Gold Producers suffer small losses

22 January, 2007 at 11:20 am | Posted in Companies | Leave a comment

South African gold miners have probably suffered smaller operating margins in the quarter to end December compared to the preceding three-month period, as the domestic gold price flattened and the dollar price weakened.
The average gold spot price in rand terms has increased in every quarter since the first three months of calendar 2005, and gold producers are now selling their gold for about R145 000 per kilogram, 68 percent more than they were getting seven quarters ago.

December’s quarter, however, showed the least gain of late, as the average gold price increased by a little over 1 percent, highlighting the importance of cost control for the first time since prices were falling on a quarterly basis just a few years back.

Cost increases have, however, not allowed producers to completely see the benefit on the higher prices, as inputs such as oil, a large portion of expenses in open pit mines, steel, timber and wages have all showed above inflation increases.

On the plus side, oil prices have dropped since the $70 per-barrel level in the middle of the year, with further drops having come since the end of December.

At a results briefing for the quarter to end-September, Gold Fields chief executive, Ian Cockerill, said his company would struggle to keep costs below the level of South Africa’s producer price inflation in the months ahead.

“We are saying this that it’s going to be a challenge to keep it there. Clearly, we’re going to try and beat it,” said Cockerill.

Producer inflation figures released by Statistics South Africa came in at 10 percent year-on-year for the month of August.

Andrew Joannou, a portfolio manager at Renaissance Asset Management in Cape Town, says that he would actually be content with a 10 percent annual increase in costs, but pointed out that the country’s gold producers have actually exceeded this “natural inflation” in the past.

The fund manager is not expecting spectacular results for the December quarter, and adds that much higher quarterly earnings figures are factored into the share prices of the country’s big three producers.

In AngloGold, Joannou says a quarterly earnings figure of about 500 cents a share has been factored in by the market, and about 200 cents for both Gold Fields and Harmony.

Analyst forecasts of headline earnings for the December quarter average between 300-376 cents per share for AngloGold, 130-150 cents for Gold Fields and between 50-60 cents per share for Harmony.

Joannou says that the market will also keep an eye on Harmony’s production profile and improvements on the previous quarter, as the company has underperformed in the past, but has a promising project pipeline going forward, which would increase both production and grades in years to come.

On a more company specific basis, another analyst pointed out that AngloGold can be expected to report impacts from a recent employee share ownership plan, share option costs and increases in tax provisions.

Meanwhile, Gold Fields has just about wrapped up its acquisition of the South Deep gold mine, and while the loss making operation will not show up too much in the current results, guidance will be sought as to how Gold Fields will fund the mine’s capital expenditure, considering the large debt taken on to buy the mine.

At Harmony recent reports of much higher costs for the December quarter were described as a misunderstanding by chief executive Bernard Swanepoel, and so the market is undecided on that one.

Overall, according to an I-Net consensus, AngloGold is rated a ‘Buy’ in a survey of 8 analysts, with no sell recommendations. Gold Fields is rated a Hold+ with one sell out of seven analysts, while Harmony is a ‘Hold’ with two sells out of eight analysts.



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