Falling Gold Price Raises Red Flag for SA Miners

June 27, 2013 at 09:02

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The recent gold price falls are endangering the future of some of South Africa’s top gold mining houses if the fall continues.

The top three JSE-listed gold shares — AngloGold Ashanti, Harmony Gold and Gold Fields — have shed a combined R100bn in value so far this year, underlining concerns over the sector’s future.

Predictions that gold could fall under $1,000/oz as expansionary monetary policies are reined in, especially in the US, are putting further pressure on gold miners.

The companies are also facing surging labour unrest, and wage demands ranging from 60% increases to a whopping 100%.

The JSE gold index is down 23% this month for a 48% loss so far this year. Harmony and AngloGold shares have lost 54% and 49%, respectively, since the start of the year, while Gold Fields has given up 47% since Sibanye Gold was unbundled on February 11.

“The gold industry is under attack from all sides,” said independent analyst Ian Cruickshanks. “With the price in bear market territory, it is very difficult to make an investment case for the sector and its future in South Africa is limited.”

Earlier this week, the Association of Mineworkers and Construction Union tabled a 100% wage demand for all unskilled and semiskilled employees in the gold industry, raising fears of a strike and attendant consequences for production if its demands were not met. The National Union of Mineworkers tabled a 60% wage demand last month.

Spot gold fell to lows of $1,236.25oz on Wednesday, which analysts deemed unsustainable for the bulk of South Africa’s gold mines.

“The gold spot could go as low as $1,000/oz, further impacting gold miners negatively from the cost point of view. The $1,300/oz is, on average, the break-even point for gold companies to produce gold profitably,” said Rezco Asset Management investment director Rob Spanjaard.

The dollar-denominated metal has lost 25% in value this year as investors cut back their positions amid expectations that the US Federal Reserve (Fed) will wind down its cheap money policy.

“Gold is susceptible to so many exogenous factors. Investors had previously bought gold to hedge themselves against the threat of global inflation as a result of the US’s easy monetary policy,” Sasfin Securities portfolio manager Nicholas Sorour said.

The metal is also generally perceived as a haven from collapse scenarios, and demand will tend to wane when market players feel better about the global economy.

Rand Merchant Bank analysts said the fall in the gold price has not hit the rand yet but “we are increasingly concerned that the Fed tapering is going to generate a further bear market in South Africa’s commodity export prices”.

The Fed’s action, along with liquidity trouble in China’s interbank market, was adding to commodity price woes, Standard Bank analysts said.