Could South African Miners’ Difficulties End in 2019?



AngloGold Ashanti’s rerating potential

South African miners (GDXJ) have traditionally traded at discounts to their global counterparts (GDX), primarily due to South African laws, labor concerns, and infrastructure challenges. Among these miners, AngloGold Ashanti (AU) is trading at the highest multiple of 4.9x, which represents a premium of 22% to its South African mining peers.

On January 22, AU reopened its Obuasi mine, which closed in 2014 due to capital issues and some challenges with concession. There was speculation that the company could go for a London listing. Moreover, many analysts believe that AU should leave South Africa completely, as it remains a high-cost region. Such a move could be a major catalyst for the stock going forward.

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Sibanye’s difficulties

Sibanye Gold (SBGL) is trading at the second-highest EV-to-EBITDA (enterprise value-to-EBITDA) multiple of 4.1x—a premium of 3.0% to the peer average.

The question remains, however, whether the stock will be able to maintain this premium given its poor operational performance. The workers at three of its mines in South Africa are on strike, and there’s no end in sight. Its production has been falling, and its costs are ramping up, painting a grim picture. Moreover, the company is struggling to cut its debt, which climbed during its acquisition spree. The fatalities at its mining operations haven’t been helping it either.

Other key valuation catalysts

Gold Fields (GFI) is trading at an EV-to-EBITDA multiple of 4.0x, almost on par with its historical average. The company is struggling with continued difficulties at its South Deep mine. Due to these issues, the company downgraded its production guidance for 2018 in its third-quarter earnings results. The company needs to either turn things around at the mine or sell it.

Bloomberg reported on January 22 that Gold Fields would like to merge with AU. However, Gold Fields denied any such interest. Any such offer could be a rerating catalyst for the stock.

Harmony Gold (HMY) is trading at the lowest multiple among its peers at 3.0x. While it remains a higher-cost producer, its management is expecting the South African rand’s weakness to support its costs going forward. Higher gold prices (GLD) and a weaker rand could also provide support for the company’s valuation.


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