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South Africa: Sibanye’s new listing plans won’t alter case against gold mining investment

By David Whitehouse
Posted on Wednesday, 3 April 2019 16:51

Gold production in South Africa is declining, but it is on the rise in Ghana. AP/Themba Hadebe

Sibanye-Stillwater Chief Executive Neal Froneman said in March that the South African miner plans to change its primary listing as it seeks to find capital and growth outside its home market.

The plan won’t solve any of the company’s fundamental problems. Sibanye is currently listed in Johannesburg and has American Depositary Receipts which trade in New York. It said in February that it may cut close to 6,000 jobs as it restructures its gold mining operations in South Africa, and Froneman argues that there is potential for growth in gold outside the country.

Mining in South Africa, of course, presents a range of specific problems.

  • Gold mining in South Africa has historically been very expensive because of the small amount of gold in vast tonnages of rock.
  • Paskalia Neingo and Tinashe Tholana of the School of Mining Engineering at the University of the Witwatersrand found in a 2016 journal article that gold ore grades in South Africa have been in constant decline over the past 80 years.
  • At close to four kilometres, South Africa has the world’s deepest mines, and their narrowness prevents the application of mechanization and automation, the academics wrote. Most of the high-grade gold deposits have been exhausted and miners are forced to exploit deep-lying, lower grades. A long-term pattern of under-investment in mine modernisation has made this harder to achieve.
  • Meanwhile, a specific culture of industrial militancy with its roots in the exploitation of black mining workers under apartheid persists. The Association of Mineworkers and Construction Union (Amcu) has been on strike for four months at Sibanye-Stillwater’s gold operations in a dispute over wages that shows no signs of ending.

A higher gold price would be of some help in addressing these problems. Froneman hopes to sidestep them by finding better places to mine gold. But is there any prospect of a move higher in prices being sustained?

Gold’s drivers

Longview Economics argued in a piece of research in March that the supply-demand balance is ineffective at determining gold price direction.

  • From 2004 to 2010, for example, the market was largely oversupplied, yet gold prices remained in a bull market.
  • Despite a doubling of demand growth from central banks in 2018, gold prices trod water.
  • Contrary to popular belief, Longview found that central bank buying is not a key driver and is in fact insignificant in determining prices.
  • Gold jewellery demand, for example in India, is determined by the price of gold, rather than setting its direction, Longview says.
  • Recycled gold supply also follows the price, although on a shorter timescale.
  • Overall, the whole of global gold supply is found to be determined by historical changes in the gold price.

So what are the real drivers? Longview finds that there are three key factors which set the gold price direction: real US bond yields, Fed interest rate expectations, and the US dollar. Longview suggests that gold prices will continue their current uptrend in coming weeks, but notes that the risks include the fact that both bond yields and Fed funds rate expectations have recently been volatile.

Gold as a financial investment, all this implies, can make sense as a hedge against US bond and dollar volatility. But potential investors in new gold listings need to understand that there are no reliable grounds for an industrial mining strategy based on gold supply and demand – because those factors don’t drive the metal’s price.

Bottom Line – Unless you have a hotline to Trump and/or the Fed — or a strong stomach — avoid new gold miner listings on whichever stock market they appear.

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