Weak rand lifts gold firms’ profits

Johannesburg – South Africa’s weakening exchange rate against the US dollar is boosting the balance sheets of local gold producers, but they are not out of the woods as rising input costs weigh heavy on operations.

The rand has weakened by 31 percent against the US dollar since the beginning of the year as commodity prices fell amid slow Chinese growth to the current R16.83 level against the US dollar. China is South Africa’s biggest trading partner.

Sibanye Gold, Harmony Gold and AngloGold Ashanti said yesterday that the weakening currency was a relief.

Neal Froneman, Sibanye Gold chief executive, said profit margins had doubled in the past six weeks as the rand plunged against the dollar, reported Bloomberg.

The increase in the rand price “flows through straight to the bottom line”, he said yesterday.

Froneman was speaking after Sibanye shareholders approved the company’s proposed acquisition of three platinum mines in Rustenburg from Anglo American Platinum for R4.5 billion.

“Our margins have doubled overnight. We already had decent margins,” he said.

“There may be better profits for a while, but it doesn’t take long for inflationary pressures to catch up.

“We continue to manage our business in a prudent way and we haven’t changed our planning,” said Froneman.

Short-term benefit

The gold price strengthened by 2 percent to $1 090 (R18 270) an ounce since December 1 and the gold price in the rand was R587 734 a kilogram, 19 percent higher.

Chris Nthite, a spokesman for Anglogold Ashanti, said the weaker currency provided some short-term margin benefit to mining companies, but there was inevitably a lagging inflation effect that the company should be mindful of.

“The gold price in dollars remains more than 40 percent lower than its peak only a few years back, and its future trajectory remains uncertain, which means the emphasis for us must remain on continuing to manage costs in local currency,” Nthite said.

“We simply can’t rely on a weaker rand to provide us a margin. That’s not a sustainable strategy,” Nthite added.

Harmony spokeswoman, Marian van der Walt, said the company benefited greatly from a weaker rand-US dollar exchange rate, as the majority of the company’s gold production came from South Africa.

The gold was sold in US dollar an ounce and then converted to rand (revenue).

She said to illustrate the weakening of the rand by means of an example – and using the September 2015 quarter results – the R/kg gold price that the company applied at the time was R473 567/kg (using an exchange rate of R13.00 to the dollar and a dollar gold price of US$1 133 an ounce).

Continue control

“Inflationary increases are already built into our plans and we will simply continue to control what we can – positioning each operation to be profitable by driving production and limiting cost increases,” Van der Waly said.

The local firms have been strengthening on the JSE with Sibanye rising 6.27 percent to R34.75 yesterday, Harmony rose 2.46 percent to R28.70, AngloGold Ashanti declined marginally by 0.01 percent to R130.80 a share and Gold Fields rose 3.52 percent to R54.36 a share.