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May 15, 2024
Costs catching up with gold miners’ near record margins


AT this time of near-record gold prices, it’s worth asking whether JSE-listed miners of the metal have ever had it so good.

Three companies were recently earning a $650-$700/oz margin over their all-in unit costs: Gold Fields, Harmony Gold and AngloGold Ashanti. These are good times indeed for a sector largely seen as in decline in South Africa.

But while it’s undeniably impressive, it turns out that these companies have twice earned more, according to a report last month by RMB Morgan Stanley.

In 2011 and 2020 all three firms registered margins of between $800 and $1,000/oz above their unit costs. However, the bank also discovered that in those years, at a certain point, costs began to keep pace with the gold price.

The implication is that recent margins may now be capped. Perhaps this explains, at least partially, why the one-month performances for AngloGold and Harmony are relatively modest increases of 1% and 1.5% respectively, and a 8% decline for Gold Fields’ shares?

Despite these recent performances, gold shares have nonetheless given off some much-needed light in South African mining.

The sector’s other precious metals, those in the platinum group, are showing no improvement in fortunes after a drastic price reduction last year. Where once platinum was in lockstep with gold, the difference between the metals today couldn’t be starker. Platinum is more than $1,300/oz cheaper than gold at the current spot price.

Harmony is achieving the biggest margin over unit costs, exceeding $700/oz in real terms. This has translated into fabulous cash generation. In a third-quarter production update, it disclosed a net cash position of R1.5bn, a staggering increase quarter on quarter of more than R1.4bn. While this was partly owing to a deferral in capital expenditure, the performance was at an average rand price of just more than R1.2m/kg — lower than the rand gold price of R1.36m/kg. So, more to come.

Golden fortunes

The question, though, is about the extent to which the gold price momentum can be sustained.

Gold’s record high, in real terms, was in 1980, after a three-year run-up during which the price scaled $650/oz (about $2,650/oz in real terms) from about $250/oz. But by 1982 it was back below $500/oz. In 2001, shortly after the sale by England’s central bank of 500t of gold, the metal began a steady rise, which was to continue over the next decade and culminate in the 2011 peak of about $1,800/oz.

But what can be said of the current improvement in gold: is it another relatively brief peak as in the 1980s, or a long-term appreciation such as the one of only a decade ago, when its price doubled? If the latter, gold is in the foothills of a major bull market. As ever, it’s hard to get definitive answers for gold.

Commenting in April, UBS said that sooner or later the metal would succumb to the “macro-relationships” that traditionally tether it. Normally, a strong dollar, such as it is now, depresses gold. But that doesn’t seem to be the case at present, which confounds the Swiss bank. In an economic environment of declining interest rates, gold normally improves. But interest rates are high, though the increasingly dovish statements from the US Federal Reserve imply sustained gold price strength.

John Reade, chief market strategist at the World Gold Council, argues that traditional explanations for gold’s behaviour are less compelling because they are Western in nature, when in fact the biggest influence today on the gold price comes from developing economies, especially in the East — that, and the unusual confluence of geopolitical pressures that is driving investor fear. And here one thinks immediately of conflicts in Ukraine and the Middle East, and the many elections this year, including in the US and the UK.

“I think there are fundamental changes that are taking place in the gold market, or have taken place over the past couple of years,” says Reade. “I wouldn’t describe them as pre-war; I would more describe them as systemic change … coming from emerging markets.”

China and India have been the bedrock of gold consumption for years, accounting for about 50% of all physical gold purchases, but now economies such as these are beginning to dominate price formation, Reade says.

China’s central bank is also the largest buyer of official sector purchasing, which is now double that of 2022. “All indications are that they’re going to continue at very strong levels,” says Reade. Dedollarisation is a factor in this; central banks taking long-term policy decisions are tending towards a multicurrency regime rather than the hegemonic US dollar-driven world economy.

Central banks in emerging economies are not necessarily enemies of the West, but they’re not automatic allies either.

“They don’t want to put themselves in a position where they’re more vulnerable than they need to be if they offend the West, particularly with a potential change of government in the US with, maybe, a more isolationist expression to follow,” says Reade.

A version of this article first appeared in the Financial Mail.

The post Costs catching up with gold miners’ near record margins appeared first on Miningmx.


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