South African gold output continues to fall – how much further?

LONDON (Mineweb) -

How the mighty have fallen! Not so long ago South Africa dominated global gold output with the rest coming nowhere in comparison, but the country’s gold output has been on the decline since the 1970s.

It fell to fifth largest gold producer in 2012 when it was overtaken by Russia and on the latest output figures the country has drifted downwards towards being now only the world’s sixth largest gold producer, having been overtaken by Peru as well – however that is on production so far this year.

In yesterday’s publication of minerals output and revenues, Statistics South Africa noted that the country’s gold output fell again in May commenting that its ‘overall mining production decreased by 0.7% year-on-year in May.The largest negative growth rates were recorded for ‘other’ metallic minerals (-32.3%), diamonds (-19.7%) and gold (-14,6%). The main contributor to the 0.7% decrease was gold (contributing -2.4 percentage points). Manganese ore (contributing 1.5 percentage points) was a significant positive contributor.’

But will there be any recovery in South African gold production ahead? The short answer is that, barring a huge gold price increase, the country’s gold output will likely continue to decline at a rapid rate.

South Africa has some of the world’s highest cost producing gold mines – a recent estimate has suggested that at current gold prices around half the industry is operating at a loss – and this would suggest that gold production could continue to decrease at an escalating rate as companies will no longer be able to afford to keep unprofitable mines and shafts open.

Add to this the pressures on the companies from massive wage demands brought on by mining union competition for membership between the NUM and AMCU, and this is a recipe for the potential annihilation of the country’s gold mining sector in its current form.

Some of the production fall may be mitigated, though, by selective mining of higher grade ore to try and maintain profitability at the expense of mine longevity.

South Africa’s gold sector though is not the only part of the country’s vitally important mining industry to be affected. The platinum miners are facing many of the same problems as the gold sector although this year’s figures may end up being a little better than in 2012 given the levels of labour disruption that year.

South Africa’s gold sales have now for some time lost their dominant position in terms of revenue. The country’s No.1 revenue earner nowadays, according to Statistics South Africa, is coal, followed by platinum group metals with gold languishing in third place – and could even be knocked into fourth place by iron ore sales if the production decline continues.

The relative figures in terms of unadjusted sales in April – the latest available – according to Statistics South Africa are as follows:

Metal Mineral Sales Value (million ZAR) Sales Value (million US$)
Coal 8 506.6 847.1
Platinum Group 5 612.6 558.9
Gold 4 877.6 485.6
Iron Ore 4 875.3 485.4

Between them these four accounted for almost 80% of the total value of South African metals and minerals sales in April.

The South African government has to be particularly concerned about the fall off in the volume and value of the minerals produced, particularly with regard to gold and pgms, given that it is very much a resource economy and heavily dependent on the sector for its export earnings. Both the gold and platinum sectors are in crisis and with the mining unions set on what the industry will see as untenable demands and prone to unacceptable militancy and inter-union rivalries, things may well get worse before they get better.

Source: http://www.mineweb.com/mineweb/content/en/mineweb-gold-news

Get ready for turbulent gold earnings season

The second quarter of 2013 is one that gold miners and their investors would love to forget. Unfortunately, they will have to relive the horrors when the companies start reporting earnings later this month.

The results will be ugly. Analysts at Stifel Nicolaus estimated that the gold miners under their coverage (which includes the senior producers and a smattering of others) will report an average 20% drop in EBITDA from the first quarter. Lower metal prices are obviously a key factor, but so is an anticipated decline in production (down 1%) and an increase in cash costs (up 8%).

With squeezing margins and potential mine closures on investors’ minds, the Stifel analysts ran their models at a gold price of US$1,000 an ounce to see how many operations would have to shut down if the price stayed at that level for an extended period. They found that Kinross Gold Corp., Barrick Gold Corp. and Newmont Mining Corp. would lose well over 30% of their production from closures. But Goldcorp Inc. would only lose 7% because of its low-cost asset base.

“With a management response on costs, probably half of the production loss could be saved for a year or two. However, the simple study shows that there would be strong supply side support at US$1,000 [an ounce],” they said in a note.

The only gold miner under Stifel Nicolaus coverage to be downgraded is Barrick Gold Corp., which was cut to hold from buy by analyst George Topping. He noted the company needs higher gold prices to pay off its debt, and the stock is likely to drift lower if prices remain flat. He also anticipates a dividend cut in the second quarter, along with US$7-billion to US$8-billion of writedowns. Neither of those moves would come as a surprise to investors.

Source: http://business.financialpost.com/2013/07/09/get-ready-for-turbulent-gold-earnings-season/

Sell Equities And Buy Physical Gold Now While Prices Are Low

Faber said it’s a good idea to take money out of the stock market.

“I don’t think there is a lot of upside potential, but I think there is considerable downside,” he said.

Marc Faber, managing director of Marc Faber Limited and the author of the widely read monthly investment newsletter “Gloom, Boom & Doom” report, said weakness in China’s economy could spell big trouble global markets.

Faber said that if the Chinese economy grows at 3 or 4 percent—or even not at all, which he sees as a possibility—it will have a huge, negative affect on industrial commodities and the incomes of countries that produce them. In turn, he said, if countries such as Russia, Brazil or nations in Africa, Central Asia or the Middle East have less income, they’ll buy less from China, Western Europe and America, leading to very little earnings growth or an earnings contraction for those more prosperous economies.

China preferably would show trend line growth of 10 percent, as it has done for the past 20 years, Faber said.

Faber said it’s a good idea to take money out of the stock market.

“I don’t think there is a lot of upside potential, but I think there is considerable downside,” he said.

However, he said that markets are now seeing emerging markets and their currencies go lower, and “It could be that all the money in the world flows in to U.S. stocks and avoids emerging markets.”

Gold can eventually be a source of profit, according to Faber. He said it’s possible the price of gold can go somewhat lower, even though he thinks it’s now at a reasonable level. “I keep on buying gold and I have faith that gold prices will eventually be higher,” Faber said.

Faber said that, in general, corporate earnings will disappoint.

“They may not collapse, but I don’t think they will be as a good as expected,” Faber said. He said cyclical stocks, such as semiconductors and materials companies, will have tough time matching earnings expectations.

U.S. aluminum giant Alcoa kicks off the unofficial start to quarterly earnings season after the closing bell on Monday.

Source: http://finance.yahoo.com/blogs/big-data-download/mark-faber-china-puts-global-markets-risk-164954983.html