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Gold mines set to announce sterling results

Profitability will have increased on the back of the high gold price, weak rand and good production.
The weaker rand during 2020 benefitted local investors who receive dividends in rands. Image: Waldo Swiegers, Bloomberg

Gold mining companies (and their shareholders) haven’t had it so good in years. The gold price scaled new highs during the last few months and the rand was quite weak, while all the bigger gold mines said they met or exceeded their production targets for the reporting period ended December 2020.

The trading statement from DRDGold this week gave shareholders the excellent news that earnings per share is set to more than double in the six months to December compared to the same period in 2019, while AngloGold Ashanti told shareholders towards the end of December that it expects to post its strongest annual free cash flow performance in almost a decade.

AngloGold Ashanti also said that shareholders can expect a “sharply higher dividend payment” compared to the previous year.

Recent operating updates from other gold mines – not all of which included earnings figures – show an increase in gold production which should translate into significantly higher earnings given the high gold price. Companies are not allowed to supply more information at the moment while preparing their final figures for 2020.

However, shareholders can expect good figures.

Not only did the gold price reach a record high in August last year, it was also consistently higher in 2020 than in 2019.

The gold price fluctuated around $1 100 per ounce in the first six months of 2019 and increased to between $1 600 and $1 800 per ounce in the first half of 2020. The second half of 2020 was even better: Gold remained between $1 800 and $2 000 per ounce compared to around $1 500 in 2019.

Consistent increase in the gold price

Source: Goldprice.org

Read: Investors go for gold

The rand was much weaker during 2020 too, benefitting local investors who receive dividends in rands and thus focus on the rand price of gold shares on the JSE.

The rand started 2020 at around R14 per dollar and weakened to above R19 by April. It spent most of the year above R16 per dollar, compared to the 2019 levels of R12 to R14.68 per dollar.

The higher gold price and weaker rand will have boosted profitability significantly, as the recent trading updates from gold mines confirm.

DRDGold

DRDGold noted in its trading update that shareholders can expect earnings and headline earnings to increase to between 106.2 cents and 115.8 cents per share for the six months to December compared to 48.5 cents per share for the comparable six months in 2019.

“The expected increases in EPS [earnings per share] and HEPS [headline earnings per share] are due mainly to movements in revenue, cash operating costs and the weighted number of ordinary shares. Revenue increased by R866 million (41%) to R2 977 million (2020: R2 111 million),” according to a press release accompanying the trading update.

DRDGold gave a quick update of the performance of its different mines.

The central feature is that the gold price increased by 42% in rand terms compared to 2019.

Management also reported that production volumes increased, in cases to offset declining gold content in some of the old mine dumps it is reworking. Final gold production figures will be available when DRDGold publishes it results on February 16.

Harmony Gold

Harmony Gold’s Sens update last week did not include specific earnings figures, but nevertheless creates the impression that profit will show a substantial increase.

Management informed shareholders that Harmony’s half-year production to end December was in line with targets and that the mine is on schedule to meet its annual gold production target of between 1.26 million and 1.3 million ounces for the year to June 2021. It had already produced more than half the target (745 347 oz) during the six months to end December.

“Total production for the quarter ended December increased by 38% to 13 425kg (431 622 oz) compared to 9 758kg (313 725 oz) in the September 2020 quarter,” according to the update, which noted that the average underground grade increased by 9% from 5.3 grams per ton to 5.8 grams per ton.

It said the higher gold production was due to the integration of the Mponeng and Mine Waste Solutions assets, which Harmony bought only last year, as well as the effective measures adopted in preventing and mitigating the impact of Covid-19 and disciplined mining.

“The integration of Mponeng and Mine Waste Solutions went according to plan and contributed both to the quality of the ounces produced and overall production,” said chief executive officer Peter Steenkamp.

Harmony is due to announce its results on February 23. Shareholders will then see how the higher output and higher gold price translate into profit when the company discloses the missing numbers – production cost.

AngloGold Ashanti

AngloGold Ashanti said in its update mid-December that it is on track to meet the cost and production guidance shared with shareholders earlier.

