The Donald has slapped us with tariffs. He has also given us an extra R20bn a year in the value of the gold we sell and added about R600bn to the value of the gold shares listed on the JSE.
The gold price has been on a tear this year, up 23% in dollars and 19% in the mighty rand. If we adjust for US inflation the real inflation-adjusted dollar price of gold is now at a record levels — higher than it was in early 1980, when the gold price broke $800/oz. In real rand terms the gold price is now almost three times higher than it was in 1980.
A favourable trend for producers, but not favourable enough to prevent a continuous decline in gold mined in SA. The rand costs of mining gold, especially employment costs, have risen faster than prices in general, reducing profits. There is also less gold to be found in the ground. The grade of the ore extracted for gold has fallen from 8g per tonne of rock in 1980 (a mere sliver of gold trapped in rocks deep underground) to about 6g and less today.
It was 12g per tonne in 1970 before the gold price took off with the end of the gold standard. The last new significant increase in gold mining capacity was the South Deep venture undertaken by Gold Fields in 2015. And before that the Moab-Khotsong development of 2003 — now part of Harmony.
Gold mining now plays a much-diminished role in the SA economy. In 1980 mines in SA produced close to 1,000 tonnes of gold. Output appears to have now stabilised at about 100 tonnes. Gold sales in 1980 were equal to an imposing 15% of the economy (GDP) and 45% of all merchandise exports. These proportions today are about 2% of GDP and 7% of goods exported.
What is good for the gold price has been even better for the shareholders in mines with large reserves of gold in the ground. These are consistently revalued in line with the price of gold, to add to the prospective operating profits from the mines. It is suggested that proven reserves of the SA mines are equivalent to about 20 times the current output of gold.
The market value of the four largest gold mining companies listed on the JSE — Gold Fields, AngloGold, Harmony and Pan African Resources — has about doubled this year. From a combined market value of $30bn in January, they are worth about $70bn today. Yet before we get carried away with the scale of this wealth creation on the JSE it should be recognised that the combined value of the JSE-listed gold miners is now less than that of leading US-listed global miner Newmont, with a market value of $75bn.
The gap between the gold price and what is described as the all-in sustaining cost of mining gold that excludes capex has widened significantly — about $1,971/oz produced and sold by Harmony, $1,694 for Anglo and $1,739 for Goldfields. Operating profit margins (the jaws) have therefore widened dramatically. You clearly get more bang for your gold buck investing in gold mines rather than in gold bars. Since 2020 the monthly percentage move in gold shares is about twice the move in the gold price — in both directions.
The changes in the gold price have a statistically significant effect on the changes in the value of the gold shares. They explain up to 50% of the move up or down in share values. This still leaves much to be explained in the behaviour of shares in gold mines by forces other than the gold price itself.
For example, allowing for the risk that extracting the gold-bearing rock will rise sharply as mines attempt to add production. Or that cash-flush gold mine managers will pay too much to acquire other gold mines. Or, most important, that the gold and other mines over their long lives may be subject to onerous taxes and regulations or even expropriation without adequate compensation, which is especially likely when they prove highly profitable.
These are unknowns that clearly affect the present value of any mining venture. Gold in the ground is worth more in North America and Australia than in SA and Africa for these reasons — less uncertainty about mining policies and more sympathy for the capital providers.
Judged by the amendment of the Mining Regulations Bill, now with parliament, the government prefers not to recognise how the value of a gold mine, or indeed any other mine, and the incentive to explore for and establish new mines is adversely affected by policies that are hostile to risk-taking shareholders. The government rejects advice from the mining industry and serves special interest groups, not general interests in a thriving mining sector.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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