Johannesburg - 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% 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 R20 000 an ounce.
The result: South African gold producers which were struggling are now suddenly flush with cash.
Harmony Gold [JSE:HAR], which gets 90% of its production from South Africa, recorded a profit of R74m in the December quarter last year after losing R523m in the previous three months. Its share price has soared 230% 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%, 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 dependents, 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, spokesperson 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% 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 service StarMine.
AngloGold Ashanti [JSE:ANG] - which returns to Johannesburg's Top-40 index this quarter and coveted blue-chip status after being relegated last year - should be trading at R262, implying a potential upside of about 20%.
Rival Gold Fields should rise about 39% to reflect its most likely annualised growth prospects over the same period.
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% dividend yield, according to StarMine Relative valuation.
That compares with a 0.6% yield for Canada's GoldCorp Inc, the world's largest gold producer by market value, and just 0.4% for Newmont Mining Corp of the United States.