AngloGold Ashanti interim CEO Christine Ramon said: “We’re expecting our strongest free cash flow performance in nearly a decade. Given the momentum we’ve built, I’m excited about the year ahead as we continue to execute on our organic growth plans, including adding more low cost ounces through our focused ore reserve investment programme, ongoing development and two potential new greenfield projects in Colombia.”

This indicates that numbers should be good, given the company’s disclosure that all-in sustaining costs will be kept between $1 060 and $1 120 per ounce of gold produced in the current financial year.

AngloGold Ashanti also said that it has strengthened its balance sheet by reducing borrowings, increasing liquidity and extending the average maturity of its debt by issuing a $700 million, 10 -year bond at a coupon of 3.75%, the lowest it has ever achieved.

“We are on track to build on the robust free cash flow of $516 [million] in the first nine months of the year and [are] expected to post the strongest annual free cash flow performance in almost a decade,” says Ramon.

AngloGold Ashanti previously announced that it will double its payout ratio to 20% of free cash flow, creating expectations that dividends will increase significantly on the back of the high gold price.

Sibanye-Stillwater

Sibanye-Stillwater said in an update during the last week of January that the group’s operating performance for the year to end December “was extremely pleasing”.

“All the operating segments increased production relative to the first half of 2020,” according to the update of January 20.

Neal Froneman, CEO of Sibanye-Stillwater, then commented that the group is well positioned to deliver a much more consistent and significantly improved operating result in the current financial year, barring unexpected disruptions.

As far as it gold operations go, the company said that production from the SA gold operations (excluding DRDGold) of 25 192kg was 3% above revised guidance of 23 500kg to 24 500kg for the year.

Production in the second half of the year was 48% higher than the disastrous first half that was affected by the Covid-19 closures.

Sibanye-Stillwater will release operating and financial results for the six-months and year ended December 31, 2020 on February 18.

Gold Fields

Gold Fields is due to publish a production update only next week, with the last numbers available those for the three months to end September 2020. The results for the September quarter showed an increase in gold production and a slight decrease in cost per ounce of gold, setting the stage for good results if this performance has been sustained in the December quarter.

Meanwhile, share prices have not recovered fully from their 12-month lows.

Most of the shares are trading halfway between their annual lows and annual highs, with Sibanye-Stillwater and Gold Fields closest to the best prices of the last 12 months.

Snapshot of gold miners’ share prices

Price 12-month low 12-month high
AngloGold Ashanti R332.40 R209.79 R637.35
DRDGold R15.02 R6.00 R29.50
Gold Fields R132.58 R63.97 R146.88
Harmony R61.21 R31.06 R126.76
Sibanye-Stillwater R59.06 R65.79 R15.37

Source: Moneyweb

Read: Is bitcoin the new gold?

Meanwhile, gold shares took a beating on the JSE on Thursday afternoon, dropping by around 5% on the gold price losing $2 to $1 788 per ounce and the rand steady at R15 to the dollar.

Hopefully the shares will find support once the gold mines officially announce their (good) results for 2020. Then the focus will move to 2021 and the outlook for the gold price and the rand.

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The golden circle of Sub Saharan Africa has certainly had a magnificent run through the pandemic crisis.

Even if the newcomer bitcoin and etherium have stolen some of the glory (for the time being)on the “store of value” front, the numbers still shine. After all, can we be certain the crypto fairy tale will come true?

The next hurdle is to see whether these mining companies can share some of the good news with investors. They have been very conservative about sharing the Love to date- i.e pay decent dividends and bring that other item in that crypto assets don’t provide- a passive, tax efficient flow of funds.

Us hungry Zion-Lions are looking forward to a cosy snooze in the lunchtime sun.

Gold miners are printing money at these prices. Cashflow has increased dramatically worldwide and most of the gold miners have paid off a substantial amount of debt.Things are looking good for investors in this much hated sector. Gold will shine once again. Don’t miss out!

“A mine is a hole in the ground with a liar at the top talking, and a fool at the bottom working.” Never forget this. If you think you are at the front of the queue to share the spoils, you will probably be disappointed if history is a guide.

Please could you include Pan African Resources in your next analysis. The company is a constituent of the JSE Gold Miners index. Thank you

End of comments.

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