Gold miners in South Africa will witness improved currency-adjusted earnings as the short-term boost to the rand prompted by Cyril Ramaphosa’s election as new ANC leader and President of South Africa comes to an end in the coming months.
This is the view of BMI Research – a unit of the Fitch Group.
Moving forward the rand is expected to continue on a depreciation trend which, combined with higher gold prices, will be supportive of the gold sector in South Africa.
The negative impact of a strengthening rand on South African gold miners witnessed over 2017 is likely to be short-lived.
Traditionally, mining companies outside of the US receive their revenues in US dollars but pay a significant share of their costs in local currencies .
[quote]As such, when local currencies depreciate relative to the US dollar, operating costs that include wages and electricity become less expensive relative to the sales revenue earned and vice versa.
In South Africa, over the past 12 months we have seen how despite rising gold prices, an appreciating rand has led to subdued earning s among local gold miners on an annual basis.
While Cyril Ramaphosa’s election as new ANC leader in December 2017 and as President of South Africa on 15 February 2018 gave the rand a further appreciatory boost, we expect this trend to be reversed in the coming months as attempts to implement reforms in the country s tall and inherent weaknesses in the South African economy continue to weigh on the currency, while gold prices continue to head upwards .
The rand’s 10% appreciation over 2017 has led to poorer-than-expected financial results for key gold miners in South Africa, through lower earnings and higher costs, even though gold production remains relatively sustained and gold prices are trending higher.
Despite a 5% rise in gold prices from November 2017 to February 2018 , the value of gold in rand terms over the same period has decreased from ZAR18,336/oz to ZAR15,613/oz, offsetting potentially substantial gains for domestic miners.
For instance, both Anglogold and Sibanye Gold’s results in 2017 reflect a decrease in adjusted EBITDA y-o-y while All-In Sustaining Costs increased (by 15% and 21% respectively) in both companies ’ gold operations in South Africa as currency-adjusted costs rose.
Similarly, Gold Fields’ all-in costs at the company’s South Deep operations in South Africa rose from US$1,006/oz in 2016 to US$1,088/oz in 2017.
Furthermore, the steep increase in Anglogold’s gold operations in South Africa costs contrast to the flat lined yearly costs in the company’s Australian operations due to the largely stable currency there, compounding the impact of producing countries ‘ currency movements on local operational costs .
These modest financial results come as gold production in South Africa remains steady, with 2017 output reaching 5.1 Mt, the same as in 2016, according to BMI’s estimates.
Ramaphosa’s victory only a short-term boost, long term depreciation intact
Looking towards the latter half of this year, BMI expects the currency-adjusted losses on South African mining companies to wane as the rand’s appreciation comes to a halt.
BMI’s Africa Country Risk team believes that the recent political changes in the country, namely Cyril Ramaphosa’s ascent to leader of the ANC and President of South Africa in replacement of Jacob Zuma, will only provide a short-term boost to the currency, following an overly-optimistic reaction by markets.
BMI expects Ramaphosa’s market-friendly reform agenda will likely be slowed, if not impeded, by strong opposition within the ANC, which will consequently sour investor sentiment towards the rand in the next six months.
In the longer term, the rand is likely to continue facing depreciation pressure due to an unattractive business climate, characterized by powerful labour unions, unemployment and lacklustre economic growth.
Considering BMI’s Country Risk team does not expect Ramaphosa’s reform plan to succeed, foreign investment is also unlikely to pick up in any significant way contributing to a depreciation from ZAR11.6/$ currently to up to ZAR14.8/$ by 2019 based on BMI currency forecasts .
As a result, BMI expects domestic mining companies in South Africa, comprised mostly of gold and precious metals producers, to be key beneficiaries of currency-adjusted returns relative to other important mining markets in the coming years.
As an added tailwind for South African gold miners, higher gold prices forecast over the coming years should further boost exchange-related profits while reducing operational costs.
BMI expects gold prices to average US$1,400/oz by 2021, up from US$1,300/oz in 2018, as demographic-driven widening of fiscal deficits in developed markets will send inflation structurally higher in these markets, thereby eroding real yields and eventually boosting gold prices.
Feature image credit: Wikimedia