These Gold Miners May Have More Upside

African gold miners are likely to benefit from cost-cutting and production growth.

Feb 11, 2014 at 10:11AM

Africa is not the easiest place in the world for the mining business. Challenging political situations in many countries, problems with infrastructure, and powerful unions contribute to the difficulties posed by depressed gold prices. However, shares of gold miners like Randgold Resources (NASDAQ:GOLD), AngloGold Ashanti (NYSE:AU), Harmony Gold (NYSE:HMY), and Gold Fields (NYSE:GFI) started the year on a positive note. Will this trend continue?

Production costs are declining
Costs are the thing that has been keeping African miners under big pressure last year. The situation seems to have changed as the companies implemented diverse cost-cutting measures. For example, Harmony's third quarter all-in sustaining costs were $1,264 per ounce, while the fourth-quarter all-in sustaining costs declined to $1,222 per ounce.

There is still much work to do for Harmony, as the gold price continues to be dangerously close to its cost of producing gold. In my view, the company will be able to report lower costs in the next quarter. Its Kusasalethu mine had technical problems which resulted in significant downtime, pushing the costs of the mine to as much as $1,640 per ounce. The costs are likely to decrease in the next quarter as the company works through these problems.

AngloGold, which is set to report its fourth-quarter results on February 19, lowered its all-in sustaining costs from $1,302 per ounce in the second quarter to $1,155 per ounce in the third quarter. Gold Fields adopted the all-in sustaining costs metric in the third quarter of 2013, reporting costs of $1,089 per ounce.

Randgold has not yet started to report all-in sustaining costs, but we can get a feel of its costs by looking at reported cash costs. The recent fourth quarter report showed that Randgold's total cash costs were $628 per ounce, down 5% from the previous quarter. In comparison, Gold Fields' total cash costs were $780 per ounce in the third quarter.

Production growth continues
African gold miners were heavily punished in 2013. This statement is especially true for Harmony and Gold Fields. However, as the production costs finally slipped below the actual gold price, the outlook for the miners improved. What's more, gold production has been stable at both companies, which means that they were able to lower their costs without sacrificing ounces.

Randgold and AngloGold have been outperforming their peers due to manageable costs and a solid rise in gold production. Randgold increased its gold production by 15% in 2013, and is planning a production increase between 24% and 30% in 2014. Randgold and AngloGold hold an equal share in the Kibali mine in Congo, which has more than 10 million ounces of reserves. Randgold guides that the mine will deliver 550,000 ounces for this year at cash costs between $500 and $600 per ounce, enhancing both companies' cost profiles.

Bottom line
In my view, Randgold is one of the best performing gold miners in the industry. This debt-free company maintained low costs while growing production. AngloGold has also been performing well recently. the potential upside for Gold Fields and Harmony lies in the fact that their share prices have been beaten down and the companies therefore sell at a significant discount to their book values. 

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