IN the past few weeks, South Africaâ€™s two biggest gold names, AngloGold Ashanti and Gold Fields, have seen successive 12-month lows in stock pricing in trades on the New York Stock Exchange.
The parallel performance on the Johannesburg bourse has been less depressing, given the persistent weakness in the rand.
Both stocks have traded higher in the past few trading sessions, giving specialist analysts and investors exposure to the possibility that South African gold stocks may be oversold, especially within a longer term context.
Analysts at RBC Capital Markets note that the South African gold index “used to trade like clockwork” on a six month forward price-earnings (PE) multiple, oscillating between 10 times (indicating good value) and a maximum of 25 times [indicating “expensive” value] forward.
Over the past four years though, RBCCM adds that “earnings have been largely non-existent. With massive losses and constant under-delivery on production promises, the market has had a torrid time of pricing for earnings potential”.
In the result, valuations have been declining consistently, to the point where analysts at RBCCM “now believe a trading opportunity is presenting itself”.
For the first time in almost six years, RBCCM states, “we believe the index to be priced on a forward PE multiple in the order of 15 times. Although this assumes meaningful delivery against production and cost guidance and a sustained high rand gold price, we believe this rating level allows for enough â€˜protectionâ€™ against more possible disappointment (given past maxima to about 25 times)”.
South Africa-specific issues such as power shortages and political violence are seen as having “certainly added to the decline in valuations”, but RBCCM believes that the second half of 2008 has “the potential to deliver a marked increase in earnings from these gold mining companies”.
Longer-term, RBCCM remains negative over the South African gold industry. The analysts see the sector as “still plagued by rapidly rising costs â€” having to constantly go deeper to extract viable ore, declining grades (compounding the cost pressure) and declining productivity. Still, recent further deterioration in the dollar-rand exchange rate coupled to a very high dollar gold price, we believe, will be lifting revenue high enough to allow a short-term opportunity for strong share price appreciation”.
Overall the RBCCM analysts argue that the current selloff of South African gold stocks has been overdone.
The analysts further discuss South African political risk concerns, and the weak rand, noting that “the constantly deteriorating position in Zimbabwe and the apparent unwillingness of the South African government to acknowledge the problem for what it is”, and, as such, believe that a higher risk premium is indeed in order, especially relative to North American gold stocks. However, the analysts add, “these issues also reflect in a very weak currency â€” significantly boosting short-term profitability”.
As to cost pressures, power supply issues, and restructuring, RBCCM argues that the South African gold industry has been suffering extreme margin pressure for some time, “and has largely now dealt with the issue by reducing the labour force and closing down marginal production. If the current power supply and the gold price holds, we expect significant improvements in profitability by year-end”.
On the subject of growth, the analysts note that all major South African producers are currently promising growth that will mostly be coming from outside South Africa, while a number of juniors will be delivering growth from existing assets in South Africa.
With the odd exception, this growth is funded internally.
Arguing that the last of the bad news is “out soon”, RBCCM states that while the first quarter of 2008 was “a disaster as a result of the power problems, the second quarter is expected to be markedly better, but still bad given the very high number of public holidays in the quarter, but the third quarter should see significant earnings improvement from current dismal basis. We believe the market will look through to the potential offered from September”.
On Wednesday Gold Fields issued a special statement announcing that its operational results for the second calendar quarter of 2008 would “be better than the guidance provided” on May 9 2008.
Group attributable production for the quarter is expected to be up by about 4,5% compared to that reported for the previous quarter.
South African production for the quarter is expected to be up by about 6,6% against the production achieved for the previous quarter, compared to the previous guidance of an improvement of between 2% and 4%.
The upgrade in expectation has been attributed mainly to improved quality mining at Beatrix. â€” Mineweb.