Discount to global peers
South Africa is a difficult market environment to in which to operate, given its labor and infrastructure issues. These factors lead to higher costs and lower production growth.
Overall, their 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 4.9x, the highest among South African miners. Its estimated EBITDA margin for 2017 is 32.6%. Its diversified production base and lower exposure to risky mining prospects in South Africa are the major reasons for its higher multiple.
AU’s reducing its financial leverage has worked in its favor. Further steps in this regard and addressing long-term production growth concerns could lead to more re-rating for the stock.
Gold Fields (GFI) has the highest estimated EBITDA margin among its peers at 45.0%. Still, it’s trading at 4.2x, 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. Guidance on South Deep will be a key catalyst for Gold Fields stock.
Key valuation catalysts
Sibanye Gold (SBGL) is trading at an EV-to-EBITDA multiple of 2.4x. It’s most likely factoring in a discount due to its full exposure to South Africa. The company expects a significant valuation re-rating after its Stillwater Mining (SWC) acquisition closes. Investors should watch its full-year results for an update.
Harmony Gold (HMY) is currently trading at the lowest multiple among its peers at 2.0x. 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 rand gold and copper price environment to fund its project, or it will likely have to seek external financing. Under a depressed gold price environment, Harmony Gold may not be able to repeat its 2016 performance. Updates on its Golpu project and its financing arrangement will be key to watch in its 4Q16 results.
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?