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Which South African Miner Offers the Optimal Geographical Mix?

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Less exposure to South Africa

AngloGold Ashanti (AU) it is less exposed to South Africa than other South African miners. About 28% of its production comes from South Africa. While the depreciation of the South African rand in comparison to the US dollar has provided a nice tailwind to miners such as Harmony Gold (HMY) and Sibanye Gold (SBGL), which are more exposed to the rand, there is a flip side. South Africa is a very difficult market environment to operate in, given its labor and infrastructure issues. Gold mining costs are higher in South Africa than in other areas. Also, wage negotiations have been ongoing for quite some time without a full resolution. These factors have contributed to South-Africa-exposed miners trading at a discount to their global peers.

AngloGold has 36% of its production coming from other African countries, including Ghana, the Democratic Republic of the Congo, Tanzania, Mali, and Guinea. Some of these locations, particularly Ghana, have been facing problems of law and order at the mining sites.

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Diversified exposure

Gold Fields (GFI) has been trying to diversify itself away from risky mining jurisdictions. It unbundled its labor-intensive South African operations in Sibanye Gold and at the same time purchased assets from Barrick Gold (ABX) in Australia. With this, the company’s geopolitical risk has reduced greatly, with ~45% of its production coming from Australia and 9% from South Africa.

South African pure plays

Sibanye Gold is fully exposed to South Africa, which accounts for 100% of its production. Close to 90% of Harmony Gold’s production also comes from South Africa, with Papua New Guinea accounting for the rest. As can be seen in the graph above, these two companies are the most exposed to South Africa. As gold prices have been rallying and the rand has weakened, these players have outperformed the rest by a huge margin since the start of 2016.

The SPDR Gold Trust ETF (GLD) mirrors gold prices in the market. Gold Fields and AngloGold Ashanti account for 8.2% of GDX’s holdings.

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