Gold Miners in South Africa
Gold miners in South African, as seen on-the-ground by a gold-miners expert...
WE ARE REPEATEDLY ASKED whether shares in South African gold miners remain a good investment, writes Julian Phillips of the GoldForecaster.com.
Our stock answer will now be yes, in the longer term. But how can we say this of S.A. gold miners when it is clearly apparent that the political and economic climate of South Africa is decaying and looks likely to continue to decay as far as one can see ahead?
Take a look at Randgold Resources. Many think this a South African gold miner, but it is not. It is active in Mali and West Africa, two thoroughly African economies with all the negatives that Africa brings with it.
And yet the gold miner is successful and has the competence to remain so, because of its management and their ability to overcome "African problems".
What are these problems exactly? Primarily it is the continent's inability to provide reliable infrastructure in the form of reliable electricity, water and sometimes roads. Apart from that, Africa, like all other poorer regions, has governments who believe that although they could not possibly bring resources out of the ground themselves, they have a right to a good portion of the profits – if not to the entire mine – once in production.
This political theft points the way to difficulties down the road for African gold miners. So how does Randgold Resources do so well?
First, Randgold accepts that these problems are part of life on the African continent, and they must be overcome by the mining company itself. It does not have an attitude of reliance on government run and built infrastructure. It is in a position to provide these things for itself, treating any infrastructure already available as a bonus. As a result it can only blame itself for any shortcomings, and look to fix them.
And in South Africa – what's the problem there?
South Africa in the past had a well developed infrastructure that was professionally planned, built and run. This has since ground to a halt, and here we have now witnessed the first problems of African decay – namely insufficient electricity to run present, let alone future, requirements of the mining industry as well as everybody else.
The mining companies had learned to depend on the reliability of these supplies so much, they were caught by surprise when the decay reached them in January this year. Now they are rushing to ensure initially partial reliance on themselves to shore up the early shortfalls of electricity supply. Eventually no doubt they will ensure total self-reliance, so that if South Africa were to drop to the level of their sub-Saharan neighbors, the miners will have adjusted their resources and supplies to a self-sufficient or alternative source base.
Let's be very clear on one point: South Africa has amongst the world's most competent, self-reliant, tough and innovative of miners. A classic example of this has been shown by Goldfields, who just announced they will spend a total of R200 million ($25.52 million) to install emergency power supplies, ready to be able to withstand a total power blackout at its South African mines.
Gold Fields says it plans to install this equipment by year-end, ready to generate 50 megawatts of electricity in case the country faces a national power outage. The equipment has been purchased and is being tested in the UK. However, it will take some time before the full adjustments are made to achieve the level of independence such as Randgold now enjoys. But it will come.
So why do we have longer term faith in South African mining companies as investments? Take a gold miner like Goldfields. It has just seen the departure of its CEO Ian Cockerill to blacker, coal pastures encompassing perhaps a better near-term future for that company –Amcoal – than more difficult and expensive deep-level gold mines might offer. But GoldFields' mine at Deep South has the most gold resources of any gold mine we know, with perhaps more than a 55-year life.
Half Deep South's electricity, however, is used to keep the mine workable and the other half to produce Gold, so it suffered this year at the hands of Eskom, the local electricity supply monopoly in South Africa.
Not only will it take some time for GoldFields, through its other mine, Kloof, to bring these resources in to full production, but it will now have to develop a far greater self-sufficiency in all fields where they are dependent, at the moment, on government supplies. We believe that at great cost and in due course, it will be able to produce Gold at a good profit from then onwards.
It will also harness the abilities of its management in applying themselves to these new conditions and techniques to ensure far more production per Dollar invested.
Meanwhile the share price has dropped back considerably to reflect the "Africanization" process, providing a good entry point for higher-risk investors looking to earn better dividends than from gold mining peers overseas. As these adjustments are made, so we feel the company will rise in price to reflect this, lowering the dividend yield. Consequently, Total Returns, over the medium to long-term could also prove extremely attractive to long-term funds such as Pension Funds.
The company continues to be a growth company in South Africa and aims to achieve 50% of its cash flow outside South Africa still. If it should eventually succeed in relocating to somewhere like Denver, as per earlier plans, it will also be able to see a much greater appreciation of its efforts and future in its share price, giving one the basis for a long-term growth company producing a commodity whose price is sure to rise considerably in time. Its reputation and current competence level will ensure an easy access to future capital too.
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