GOLD ANALYSIS

SA gold stocks - like kissing a galloping goat

SA’s big gold stocks choke on the increasingly indigestible swill cooked up by a public sector gone the way of a mangy dog.

JOHANNESBURG - 

Since 24 January, when Eskom forced South Africa's mining sector to shut down for up to five days, the country's Big Three big gold names lost as much as a combined $6bn in market value, equal to the capital cost of building a big new power station.

The combined collective market value loss of AngloGold Ashanti (AU, US $35.48 a share), Gold Fields (GFI US, $14.32) and Harmony (HMY US, $12.93) has since clawed back to just under $4bn, mainly under the heavy influence of dollar gold prices pushing to new records over the past few days. Where the country should have been celebrating record bullion prices, there is only silence as an insolent public sector staggers sideways to backwards.

The Big Three South African gold stocks belong to the elite global Tier I gold stocks club, which comprises nine names. In the past few days, as gold bullion has risen to new heights, so stock prices for Goldcorp (GG US, $43.40), Kinross (KGC US, $24.62) and Barrick (ABX US, $51.45) have shifted to new record highs. It's logical enough. AngloGold Ashanti and Gold Fields, by contrast, are nearly one-third below their record prices, and Harmony nearly a quarter below.

Just under three months ago, AngloGold Ashanti emerged as the new leader of global Tier I gold stocks. Those days now seem to be nothing more than a distant and wrecked memory. Even Lihir (LGL AU, A$4.00), battered by a litany of doggerel issues, has left South Africa's gold names in the dust. Earlier this month, AngloGold Ashanti said it anticipated losing about 400,000 ounces of gold from its South African operations in 2008. Even that assumes that a perfect and sustainable 90% rate of previous power supply is achieved for the remainder of the year.

Gold Fields this week said it will be scaling down South African production some 15-20% on a longer-term sustainable basis, and could shed up to around 7,000 jobs in the process. While Eskom lurks as one issue, Gold Fields is also facing wider domestic industry challenges such as unsustainable rates of cost increases, and longer-term grade declines.

Gold Fields also faces certain particular demons at the acquired South Deep mine, adjacent to its renowned Kloof operation. South Deep continues to disappoint against production targets and also continues to drain significant capital cost from the rest of the group. Gold Fields recently sold off some international assets in order to bolster its cash position, and may have been forced into this week's drastic action by the institutionalised failures at Eskom.

The vast majority of smaller South African gold names are similarly far off record price levels. Indeed, just about the best performing gold "name" on the Johannesburg bourse is the gold Exchange Traded Fund (ETF), which effectively represents a direct investment in gold bullion itself.

This reflects the huge degree of fear in investing in an operating gold mine. South Africa's gold mines, among the deepest in the world, have been around for more than a century and are shown increasingly less respect as mining and most other conditions become increasingly difficult. In any investor friendly country, these gold mines would be held in awe for a host of reasons, not least technological achievements ranked among the highest in the world.

The ongoing stock price performance of South Africa's Big Three gold names is going to remain a key and transparent litmus test in gauging investor appetite for risk. Much the same can be said for the performance - if that's what it is - of other listed mining names with a full or partial South African connection.