Gold miners have been in trouble for some time now. Rising costs and a falling gold prices are just two factors of many that are holding the industry back. However, not all miners are created equal, and some are suffering more than others.
Stay well away
One group in particular is feeling the pain, and that is South African miners, which are struggling with rising wage costs and a weak South African rand. Indeed, miners based out of South Africa are trapped within a downward spiral as the rand is weakening due to falling commodity prices and unrest in the mining sector over high wages. However, a weaker rand means that imports such as maize, petrol, and chicken are becoming more important, which in turn is pushing up inflation, leading to more demand for wage increases...I could go on but I think you get the point.
Unfortunately, this instability reached such a level earlier this year that South African President Jacob Zuma was forced to step in and make promises to tackle instability in the mining sector in an attempt to restore confidence in the country.
Back in September the National Union of Mineworkers led a strike in the mining sector, and 80,000, or two-thirds of the country's mine workers, walked out in sympathy. The union was calling for a 60% rise in wages for its workers, ten times more than the yearly increase being offered by mining companies. What's more, a rival union, the Association of Mineworkers and Construction Union demanded wage increases of 150%!
With almost all of its workforce within South Africa on strike, AngloGold Ashanti (NYSE:AU) had to give into demands. That said, AngloGold did get off lightly as the company promised workers a 7.5% to 8% pay raise for this year followed by an inflation-linked pay raise during 2014. However, as inflation within South Africa was 6% for the month of September, it is likely that another high single-digit pay raise could follow next year. The company also promised workers an annual 11% rise in their 'living out' allowance, which is the amount paid to workers when they work away from their usual premises.
33% of AngloGold's production came from South Africa during the company's second fiscal quarter. Unfortunately, the average cash cost per ounce of gold produced within the country was approximately $900 during the quarter, which indicates that a wage increase of around 7.5% annually for the next two years will put the company's average cost of production at around $1,040 per ounce by 2014. Moreover, this price excludes company admin costs, so the all-in cost could be much higher.
Harmony Gold Mining (NYSE:HMY) also produces more than 90% of its gold within South Africa and just like AngloGold, the company was embroiled in labor disputes earlier this year. In the end, Harmony did not reveal how much it was going to increase wages to its workers. However, at the end of the company's fiscal second quarter, Harmony reported that production costs had expanded nearly 8% year-on-year, which gives an indication of how things will work out going forward. Rising costs, combined with a 12% year-on-year decline in revenue ruined Harmony's cash flow and cash generated from operations fell 90% year-on-year based on fiscal second quarter 2013 reports.
Sibanye Gold (NYSE:SBGL), another South Africa gold miner, reached a similar agreement to AngloGold after the labor dispute earlier this year. High single-digit wage increases are penciled in for the next two years, but this could be too much for Sibanye. Indeed, the company reported that its first quarter cash cost per ounce of production was $1,073. What's more, the company reported that its notional cash expenditure, a figure that takes into account expenditure such as capital spending and admin costs, was $1,334 per ounce for the quarter. With these figures expected to expand around 7% during the next two years thanks to wage increases, Sibanye could soon be reporting negative margins on production.
The gold sector in general is under a lot of pressure. That said, some companies are coming under more pressure than others. In particular, companies that operate within South Africa are having to contend with a rapidly rising cost of living but a declining gold price.
For this reason, it would be wise to stay away from South African miners for the time being; there are other deals to be found in the sector.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.