Strong rand spoiling the gold rally for SA mines

The metal started the year with a bang, rising more than 4% to the highest since August 2016. But an equally impressive rally in the rand means that South Africa-focused producers are likely to miss out on the party.

Because mining companies pay most of their expenses in local currency, a stronger rand squeezes profit margins and can render some operations unprofitable. Many of South Africa’s gold mines date back to the 1950s and 1960s and much of the easily accessible metal has been exhausted, while labour-intensive mining methods compound the effect of currency moves.

“With the rand below R12/$, margin pressure is definitely building up,” Carsten Menke, an analyst at Bank Julius Baer & Co, said by phone. “Rand strength is the flip side of an improving economy, but it’s causing headwinds to miners because of costs going up - they are not enjoying the tailwinds from rising gold prices.”

Gold for immediate delivery was little changed at $1 353.80 an ounce at 10:58 on Friday.

The rand traded stronger than R12/$ on Wednesday for the first time since May 2015 and on Friday was at R11.84/$ by 11:00 in Johannesburg. The unit rallied as sentiment has been buoyed by the election of Cyril Ramaphosa as head of the ruling African National Congress in December, setting him on a path to take over from President Jacob Zuma.

• READ: Rand breaks below R12/$ for the first time since 2015

The gold price rally “won’t make a difference in the short term” to South African miners, Menke said. The need to maintain high capital expenditure also thins out profit margins, he said.

More than half of South African gold shafts may be operating at a loss and a stronger currency raises the risk of closures, said Rene Hochreiter, an analyst at Noah Capital Markets.