What Are the Valuation Catalysts for South African Gold Miners?
By Annie Gilroy
Sep 22, 2017
Given the South African market’s labor, laws, and infrastructure issues, miners operating there usually trade at a discount to their global peers (GDX). These factors usually result in higher costs and lower production growth.
Sibanye Gold (SBGL) has a higher forward multiple of 5.0x, which is a premium of 19.0% to its peers. While it’s trading at a premium to its peers, its performance in 2017 has not been outstanding. In fact, SBGL canceled its dividends in the first half of 2017 after it posted a loss and its debt ballooned. However, the company still expects to generate positive free cash flow in 2017.
AngloGold Ashanti (AU), one of the largest gold mining players, has a multiple of 4.8x. Its diversified production base and lower exposure to risky mining prospects in South Africa are some of the positives the company enjoys. However, its South African operations are still proving to be a drag on its overall multiple. AU is reducing its financial leverage, which has worked in its favor.
Gold Fields (GFI), which has the highest estimated EBITDA margin among its peers at 42.4%, has a forward multiple of 4.6x. Its stock has outperformed its peers significantly in 2017, which has resulted in its valuation rerating 45.0%. Its South Deep project remains its biggest catalyst for valuation.
Key valuation catalysts
Harmony Gold (HMY) is currently trading at the lowest multiple among its peers at 2.5x. While the stock might seem cheap based on the multiple, the company has higher costs than its peers. One of its major upcoming projects, Golpu, could face financing shortages. In March 2017, the company suffered a mine explosion with several of its workers losing their lives.
The company will need a higher gold and copper price environment to fund its project, or it will likely have to seek external financing.
Article Source – Market Realist
Highlighting trends in SA Mining industry
The 2017 financial year was another tough one for stakeholders in the mining sector:
Investors in aggregate saw a decrease in dividends and market capitalisation after a cautiously optimistic view on a recovery last year;
Decreases in precious metal rand prices have put a lot of pressure on conventional deep-level platinum and gold mines’ profitability and sustainability;
Tax authorities only saw marginal increases in taxes paid;
Employees experienced further retrenchments with the prospect of more to come; and
On the fifth anniversary of the Marikana tragedy, communities around some mines are still desperate for improved service delivery and employment.
The negative environment has been offset somewhat by the excellent recovery in the prices of coal, iron ore, manganese and chrome over the last 18 months. Mining companies that have repositioned themselves within the current low-price environment have also started to see the benefits of cost saving initiatives reflected in lower operating cost increases.
Identification of Risks
It is not surprising to see cybersecurity being included as a risk by some companies. PwC’s Global state of the information security survey data shows that the compound annual growth rate (CAGR) of detected security incidents has increased 66% year on year across all industries since 2012.
Safety remains a focus area for all mining management and is probably one of the biggest success stories for the mining industry over the last 20 years. Statistics provided by the DMR show a downward trend in fatalities for the industry as a whole over the past 10 years, indicating that investments made in safety initiatives by both companies and the DMR are delivering positive results.
Improving value to stakeholders
Total value created by the entities analysed increased by 12%, from R161 billion to R180 billion. The increase is largely attributed to improving commodity prices and a significant cost focus.
Funds reinvested in the form of capital additions and acquisitions is 12% of total value created (2016: 20%), which is significantly lower than previous years.
Companies continue to feel the burden of high labour costs, adding pressure on margins. This, despite a reduction in the number of employees. The value received by employees represented 40% of total value created (2016: 39%).
Revenue increased by 13% (R43 billion) from the prior year. This is the first substantial increase in more than five years.
Operating expenses increased by R13 billion, which is a 5% increase from the prior year.
Labour cost increased by 4.5%, which was marginally below inflation.
The ten-year summary shows flat revenue with significantly reduced profitability as a result of continued increases in cost pressures and marked impairments.
The improvement in the current year does provide hope of some recovery for the sector.
For more details, visit PWC South Africa