Discount to global peers
South African miners can be categorized as senior miners or intermediate miners. However, there are unique factors driving their performances that merit special attention. South Africa is a difficult market environment to operate in, given its labor and infrastructure issues. These factors have contributed to South Africa–exposed miners trading at a discount to their global peers (RING) (GDX).
South African miners
AngloGold Ashanti (AU), one of the largest gold mining players, has an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] multiple of 5.0x, the highest among the South African miners. Its estimated EBITDA margin for 2017 is 35.0%. Its diversified production base and lower exposure to risky mining prospects in South Africa are the major reasons for the higher multiple.
Its recent attempts to cut debt have encouraged investors. Further steps in this regard and addressing long-term production growth concerns could lead to more rerating.
Gold Fields (GFI) has the highest estimated EBITDA margin of 46.0%. However, it’s trading at 4.2x, a discount to AngloGold, due to the uncertainty regarding its South Deep project. If it fails to meet the company’s expectations, the miner’s production could fall. Guidance on South Deep is a key catalyst for Gold Fields stock, which could both be a negative or a positive catalyst.
Lower valuation multiples
Sibanye Gold (SBGL) is trading at a multiple of 2.3x. It’s most likely factoring in a discount due to its full exposure to South Africa. The company expects a significant valuation rerating after its Stillwater Mining (SWC) acquisition closes.
Harmony Gold (HMY) is currently trading at the lowest multiple of 2.0x. It also has the lowest estimated EBITDA margin of 31.0%. While its multiple may seem quite cheap, investors should note that it has higher costs than its peers. Golpu, one of the its major upcoming projects, could face financing shortages.
Although HMY’s management expects to fund the next two to three years of the Golpu project, it can’t fund the entire project on its own. It could need a higher rand gold and copper price environment to fund the whole project or it will have to go for external financing. So, under a depressed gold price environment, Harmony Gold may not be able to repeat its 1H16 performance.
For an in-depth discussion of South African gold miners, please read Can South African Gold Miners Continue at a Discount to Peers?