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Low quality of assets and high debt hit gold miners the most - Business Day

Monday, 14 May 2018

The rush by JSE-listed gold miners to reduce exposure to SA and the scramble to grow international portfolios has not unlocked the value shareholders have hoped for, nor is the strategy in its current form likely to do so, Nedbank analysts argue.

One of the persistent themes in valuing South African gold equities is the discount at which they trade relative to their international peers, a point Nedbank mining research analysts Leon Esterhuizen and Arnold van Graan explored in depth, considering the political risk discount and the quality of assets held by South African gold miners abroad compared with their multinational peers.

"Although we have no doubt that politics is a contributing factor to the underperformance of SA’s gold equities, our analysis shows that a far bigger driver of this underperformance is the lower quality of this asset base, short mine lives, poor management and exceptionally bad capital allocation and project execution," they say in a detailed report.

"We find the impact of politics to be much smaller than most investors seem to believe," they say, using their analysis to argue that less than 10% in the movement of gold equities could be ascribed to uncertainty created by political events over time. "This tends to argue against the so-called political discount and rather points a lot more towards operational delivery and share dilution as the bigger drivers of that "consistent discount".

Overall, the quality and cost performance of their international suite of mines does not stack up well against the portfolios held by their offshore peers, they say, seeking an explanation for JSE-listed miners with large foreign footprints not shooting out the lights since cutting their exposure to SA to the bare minimum of single underground mines.

Another theme in SA’s gold mining sector in recent years has been the flight to offshore assets, reducing exposure to the country’s uncertain regulatory environment, sociopolitical ructions, the high cost base relative to the rest of the world, difficult organised labour, and old, deep-level, dangerous mines.

SA’s all-in sustaining costs are the highest in the world, rising $156/oz in a year to $1,187/oz in 2017 compared with a global average of $878/oz.

Companies such as Sibanye-Stillwater have incurred mind boggling debt loads of more than R23bn, which tops its R20bn market capitalisation, to secure US-based palladium and platinum miner and recycler Stillwater Mining for $2.2bn.

Gold Fields, with net debt of $1.37bn, is in the throes of developing three mines in Australia, Ghana and SA, with the latter, the South Deep mine, regarded with deep scepticism by the market for its string of disappointments in missed production targets.

South Deep has already absorbed R29bn to buy a partially built mine and will need at least R2bn more to bring it to a much-reduced target of 480,000oz by 2022.

AngloGold Ashanti, with net debt of $1.77bn, has sold and shut all its underground mines in SA bar one, citing the age and costs of operating them, while "leaving meat on the bone" for the buyers of others, said CEO Srinivasan Venkatakrishnan.

He has pushed investment in low-cost international mines hard during his tenure as CEO and aggressively tackled debt, cutting it by a third in five years.

"Cyclical businesses simply should not run high debt exposure. If you do, it is essentially tantamount to gambling with shareholder value," the Nedbank analysts say. "Sibanye is the clear standout … but we believe AngloGold and Gold Fields are also flirting with disaster and need to get these debt loads down as a matter of urgency."

Worryingly for South African gold miners, the analysts do not see any respite from the rand gold price, which at a little more than R500,000/kg is dangerously close to the all-in sustainable costs of a number of shafts.

This is at a level Pan African Resources CEO Cobus Loots says is unsustainable for underground mines in SA and will lead to closures.

"Perhaps we might be incorrect, but when we back this up with the real rand gold price still sitting very high relative to history — and relative to the PGM [platinum group metal] basket — we believe the probability to be loaded towards a lower, rather than a higher, rand gold price over the remainder of this year," the analysts say.

Gold equities have struggled in recent years, the Nedbank analysts say, pointing out this was not an entirely domestic phenomenon.

"We believe that the gold price bull rally was fast being wasted by the gold producers and as soon as investors realised this — when free cash flows did not go up in line with the gold price — they ran for the hills," they say.

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