A handful of problems
AngloGold Ashanti Limited (ADR) (NYSE:AU), Gold Fields Limited (ADR) (NYSE:GFI) and Harmony Gold Mining Co. (ADR) (NYSE:HMY) are gold miners that are based in South Africa. These companies have faced rising operating expenses during recent years. Operating expenses rose 32.5% in just two years for AngloGold Ashanti Limited (ADR) (NYSE:AU), while revenue rose only 19%. Gold Fields Limited (ADR) (NYSE:GFI) and Harmony Gold Mining Co. (ADR) (NYSE:HMY) saw expenses rise at a pace of the revenue growth.
The labor situation has never been easy in South Africa. The country has several workers’ unions, which constantly battle for power. Labor unrest is typically violent and spreads over industries, and there is a lot of negotiation happening on the wage front. Management has to spend their time on dealing with workers and unions rather than focusing on production and costs.
The latest big strikes happened back in 2012 and lasted for two months. The deals were set and the wages increased, but South African miners operate in an environment where unions and workers will always want more.
The outlook for gold prices is dubious. According to the latest World Gold Council report, gold demand was down 13% in the first quarter. The major reason for this was the outflow from the gold exchange-traded funds (ETFs). Technology demand was down as well, losing 4% as the dental industry shifts from gold to new materials. The latest price action in gold does not promise a fast recovery from current levels.
Can the rand save the game?
Since the wages are paid in local currency, rand depreciation means lower wages in dollar terms. If the rand manages to stay as low as it is now, it could help offset wage increases. The main problem is that every major accident or wage negotiation starts a strike. Recently, platinum miners went on strike when a union official was killed. The strikers threatened every worker who tried to work during the strike.
The South African economy is very dependent on its resource sector, but the government does not seem to fully control the situation with strikes and production stops. It takes time for the miners to restart their production after strikes, and this negatively affects productivity.
What these gold miners offer to investors?
AngloGold Ashanti Limited (ADR) (NYSE:AU) is down 46% year-to-date. It trades at a 6.4 forward P/E and pays a dividend that yields 1.2%. Besides its South African operations, the company has projects in Colombia and the Democratic Republic of Congo. Both countries are known as unstable, so this presents certain risks too.
Gold Fields Limited (ADR) (NYSE:GFI) trades at an 8 P/E and pays a dividend that yields 2.3%. Its stock is down 43% year-to-date. The company operates mines in South Africa, Ghana, Australia and Peru.
Harmony Gold Mining Co. (ADR) (NYSE:HMY) has all its major operations concentrated in South Africa, so it wins the most from the depreciation of the rand. It does not seem to help the stock, which is down 54% year-to-date. The company trades at a 6.6 P/E and pays a dividend that yields 2.4%.
I would like to mention that, given the current gold-price environment, dividends should not be seen as rock solid. They could be cut anytime if the companies feel the need for extra cash.
Bottom Line
In my opinion, South African miners are too risky. They operate in the country where the government fails to prevent violence during labor unrest. The costs are rising, and there are always risks of production stops. The dividends are small if compared to the risks of stock depreciation. The drop in the rand did not help the stocks so far, and would not help them for the remainder of this year.
The article Will a Drop in the Rand Help These South African Miners? originally appeared on Fool.com and is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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