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SA gold results: Not yet glittering, but at these prices - Daily Maverick

Tuesday, 20 August 2019

Results from South African gold producers have been solid though not glittering. Still, if prices remain near their current red-hot levels, profits should start spiking, though in Harmony’s case this will be used to pay down debt. Share prices, on the other hand are way up, a trend not reflected in their results. Such expectations are based on the gold price.

The JSE gold mining index is up close to 70% in the year to date, a surge not reflected in recent results from the sector, which have been solid though not stellar. Investors seem to have their eye on gold’s spot price, which recently hit six-year highs and remains above $1,500 an ounce, about 17 % higher in the year to date.

Much of this spike in the spot price has come in the past two months, so it did not flow to company profits for the latest reporting period, which ended on 30 June. The results so far have been okay, and if prices remain on the bubble, that should generally be reflected in the next round of results. The omens for gold bulls are good: lower US interest rates, tensions in the Middle East, the ongoing trade war, and the precious metal’s safe-haven status as concerns mount about the state of the global economy are all supportive of the gold price. (We have written before about how all of this is red meat to US President Donald Trump’s Republican base, for whom gold has an almost magical draw).

Harmony Gold, which reported full-year results on Tuesday August 20, will do extremely well if prices remain or shoot past current levels, especially in rand terms. CEO Peter Steenkamp told Business Maverick that if the price holds up, the company can be debt-free within a year.

“Our debt is just below R5-billion and if the gold price holds around these levels (near R750,000/kg) we will be able to repay that debt in this financial year,” he said.

That will not automatically trigger a dividend cash flow for investors – the company last paid a dividend two years ago – as Harmony’s other priorities after paying off its debt are to develop its Wafi-Golpu project in Papua New Guinea and to search for M&A prospects, at home or abroad. Steenkamp is keeping his cards close to his chest on that score, as executives always do. But an extended gold bull run will give the company scope to expand through acquisitions, which will be a sharp departure from recent years when Harmony was deeply in the red.

Speculation in this regard has centred on AngloGold Ashanti’s Mponeng operation, the world’s deepest mine, which the company has put up for sale. However, AngloGold CEO Kelvin Dushnisky said earlier in August the company would retain South African assets if it did not get the price it wanted – and at current gold prices, it is not about to go for a deeply discounted fire sale.

Both companies reported increased profits, at least in headline terms (which strip out certain one-off items), Harmony for the full year, and AngloGold for H1. AngloGold’s headline earnings for the period rose to $120-million from $99-million, while Harmony’s headline earnings increased 40% to just over R1-billion. In Harmony’s case, profits may not rise much next time around if they are used to pay off debt, but it’s a good trajectory if the price remains buoyant.

As for Gold Fields, it was the only one of the trio (Sibanye-Stillwater only reports next month) to pay a dividend (AngloGold has a policy of not paying dividends until the end of the year). Gold Fields’ normalised profits amounted to $126-million for the six months to 30 June compared to $43-million for the six previous months, allowing it to pay an interim dividend of 60 SA cents per share, or R500-million. To put that in some perspective, Anglo American Platinum paid a whopping R3-billion in dividends out of profits of just over R7-billion for its latest full-year results.

It remains to be seen if the sharp rise in share prices is justified. Gold price expectations are clearly high, and with Trump in the White House, these expectations may well be based on some sound fundamentals. Prospects on this front include a debt-free Harmony that embarks on M&A. And if the rand was to take a big wobble, that would make the South African gold operations of these companies even more profitable. But if the gold price heads south, the glimmer of a glitter that now exists will be gone. BM

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