* South Africa gold shares have soared this year
* Rand gold price is near record highs, fuelling buyers
* Falling rand could fan inflation, stoking labour unrest
By Ed Stoddard
JOHANNESBURG, March 7 A sinking rand has
sparked a buying spree and rerating of South African gold mining
shares which have doubled in value in 2016, but the volatile
currency is a double-edged sword that could cut the gains back
down to size.
The crumbling currency is the main driver behind the rally.
It has shed 15 percent against the dollar since October and its
decline has coincided with a spike in spot gold, pushing
the rand/bullion price to record highs of almost
20,000 rand an ounce.
The result: South African gold producers which were
struggling are now suddenly flush with cash.
Harmony Gold, which gets 90 percent of its
production from South Africa, recorded a profit of 74 million
rand ($4.8 million) in the December quarter last year after
losing 523 million rand in the previous three months. Its share
price has soared 230 percent in the year to date.
"There has been a rerating of gold stocks but the South
African gold stocks certainly stand out. We can put this down to
the impact of the weaker rand," said Hanre Rossouw, portfolio
manager for the Investec Global Gold Fund.
"And we have seen in the quarterly numbers coming out very
strong cash-flow generation from these companies," he said.
But what the rand gives, it can take away. The sudden change
in fortune highlights just how marginal South African gold
operations are and how exposed they are to fluctuations in the
rand and gold price.
"These mines are so marginal and geared. If the price goes
in your favour, it is a multiple increase. Harmony was losing
money and now it is just a cash machine," said Peter Major, fund
manager at Cadiz Cadiz Corporate Solutions.
WEAK RAND IS GOOD FOR MARGINS, BAD FOR WORKERS
Rand weakness, coming against the backdrop of a scorching
drought, is also fanning food inflation higher, with several
analysts forecasting it will reach double digits.
This will squeeze the pockets of a restive work force that
signed wage increases last year of up to 14 percent, though for
most workers it was less than that.
Gold companies were bleeding money and pleading poverty at
the time and the sudden swelling of their margins could provide
fertile ground for labour unrest.
"That's a recipe for trouble especially when the workers on
the ground become aware of the windfall. Things could go south,
especially when food price inflation builds to double digit
territory which we see happening by the second half of the
year," said Bart Stemmet, an economist at NKC African Economics.
The typical South African mineworker has eight to ten
dependants, so much of their wage goes to putting food on the
table and they will feel the pinch.
"This will affect our members very badly. We know the
agreements are signed but we appeal to the gold miners to share
their executive bonuses with their employees while they are
making such profits," said Livhuwani Mammburu, spokesman for the
National Union of Mineworkers.
"And the gold companies cannot lay workers off when they are
making profits. If they do, we will resist that," he said.
Analysts say in the longer run, South African gold companies
will need to trim workforces to remain viable. The industry has
produced a third of the bullion ever mined but is in a long-term
spiral as shafts plunge deeper and grades deteriorate.
South Africa accounted for 79 percent of global gold
production in 1970. In 2014 it produced only around five percent
and had slipped to 7th place in the world gold rankings.
For now, the industry has a reprieve. South African gold
producers are trading below their intrinsic value, based on
estimates of their most likely earnings growth trajectory over
the next five years calculated by Thomson Reuters analytics
AngloGold Ashanti -- which returns to
Johannesburg's Top-40 index this quarter and coveted blue-chip
status after being relegated last year -- should be trading at
262 rand, implying a potential upside of about 20 percent.
Rival Gold Fields should rise about 39 percent to
reflect its most likely annualised growth prospects over the
Investors have also been attracted to the sector's
comparatively generous dividends, with South Africa-focused
Sibanye Gold forecast to pay out a 3.3 percent dividend yield
, according to StarMine Relative valuation.
That compares with a 0.6 percent yield for Canada's GoldCorp
Inc, the world's largest gold producer by market value, and just
0.4 percent for Newmont Mining Corp of the United States.
($1 = 15.3365 rand)
(Additional reporting by Tiisetso Motsoeneng; editing by Peter