Are South African Miners’ Discounted Valuations Worth a Look?
South Africa is a difficult market environment in which to operate, given its labor and infrastructure issues. These factors lead to higher costs and lower production growth.
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Overall, South African miners’ EBITDA (earnings before interest, tax, depreciation, and amortization) margins are lower than those of their North American peers. This difference has led South African miners to trade at discounts to their global peers (GDX).
Higher valuation multiples
AngloGold Ashanti (AU), one of the largest gold mining players, has an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 6.0x, the highest among South African miners. Its estimated EBITDA margin for 2017 is 33.1%. Its diversified production base and lower exposure to risky mining prospects in South Africa are the major reasons for its higher multiple. However, its South African operations are still proving to be a drag on its overall multiple. Its costs have risen 44% and production has dropped 16% year-over-year in 1Q17.
AU is reducing its financial leverage, which has worked in its favor. Further steps in this regard and addressing long-term production growth concerns could lead to more re-ratings for the stock.
Gold Fields (GFI) has the highest estimated EBITDA margin among its peers at 41.5%. Still, it’s trading at 3.8x, a discount to AngloGold, mainly due to uncertainty surrounding its South Deep project. If the project fails to meet the company’s expectations, production could fall. Its 1Q17 operating performance was also disappointing on the production and costs front. However, the guidance on South Deep will remain a key catalyst for Gold Fields stock.
Key valuation catalysts
Sibanye Gold (SBGL) is trading at an EV-to-EBITDA multiple of 4.0x. It’s most likely factoring in a discount due to its full exposure to South Africa. Its 1Q17 results were also a miss on earnings expectations. Its production also dropped year-over-year in 1Q17 while unit costs increased. The company expects a significant valuation re-rating after its Stillwater Mining (SWC) acquisition closes.
Harmony Gold (HMY) is currently trading at the lowest multiple among its peers at 3.0x. While this multiple may seem cheap, investors should note that the company has higher costs than its peers. Golpu, one of its major upcoming projects, could face financing shortages.
HMY will need a higher gold and copper price environment to fund its project, or it will likely have to seek external financing.
Overall, a higher gold price scenario could lead these miners to outperform their global peers due to their higher operational and financial leverages. In a weak gold price environment, however, the valuation discount seems justified.
For an in-depth discussion of South African gold miners, read Can South African Gold Miners Continue at a Discount to Peers?