Stuck between a rock and a hard place

For 27 years South Africa had 69 listed gold companies, but today there are a mere six, all of which face declining grades, and, some of them, high debt that leaves them no leeway to consider new investments.

Moody's has rated the outlook for most of these gold companies as stable, largely due to the restructuring they have implemented, which has entailed retrenching workers and shutting down some loss-making assets by Sibanye and AngloGold Ashanti.

Of the four major gold miners in South Africa, Sibanye-Stillwater, Gold Fields, AngloGold Ashanti and Harmony, Sibanye has the heaviest debt burden.

It has been about three years since substantial investments were made in the gold sector. Rather, in light of concerns over the Mining Charter, investments have been offshore - a trend that is expected to continue.

—  5%: SA's contribution to global gold production last year, down from 77% in 1968

In the last year, the gold price has increased a mere 1.5% while in the same period, gold stocks have dropped dramatically, with Sibanye and Harmony taking the biggest hit with a 39% drop, followed by AngloGold Ashanti with a 29% decline and Gold Fields with 0.09%.

According to Bloomberg's BI global senior gold valuation, Sibanye-Stillwater came out as the most indebted due to its takeover of Stillwater, which cost the miner R30-billion, just a fraction off its market capitalisation of R33.8-billion.

This makes Sibanye's net debt to edita almost three times more.

Focus on debt

Sibanye spokesman James Wellsted said the focus of the company now was to reduce debt and deliver a positive balance sheet. The company is sitting with debt of R30.2-billion as of June 2017.

Leon Esterhuizen, an analyst at Nedbank, said the debt had an impact but was not the most important factor - policy uncertainty really prompted the offshore investments.

"They [Sibanye] know that because they have so much debt, they can't afford to make losses anywhere, they need to service that debt otherwise they will get pushed to raise equity or issue shares to pay the debt," Esterhuizen said.

"So they are being very aggressive in trying to get their South African operations back into profit again."

However, Sibanye is not alone when it comes to uncomfortable debt levels. AngloGold Ashanti, although it has reduced its 2014 debt levels by half, would be in a much better position in terms of its credit ratings if the debt was reduced further.

Some reprieve

Closing down Savuka mine, which is part of Tautona, and selling off Kopanang has offered the gold miner some reprieve given that its South African assets are weighing down the rest of its businesses.

This has led to the market considering a possible split of its South African business from its international operations once again - a proposal that was introduced for five days in 2014 before being rejected by shareholders, including well-known gold investor John Paulson from Paulson and Co, who held a 6.6% stake in the company at the time.

Anglogold's market capitalisation was R53.1-billion as of June this year compared to R41-billion and debt of R42.9-billion in 2014 when the split was introduced. AngloGold's debt now sits at R30.8-billion.

Esterhuizen said when looking at AngloGold's South African assets, it was becoming a non-event anyway. In the next five years or so there will not be any huge South African production from AngloGold - and it will effectively become an offshore company.

"Splitting it [now] is not going to serve any purpose. They just need to generate as much as they can from the South African assets and get the cash flows to service debt and help build the offshore base until they shut down a few years later," he said.

Harmony, on the other hand, is in a race against time due to declining ore grades at Kusasalethu. Therefore, the miner is desperate for a long-life operation to help increase its 1.1 million ounces production a year.

Sibanye - 39%

Harmony - 39%

AngloGold Ashanti - 29%

Gold Fields - 0,09%

—  Decline in gold stocks last year

Phillip Tobias, COO of new business at Harmony, believes the company will reach its target of producing 1.5 million ounces by 2019 and that it's just a matter of finding 300000 ounces more since Hidden Valley, on full production, will add 100000 ounces more.

The company is presently in search of a merger or acquisition opportunity.

The prospects for Harmony are also more located offshore, specifically in Papau New Guinea, and it will probably focus its future investments on raising capital to develop Golpu in the same country.

Tobias said the company was comfortable with its debt levels as they had dropped significantly from the uncomfortable levels of 2015.

Gold Fields's debt levels are also comfortable and the company is optimistic about getting South Deep mine right with a new mining plan, despite the R30-billion capital which has already been sunk into it since inception.

In 1968 South Africa was the world's leading gold producer, accounting for about 77% of global output. However, in 2016 it produced a mere 5%, sliding down to sixth place, having long been overtaken by China, which now produces most of the world's gold.

The bleak story of a once mighty industry offers no indications that investment in it could be revived, especially in light of the policy uncertainty overshadowing it.