How SA plans to profit from sky-high gold prices

On February 28 Harmony Gold approved the R7.9bn deepening of its…

south africa gold mine e1537512960851

On February 28 Harmony Gold approved the R7.9bn deepening of its Mponeng mine, in Carletonville, west of Joburg. Once the capital work is complete in 2030, the South African miner will be operating at a depth of about 4.1km, making the world’s deepest mine even deeper.

The scale and ambition of the Mponeng “extension” — Harmony has forbidden the use of the word “deepening” for the project — is a reminder of South Africa’s former pre-eminence in world gold when, during the 1970s, gold fields stretching from the Witwatersrand to the Free State and Mpumalanga supplied roughly three-quarters of all metal mined annually. Today’s reality is entirely different.

Production was about 95.6 tons last year, according to Minerals Council estimates. On that volume South Africa just about scrapes into the top 10 of producing countries globally. Where once the JSE had more than 40 listed gold mining firms, the number has now dwindled to six. The latest blow to the sector was AngloGold Ashanti’s announcement last May that it would redomicile its headquarters to Denver and move its primary listing to New York. Mponeng was its last operating mine in South Africa, which it sold to Harmony for $300m a year earlier.

With the only other major gold producer, Sibanye-Stillwater, having reduced output about 30%, Harmony is the gold sector’s “last miner standing” if the measure is a scale and ambition to match the industry’s past.

Of 39.3 million ounces in Harmony’s total gold/copper mineral reserves across local and international assets, 51% are in South Africa. But more than three-quarters of its 1.2 million ounces to 1.3 million ounces in forecast annual gold production from now to 2030 will still be from its home base. “We will be in South Africa for a long time,” says Harmony COO Beyers Nel. “We believe deep underground gold mining is what we are good at and we will stick to our knitting in that regard.”

The Mponeng extension will help keep South African production pumping from 2030.

“It’s a fantastic block of ground with fantastic grades,” says Bernard Swanepoel, the founding CEO of Harmony Gold. “It is a low-risk ore body and the technical challenges have been known for about 25 years and the extension is actually a small decline.” In round numbers that “small decline” is a 270 metres deepening that leads to grades (grams of gold recovered per ton of rock processed) in excess of 9g/t — about 50% better than Harmony’s average grade in the six months ended December. The whole effort is a triumph of technological ingenuity.

From surface to stope where the mining happens, it takes miners about an hour and 20 minutes of travel. For this reason, the company runs 11 hour shifts, five days a week, and leaves engineering work for the weekends. The main shaft, which descends 2.3km, takes five minutes to travel at about 54km/h. From there miners take a 400m walk to the sub shaft, which takes them a further 1.3km to 120 Level, a depth of 3.64km.

A chair lift system, not unlike ski lifts of more sumptuous settings, then transports miners over 1.4km in a 180m descent. Then comes a 3.4km walk to the stopes where the mining takes place.

The entire effort is a feat of engineering and human perseverance in punishing conditions. Because it’s so far underground, heat is a major problem. Virgin rock is about 52ºC. As a result, Harmony uses 265 tons of ice an hour for refrigeration purposes. Refrigeration, transport, ventilation and a host of other requirements require energy totalling 65,000MWh, equal to 80,000 households and burning a normal household’s monthly consumption every 22 seconds.

Once developed, the project will convert an estimated three million ounces into mineable reserves, delivering average steady-state production of 260,000 oz a year until 2040, equal to 120 tons in total. From 2038, the mine will account for about 18.5% of Harmony’s total output when the South African mines that currently supply about half of production are all but exhausted.

It’s a fantastic block of ground with fantastic grades. It is a low-risk ore body and the technical challenges have been known for about 25 years and the extension is actually a small decline – Bernard Swanepoel.

Mponeng might be the tidiest bit of business Harmony has done. The group would pay three times the cost of Mponeng’s capital programme for a similar ranking resource anywhere else in the world, says Jared Coetzer, head of Harmony’s investor relations. Recent deal experience suggests this is correct. In December Harmony finalised the acquisition of a smaller undeveloped copper/gold resource in Australia called Eva for about $230m before project capital. However, progress has been interrupted owing to complications over permitting.

Another project on Harmony’s books is Wafi-Golpu, a Papua New Guinea prospect it holds in a joint venture with US firm Newmont. A 2018 feasibility study put a total cost of about $5.8bn on the project which has been delayed for more than a decade, partly by a series of political crises in the Pacific Rim country. Last year Harmony signed an agreement paving the way for talks over fiscal rules and possible Papua New Guinea government ownership. But in January, civil strife engulfed Port Moresby, the country’s capital. Despite these interruptions, Harmony is hoping for progress on both projects this year.

Harmony’s plan to extend Mponeng comes — somewhat serendipitously — amid a mighty bull charge in the gold price. Record rand gold prices of more than R1.3m/kg have been registered this month — a development that has jet propelled Harmony’s share price, more than doubling in 12 months. In dollar terms, the gold price hit a record high of $2,195.15/oz on March 8.

