Weaker rand, higher gold prices
As we saw in the previous part of this series, a weaker rand and higher gold prices are helping South Africa–focused gold miners. Due to the Brexit and the resulting uncertainty, the price of gold reached 650,000–660,000 rands per kilogram.
This will benefit gold miners that have higher operational and financial leverage as well as the highest exposure to the South African rand.
More exposed to the rand
Harmony Gold (HMY) and Sibanye Gold (SBGL) are more exposed to the rand. There are many factors that usually work against miners operating in South Africa. It’s a very difficult market environment in which to operate, 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. However, in the current environment of higher gold prices and weaker producer countries, these miners stand to gain the most in the short term.
AngloGold Ashanti is less exposed to South Africa
AngloGold Ashanti (AU) is less exposed to South Africa than other South African miners. About 28% of its production comes from South Africa. However, on a medium-to-long-term basis, it remains quite robust with a strong balance sheet after the sale of the Cripple Creek & Victor gold mine.
If gold prices remain elevated, which could be the likely scenario, AngloGold could earn significant free cash flow going forward. For more on this, you can refer to Is Gold Set to Remain Higher for Longer Post-Brexit?
This may mean the company could reinstate its dividends in the coming years and as soon as 2017. Right now, the company is focusing on repaying its debt.
Gold Fields (GFI) has been trying to diversify from its risky mining jurisdictions. After spinning off its South African operations and buying assets in Australia, its geopolitical risk reduced greatly. About 45% of its production is from Australia, and 9% is from South Africa. This makes it less exposed to currency benefits from a weak rand.
The SPDR Gold Shares (GLD) mirrors gold prices in the Market. Gold Fields and AngloGold Ashanti account for 8.2% of GDX’s holdings.
Next, let’s look at the potential catalysts for South African gold miners.