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Rand recovery punishes SA's ageing, costly gold mines

Aug 17 2017 17:32
Kevin Crowley, Bloomberg News


Company Data

Sibanye Gold Limited [JSE:SGL]

Last traded 28
Change 0
% Change 0
Cumulative volume 24181356
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

HARMONY GOLD MINING COMPANY LIMITED [JSE:HAR]

Last traded 49
Change 0
% Change 0
Cumulative volume 1341927
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

ANGLOGOLD ASHANTI LIMITED [JSE:ANG]

Last traded 298
Change 0
% Change 0
Cumulative volume 1263063
Market cap 0

Last Updated: 01/01/0001 at 12:00. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg - A year ago, South Africa’s biggest gold producer was churning cash, sizing up acquisitions and plotting expansion projects. Today, Sibanye Gold [JSE:SGL] is making losses and shutting mines.

The main difference between then and now? A big rebound in the rand.

High costs and labour-intensive operations mean that Sibanye and other South African producers are highly leveraged to one of the world’s most volatile major currencies. 

Sibanye expects to report a first-half loss of at least $360m, compared with a $22m profit a year earlier, the company said on Thursday. The loss was partly due to the rand, which averaged 14% stronger during the period, and a big impairment charge on unprofitable mines it plans to close.

Since the first discovery near Johannesburg in 1886, gold hasn’t been hard to find in South Africa, which was the world’s biggest producer of the metal for a century until 2007. But with many of its mines dating back to the 1950s and 1960s, much of the low-cost metal has been found. That means production is now located much deeper in the Earth and costs more to extract.

 Profits

A lot of the mining companies’ costs are priced in rand, which means that a weaker local currency opens up more profitable gold to be mined. But the reverse is also true - a stronger rand means higher costs, in some cases rendering entire mines unprofitable.

rand

Last year, Sibanye was considering deepening some of its existing operations, restarting production at its mothballed Burnstone project and had a plan to re-mine old waste dumps for gold. 

Now it’s working on plans to close its Cooke and Beatrix West operations, potentially affecting 7 400 jobs, and said on Thursday it will write down the value of those assets by R2.8bn. The stock has dropped by 58% in the past 12 months.

Sibanye isn’t the only company feeling the pain from a stronger currency in South Africa, which still has the world’s third-biggest gold reserves, according to the US Geological Survey.

AngloGold Ashanti [JSE:ANG], which gets about a quarter of its gold from South Africa, said August 1 it will report a loss for the first half after writing down the value of local mines by $86m. Harmony Gold [JSE:HAR] Also took a $129m impairment after deciding to close some mines earlier instead of expending capital developing them further.

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