The Land of Strikes Is Making Life Tough for Gold Miners

Shares of South African miners will likely carry a discount for exposure to the country because of multiple, long strikes.

Vladimir Zernov
Vladimir Zernov
Jul 7, 2014 at 11:16AM
Energy, Materials, and Utilities

South Africa is rich in natural resources and could have been a paradise for mining companies if it were not for one thing -- strikes. Strikes are business as usual in the country. This year, South African platinum miners were on strike for as long as five months! This enormous strike ended in the second half of June.

If this wasn't enough for the struggling South African economy, the country's National Union of Metalworkers, which consists of about 220,000 members, went on a strike demanding more pay at the beginning of July. As a result, Moody's stated that the country's credit rating was at risk as the economy was weakened by strikes.

South African gold miners like AngloGold Ashanti (NYSE:AU), Gold Fields (NYSE:GFI), and Harmony Gold Mining (NYSE:HMY) were good performers at the beginning of the year, mostly because their shares were pressured too hard in 2013. Do they have upside potential given the situation in the country?

Harmony Gold Mining has great exposure to South Africa
While AngloGold Ashanti and Gold Fields have mines in South Africa, they also have assets in different parts of the world. Harmony Gold Mining is different, as the company gets most of its production from its South African mines.

Costs are an issue for Harmony Gold Mining, and the company has been so far unable to show the much-needed improvement on this front. Harmony scored all-in sustaining costs of $1,224 per ounce of gold in the first quarter, up slightly from $1,222 per ounce in the last quarter of 2013. Just a month ago, the gold price was extremely close to this level. In comparison, Gold Fields had AISC of $1,066 per ounce in the first quarter, while AngloGold Ashanti had AISC of $993 per ounce.

Currently, AngloGold Ashanti is the best performing company out of these three. AngloGold Ashanti grew production by 18% in just a year while pushing costs down. Management has proceeded with the optimization of the portfolio, with the sale of the Navachab mine in Namibia being the latest move on this front. AngloGold Ashanti shares had solid upside this year, which could continue should the gold price tick up a bit.

Sibanye Gold is the high-flyer
There is one company that seems to ignore the difficulties of doing business in South Africa -- Sibanye Gold (NYSE:SBGL). The company's shares have more than doubled this year, fueled by growing production, decent costs, and a high dividend yield. Now, Sibanye Gold could pick up South African platinum mines from Anglo American; yes, the same platinum mines that were hurt by the massive strike in the first half of 2014.

With platinum mines or without them, Sibanye Gold will have to live up to high expectations. Meanwhile, the company has already warned its shareholders that earnings for the first half of this year will likely be 20% lower than during the comparative period in 2013. At current levels, Sibanye Gold looks like a risky investment.

Bottom line
Doing mining business in South Africa involves big uncertainty over possible strikes. Strikes and lengthy wage negotiations lift up costs, which is especially burdensome in the current price environment. Thus, more exposure to the country will likely mean more of a discount for these companies' shares. In this light, AngloGold Ashanti, which has a diversified global portfolio and decent cost level, looks like the best bet of the group.