only lose production time, but with labour contributing almost half of gold miners' costs in SA, the level of wage increases taking effect from July 1 will be important.
Results from the gold miners in the June quarter are likely to be stronger than in the March quarter. The gold price was about 5% better, at an average R328687/kg, helping to offset the rising costs of inputs like rubber, steel, diesel and electricity.
Bloomberg recently reported that prices of industrial tyres have started to surge again. Though still below the peaks of 2008, a 3,5m tyre (used on heavy haulage trucks in the mining sector) costing around $100000 is already more expensive than a Porsche 911 Carrera.
Miners that were able to increase output will have offset some of the cost pressures, but productivity remained an issue in the quarter. There were six public holidays around Easter, but that was better than the Christmas break, which is usually followed by a slow return to work in early January.
Productivity is also reduced by safety stoppages after an accident. There has been a spike in fatalities in the mining industry in the first few months of this year.
AngloGold launches the quarterly reporting season on August 4, followed by Gold Fields on August 11 and Harmony Gold Mining on August 15.
Gold Fields expects its June production will be about 5% higher than in March at 872000oz. Total cash costs will rise about 4% to R175000/kg compared with March while notional cash expenditure — which takes capital costs into account as well — will be 6% higher at R260000/kg. The group's biggest developing mine is South Deep in SA, which should continue to ramp up production.
Harmony is also building up production at three shafts in SA: Doornkop, Kusasalethu and Phakisa. Doornkop and Phakisa reported some operational problems in March and investors will be watching for signs of improvement.
In Papua New Guinea (PNG), Harmony and joint venture partner Newcrest Mining are building the Hidden Valley mine. Hidden Valley experienced a conveyor belt breakdown in the March quarter which CEO Graham Briggs has warned will also affect June's output.
Newcrest reported last week that production at Hidden Valley was relatively flat and repairs to the conveyor belt would be finished only at the end of September.
One of the reasons for Harmony's share price outperformance this year is exciting exploration results from the nearby Wafi-Golpu project, also 50% held with Newcrest. Mineral resources in PNG now constitute 10% or 16,3moz of Harmony's total of 163moz, and could grow further.
Harmony has said it expects its output for the June quarter will be 3% higher than in March but cash operating costs will rise because of higher electricity and stores costs and the inclusion of Target 3, one of the Free State shafts bought from Pamodzi Gold, in the results.
AngloGold's quarterly results are likely to benefit from the fact that a significant proportion of its operations is now outside SA, since SA's ageing, deep-level mines are more costly to operate than newer, shallower mines. About 40% of AngloGold's production in the March quarter was generated in rands.
DRDGold has said it expects gold output to rise 10% and cash costs by 8%.
Junior gold miner Gold One produced 9% more gold, at 28511oz, in the June quarter than in March and says it expects to meet its target of 120000oz this year.
In a recent presentation, Gold One CEO Neal Froneman pointed out that Gold One has the lowest cash costs in SA at R104049/kg. The Modder East mine is relatively shallow and modern compared with those operated by the three major producers.
Gold One's share price has benefited from a burst of corporate deal-making in the past year, including the recent agreement to introduce a Chinese consortium as majority shareholder. It is making an offer of 408c/share to all shareholders. Gold One shares are currently 360c-370c compared with 225c in January.
RBC Capital Markets says AngloGold, Gold Fields and Kinross Gold have the greatest potential to return to their 12- month peaks.
Though other companies, including Great Basin Gold, are even further below their 12-month peaks, there is some company-specific justification for this, RBC says.
Investec Asset Management head of resources Bradley George sees 17% upside in the share prices of gold miners in North America, 31% for midsized producers and 18% for producers in emerging markets. He says there is exceptional value in the North American companies, particularly Goldcorp, Kinross and Newcrest.
source: http://www.fm.co.za/
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