Gold mines never die

At the same time Aurous, a privately held firm backed by US fund manager Orion Resource Partners, unveiled plans to list Blyvooruitzicht (Blyvoor) Gold via a blank cheque company on New York’s Nasdaq exchange. Given that Blyvoor Gold is about 87 years old, its redevelopment, combined with the vote of confidence in its Carletonville neighbour Mponeng, has injected a level of esprit in the local gold sector that would seem to belie its sunset status.

Richard Floyd, CEO of Blyvoor Gold, says he’s thrilled by Mponeng’s extension. “It’s reinvestment into the region and that’s the narrative we want to contribute to,” he says.

Once listed — Floyd expects this to happen in the third quarter this year — Blyvoor Gold will have about $50m to spend on growing production from 30,000 oz/year currently to about 150,000 oz or more. “Right now, it’s looking very positive, very upbeat and the appetite for gold is looking very strong,” says Floyd.

Gold miners always find a way of digging out extra value when the gold price is in their favour – Arnold van Graan, Nedbank Securities

Established in 1937 and producing its first gold in 1942, Blyvoor is a storied asset in South Africa’s gold mining industry. It was the richest ore body in the West Wits line of gold discoveries but fell into disrepair when closed by Village Main Reef, leaving thousands of employees facing poverty. The mine was plundered by thieves until it was bought out of liquidation by the late Peter Skeat, a renowned gold industry entrepreneur. Floyd is Skeat’s son-in-law.

“I would say the age of the asset means nothing,” says Floyd. “The last time Blyvoor was given a shot was in the early 1990s. Ever since then it’s been starved of capital.”

Aurous has spent $125m reviving Blyvoor. The mine is currently producing at an all-in sustaining cost (a measure of expenditure including expansion capital) of about $1,100/oz. But there are aspirations to get this to $900/oz or even lower as production ramps up.

As part of Blyvoor’s proposition, the nearby tailings of Gauta Tailings, basically waste ore from previous mining, are included in resources to be “remined”. Gauta was combined into Blyvoor in the hope it would add options. “We’re right in the debt-free [zone] at this point so the intention is to raise some affordable debt to launch that business,” says Floyd. “That gives us in-house diversification, it adds an additional 30,000oz/year once it’s built out and running.”

Swanepoel, who established Harmony in the 1990s as a no-frills, low-cost margin driver, is unimpressed by the Blyvoor listing, however. “‘Take seven’ on Blyvoor? It is speculative nonsense that gives the sector a bad name because it won’t work at lower gold prices,” he says. As the gold price climbs higher people look to take money off the table, he says.

Time will tell on Blyvoor as well as its Nasdaq listing — with a possible secondary listing in Johannesburg if there’s investment demand. Aurous and Orion Resource Partners, which has $8bn under management, are hoping to list Blyvoor for $10/share. For years, there’s been a pocket of dedicated gold bulls in the US market, loyal followers of shares such as DRDGold and even Harmony in its Swanepoel days, who adore the leverage of South Africa’s rand-denominated gold business.

Barberton is one of the oldest gold mines in the world and on our calculations it still has another 20 years of operating life left. As for Evander, it is probably the lowest gold mine in the country – Cobus Loots, Pan African Resources

“Gold mines never die,” says Arnold van Graan, an analyst for Nedbank Securities. “Gold miners always find a way of digging out extra value when the gold price is in their favour.” This is never truer than for the gold resources in South Africa, which, as some of the best in the world,  can sustain business reinventions.

Based on its 2016 projections, Harmony Gold’s production would have fallen to about 800,000 oz this year rather than its guided production for the 12 months ended June of between 1.38 million and 1.48 million oz.

Pan African Resources plans to start mining from the Mintails deposit west of Joburg from November. Once fully ramped up, gold from Mintails will increase the firm’s output, currently guided to 180,000 oz/year, to 250,000 oz/year from 2025. Its business case rests on some of the country’s oldest gold mines, including Mpumalanga’s 70-year-old Evander Gold Mines and Barberton Gold Mines, which has been mined since 1886.

Cobus Loots, the firm’s CEO of the past seven years, says R2bn has been ploughed into the two mines in the past few years, mostly in stay-in-business capital. “Barberton is one of the oldest gold mines in the world and on our calculations it still has another 20 years of operating life left. As for Evander, it is probably the lowest gold mine in the country.”

Production from Evander is forecast to increase 50% to about 60,000oz/year.

South African discount

Industry experts believe there are still more gold resources left than have been mined. The US Geological Survey estimates there are 6,000 tons of gold reserves in South Africa. “The problem is that with current technology they can’t be mined economically as they are either too deep or the grade is too low,” says one prominent mining CEO. “I would estimate that current reserves will be mined out over the next 20 years, which is still significant.”

One outlier in this regard is Gold Fields’s enormous South Deep mine. Bought from Barrick Gold, the deposit has proved a major challenge for the group. It lost money for years on South Deep until a restructuring by former CEO Nick Holland in 2018. Gold Fields reckons South Deep has 70 years of life at current mining rates, though there could be an opportunity towards the end of its life to extend further, possibly through mining regional pillars of gold-bearing ore.

