THE VISIBLE HAND
SA gold miners: Been down so long it looks like up to us
Mining minister after mining minister has somehow failed to notice SA’s biggest industrial disaster unfold
SA gold companies have been in the wars for so long now, it’s hard to get a perspective on how bad things are. When things go from good to bad, or even bad to good, you know all about it. But how do you distinguish between very bad, and very, very bad? How much worse is very, very bad compared to very bad? It’s hard to tell.
It’s rather reminiscent of the title of the famous counterculture novel by Richard Fariña, Been Down So Long It Looks Like Up To Me. I think the novel title was turned into a blues song, and if it wasn’t, it should be.
The stock prices of the companies give you some indication. On a one year scale, Gold Fields is 38% down, Sibanye is 60% down, AngloGold Ashanti is 13% down and Harmony is (hallelujah!) only 9% down.
For all of the gold companies, the issue of the moment has been how to exit SA – it’s a depressing thing but it’s the truth. The combination of huge cost increases, constant labour turmoil, legislative uncertainty, and a viciously hostile political environment have made it simply an operating nightmare.All the gold companies have been defined over the past few years by how they have managed this transition. Much of what is happening now is a consequence of decisions that were made way back, as long as a decade ago.
Arguably, the company that managed this transition best has been AngloGold. After the recent sale of Moab, the company’s geographical spread looks very wide. In its recent half-year results, the company for the first time formally recorded the decline in its SA production, which has more or less halved to more or less 10% of its global production. Its African operations contribute about 40%; Australia and the Americas contribute the rest more or less equally.
The dismount from SA has been gradual and progressive, so much so that it’s been barely noticeable – except by old-timers who remember this was part of a company that more or less underpinned the finances of the entire country at one stage. AngloGold’s problems are now more parochial. Its all-in costs are hovering just below the current gold price, and its debt is still pretty high. But these are not seismic in nature.On the other extreme is Harmony, which is managing its exit very differently. The company was for years the entity that mopped up AngloGold’s unwanted assets and turned them to book through aggressive cost cutting. That worked for a while, and it is still mining that lucrative seam. But the other leg of its new strategy is to go for the jackpot, with two thumping new mines in Papua New-Guinea. One is operational – its joint venture with Newcrest called Hidden Valley. The notable part of its recent results was that the new mine seems like it might be, well, a gold mine. Production is still low, but enthusiasm is still high (although given the record of promises in the industry, one probably shouldn’t put too much store on that). The problem for Harmony is that its debt is really racking up; it’s now about four times the value of the company.
Sibanye’s exit-SA strategy has been really novel: go into a different mining sector and buy a very expensive foreign mine. In a sense, the strategy has been forced onto the company by its circumstances. As a cutaway from Gold Fields, it didn’t have the luxury of planning its departure a decade ago, so a more drastic gamble was necessary. It’s hard to fault the strategy, but the cost has been a streaming deal which strips away a lot of the potential upside. But it was necessary to stabilise the balance sheet.Arguably the most interesting exit strategy has been Gold Fields, which made the fateful decision to exit SA in one fell swoop by splitting off its SA assets. But then the company couldn’t resist holding on to one SA asset, the much troubled South Deep. Actually, describing the mine as “much troubled” is a fantastic understatement. It’s been owned now by at least five different mining groups, which collectively have pumped in R32bn into it – and it’s still losing money.
Gold Fields’ recent results poured more petrol on this fire by announcing yet another restructuring effort. The problem is that now there is no real consensus in the industry on what the company should do. Should it revert to traditional mining methods or give the mechanised system work one more go? The ore body, a huge 71 million ounces, has looked like it was amenable to highly mechanised mining, but somehow that hasn’t worked. Even closing it might be difficult, not least because its reserves constitute a large chunk of Gold Fields’ total reserves.But perhaps this doesn’t matter so much since investors have long ago stopped putting a value on the ore body of SA’s mines because there is so much doubt about whether they are actually mineable.If the gold industry in SA was the car industry, there would be huge numbers of people in government frantically pulling their hair out and making all kinds of deals to keep it going. But mining minister after mining minister has somehow failed to notice SA’s biggest industrial and mining disaster unfold. It’s simply a tragedy.