Boom! Gold miners are hot (for now)

The only people buying the drinks this year are likely to be investors in gold shares and weapons. With bullion scaling $3,322 an ounce on Wednesday, it’s been an absolute boom for investors in the physical asset, gold-backed exchange-traded funds and the companies that mine the metal. AngloGold shares are up 98% year to date, Gold Fields has gained 79%, Sibanye is 43% ahead, Pan African Resources has rallied 49%, and Harmony is up a staggering 112%.

Still, is it simply a fabulous-to-have moment in time where mining margins are fattened, but no new investment or shafts are sunk as a result? Currency spoke to veteran gold miner, former Harmony CEO and head of the Junior Mining Indaba, Bernard Swanepoel. 

Investors either score big out of gold or get horribly burnt when they buy in at the tail end of a rally. Miners have also paid the price for getting overexcited about the price of the metal at some point in time. But does this rally mean anything different for local players? 

I’m not hyper-excited about South Africa as a junior mining destination for gold – regardless of the gold price – because we just don’t have the types of orebodies that stand to benefit. Though our mining started on the greenstone belts of Pilgrim’s Rest and Barberton, those are not the future of where mining is. And then the Witwatersrand basin happened, and that was fantastic, and in the 1980s, we dominated the world of gold mining.

Then you had the era where international gold companies had multiple assets, and South Africa copied that, and you had AngloGold and Gold Fields and Harmony as the sort of bottom feeders. I think Bobby Godsell [AngloGold’s CEO in the early 2000s] will look back and say: “25 years ago this is exactly how I saw the future unfold,” and those of us who played off his strategy could say, “Harmony was going to be the last remaining gold mining company in the country if you bottom feed.” Their acquisition of the remaining AngloGold assets is exactly a conclusion of that.

Now, back to the gold price: Harmony must be printing money. At this price, they are making R2m a kilogram. But I remember sitting at Harmony having conversations around how to survive a R23,000 a kilogram price. That just shows how old I am. It’s a fantastic gold price, and it has to be because mining is not cheap, so this fills up the cash balances, and companies will pay dividends, but it also cements the next wave of strategic initiatives.  

How do you mean? 

Well, Gold Fields continues to own South Deep and has become a very successful company despite my best efforts to take them over [Swanepoel led an abortive takeover bid for the larger company back in 2004] – but they are not a South African company. They have a South African asset. AngloGold has got zero left in South Africa, and you don’t have to be clairvoyant to see that for Harmony, its next 20 years has to be the project in Australia, or the Wafi-Golpu asset in Papua New Guinea, which has always been too big for them. Now, when is it not too big for them? Well, at R2m a kilogram it’s probably not too big for Harmony.

When you say too big, do you mean just too much capital to develop? 

Yes. It’s a multibillion-dollar project in a billion-dollar company. Like South Deep was too big for Western Areas as a standalone; the challenges and the capital required for the orebody was always bigger than the company. In South Africa right now, there are huge amounts of money being made by tailings retreatment, and Sibanye’s DRD is probably going to outlive Sibanye’s gold division; it’s a godsend for them at a time when their other assets are taking strain. But it’s clearly the final phase of extracting value from its gold mines, which will then be depleted.

In terms of gold volumes, tailings are a fraction, but it’s at a fixed cost, there are no surprises, and you generate cash. And as for Pan African, the underground mines are no longer really viable, regardless of the gold price, but the tailings facilities are extremely valuable.

So, it’s not a time of new exploration and discovering new mines; a gold price like this certainly extends mines and gives the mining companies a chance to do critical catch-up in terms of capital, but there’s no growth story in terms of output.  

Is it a totally different case for overseas or African gold assets?  

Any place where your opencast mines need to go underground, this is a fantastic cash fill-up [moment] to get over the capital hump. In a cyclical industry enjoying a purple patch like this, you’ll see the full fruits over the next 20 years when the hype and stock market excitement have played out. South African companies will benefit as players in the gold space, but not South Africa itself. But these are obviously just my views.  

I know that asking you where you think the gold price is headed is probably a fool’s errand, but what is the sensible thing for gold miners to do now? Because they obviously can’t base their forecast on the best price of the moment … 

Most of my senior corporate career was during a time of falling gold prices, so we, as an industry, invented a fantastic tool which now looks stupid – but in order to be declared a reserve tonne, that tonne must be economically exploitable at a certain gold price. So, you can imagine when the gold price fell through $300 an ounce on the way to $250, you couldn’t forecast $200 because then you didn’t have a company. So we, as an industry, would use the three-year trailing gold price – and the average of those three years – which at that time was always higher, and that helped us to have reserves. It was collective bullshit, but it was the industry standard.

Now, obviously the past 10 years the reverse has been in play, but when you want to declare your reserves, you can’t use today’s spot price – you use this trailing average. For the actual forecasting of spot prices – that is the Wild West. But you feed into what we call the 3Gs – the belief in God, Guns and Gold. Inherently, gold investors believe the end of the world is near, and they live for times like these – total chaos.

When it comes to forecasting, everybody forecasts what they need to. But the orebody declaration, which is what I’m trying to convey, has an embedded conservatism. I think any company which is responsible and says the gold price is going to drop tomorrow will probably be crucified by its shareholders, but anybody who ignores that this is a cyclical business is either stupid or young or ignorant.

I expect gold companies to say, “We’re going through a purple patch, but let’s be responsible because this can’t last.” With gold, there is no underpin where you say, “This is what the gold price should be.” But if you build a mine now on the assumption that the price will be where it is, you will burn your fingers. That’s a very long way of saying, nobody knows what the price will be.  

Wouldn’t it be more sensible to keep a big chunk of cash back rather than paying it out to shareholders? Especially if companies know this is a flash in the pan?  

I certainly joined the industry at a time when some of the smartest financial directors used to say: “A gold mining company that pays dividends doesn’t understand gold mining.” But I do think one of the trends of the past 20 years is that capital allocation has become deeply embedded, and every single significant company not only has a dividend policy but a capital allocation policy that finds a balance. Even if we print a lot of money, most typically, 40% goes to shareholder returns, and you have 60% for stay-in-business capital, and growth capital for M&A and building mines. No shareholder loves a company that sits on a lot of cash – they start talking about lazy balance sheets and that’s when companies start to take on debt because they don’t need it and they hedge gold prices because they can, but I think for the next two to three years I really expect to hear about capital discipline.