As is typical with South Africa’s largest remaining ore bodies, miners find a way of continuing to extend life. South Deep’s mineral reserves, calculated at 31.3 million ounces last year, have been revised upwards from the 30.7 million ounces calculated in 2006, when the group first took ownership. “The reserve and resource estimates are in line with what was envisaged when we acquired control of the asset taking into account depletions and the fluctuations attributable to improved reserve and resource definition and updated economic factors,” says Sven Lunsche, spokesperson for Gold Fields.

Gold Fields sprang from the Gencor stable of the 1990s but since demerging its South African mines to create Sibanye-Stillwater it has shown little appetite to expand locally. Its rival throughout the heyday of South African gold production was Anglo American’s gold and uranium division, now AngloGold Ashanti. As offshoots of geographically diverse, strongly capitalised mining groups they had a foundation in non-South African gold mining that forms their businesses today.

South Deep accounts for a little over 10% of total metal produced by Gold Fields. AngloGold has no footprint in the country. To improve ratings against international peers is a key motivation.

“We haven’t seen the rerating yet, but it was never going to happen from day one,” says Stewart Bailey, head of AngloGold’s investor relations. The market wants evidence the group can ramp up its Ghana mine Obuasi and narrow the high cost gap between it and its North American rivals. A 20% share price improvement against a static GDX index is one promising sign. The reweighting of the firm’s shares on other indices such as Swix  and its entry to the Russell 2000 and CRSP indices are  also set for sometime  over the next 12 months.

Another gold miner who worries about the South African discount is Sibanye-Stillwater’s Neal Froneman. “We are overweight in South Africa so our focus in whatever we do is to globally diversify,” he says. The firm’s Kloof and Driefontein mines, also west of Joburg, are deep, expensive and have poor safety records relative to international peers. But Froneman, once an employee of Harmony Gold, remains deeply bullish on gold nonetheless.

“We like the insurance policy of gold and we think there is a lot of upside in the price,” says Froneman. Group production, however, has fallen precipitously from more than 1-million ounces a few years ago to guidance for 2024 of about 700,000 oz. Froneman says he’s still on the lookout for new assets, but they must be offshore. “It’s difficult to find quality gold assets that are affordable in the rest of the world, but it remains [an area] of business [we] would like to grow and build.”

In an effort to sustain Sibanye-Stillwater’s gold, Froneman flew a flag for the combination of his company with AngloGold Ashanti and Gold Fields. Froneman’s business case for the African mining champion was predicated on his group’s thriving share price. Driven by platinum group metal prices rather than gold, the group was valued at $1bn more than Gold Fields and AngloGold combined.

Today Sibanye-Stillwater is trading more than $1bn less than Harmony Gold. This might say as much about the deterioration in the PGM market as the catalytic impact of the gold price, but there’s no denying the extent to which events in the gold market have been transformative.

Looking ahead

Normally, elevated interest rates don’t favour gold as investors can get yield from Treasury bills and the like. The synchronous high pricing of gold and interest rates is unusual. One reason for gold’s performance, up 4.5% year to date and 7% this month alone, is aggressive central bank purchases. China was the largest accumulator of gold last year, buying 224t. It dipped into the market again this year, buying just over 43t, according to World Gold Council data. Other emerging economies have also been accumulating gold.

The prospect of an interest rate cut is also driving the price, though whether a cut will be announced as early as June is now in question. This follows comments by Federal Reserve chair Jerome Powell earlier this month that the US is in no hurry to cut rates until it is convinced inflation has been tamed. If interest rates are cut, this could support gold’s gains. JPMorgan Chase told Bloomberg News $2,500/oz was a possibility.

We actually think it’s conservative. We don’t think the rand is going to strengthen but you never know what the gold price will do tomorrow. We are gold miners though. We think gold is going to go up – Beyers Nel, Harmony Gold

Geopolitical uncertainty is also driving the price, and an outlier view is that China’s accumulation of gold could be a signal it is diluting its exposure to the West. The high level of political instability globally, as well as lurking systemic risks in the US mid-tier banking sector, have analysts in two minds. Nedbank’s Van Graan is negative on gold, or so it seems. In a note to clients recently he told clients the gold price still had legs but could be overbought.

“The risk of a known unknown pushing gold higher concerns us though, given the global geopolitical and economic backdrop. We still stick to our short gold call. We may be wrong on the timing,” he said.

Physical purchases of the metal are likely to ease at higher price levels and while consolidation in the price would be healthy for the market, investors may maintain a buy-the-dip mindset, said UBS in a recent note. “More broadly, we think positive gold sentiment and still-limited positioning suggests risks are skewed to the upside overall,” the bank said.

Miners are optimists, possibly by necessity — Harmony’s Mponeng extension is predicated on a rand gold price assumption of R1.1m/kg, but the spot price has recently hit record levels only R200,000/kg higher than that.

“We actually think it’s conservative,” says Harmony’s Nel. “We don’t think the rand is going to strengthen but you never know what the gold price will do tomorrow. We are gold miners though. We think gold is going to go up.”

A version of this article first appeared in The Financial Mail.

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