WEAK RAND A BOON FOR RSA GOLDS
Earlier this year the Republic of South African (RSA) Rand was hovering about 5 to 1 versus the US dollar. However, recent weeks witnessed a rapid run on the Rand - plummeting as low as R6.75, but currently trading betweeen R6.15 and R6.45. Paradoxically, the approximate 25% devaluation is a windfall for the RSA golds.
Historical Effect on RSA Gold SharesHistorically, a decrease in the Rand value nearly always sparks rises in the Johannesburg (JSE) Gold Index - which, of course, is denominated in Rands.
During the last four Rand devaluations, South African gold shares faired quite well indeed.
1989 -
Relatively small Rand/$ FX loss sparks 60+% rise in the JSE Gold Index1993 -
Relatively small Rand/$ FX loss sparks 200+% rise in the JSE Gold Index1995/96 -
Relatively modest Rand/$ FX loss sparks 70% rise in the JSE Gold Index1998 -
Run On Rand Raises Return to RSA Gold Stocks
Rand/$ FX lost about 34% in recent months (albeit the fall accelerated last week). Subsequently, JSE Gold Index soared more than 35% (800 to 1080) in the week of July 1st.Following are the rationale why JSE Gold Shares rise when the Rand declines in value.
South African mine expenses are in Rand. However, they sell the gold production to world markets for US dollars. Therefore, while Rand expenses remain level, gold production revenues increase by the amount of the Rand devaluation (assuming of course a stable gold price in international markets). Obviously, the bottom-line of producing mines will be substantially affected. Losing or marginal mines become profitable again - and efficiently run mines see their profits soar within a very short period. Increased profitability for all RSA golds is dramatic and almost instantaneous.
PRIME BENEFICIARIES OF A LOWER RANDWhen a currency falls in value it is GOOD for the profits of GOLD MINES or any industry whose revenue is set by world export markets (in US Dollars) - for example gold, copper, diamonds and platinum, etc.
Durban DeepAccordingly, a mine like Durban Deep will go from earning nothing in $U.S. to making $35-$40 million in Net Profits. Since mines like Durban Deep have no financial leverage, they are not hurt by the high interest rates imposed to defend the Rand. Please note most JSE golds enjoy the distinction over their North-American and Australian counter-parts in that the RSA gold mining companies normally have ZERO LONG-TERM DEBT.
Let's take a few examples - but, continuing with Durban Deep. In the quarter ending March they had revenues of US$47.5 million on a production of 149,000 oz… equivalent to a gold price of $319/oz. After all costs, including capital expense, Durban Deep showed a loss of R0.15/share on 40 million shares ($1.2 million). This translates to an average cost of (47.5+1.2)/149,000 = 48.7 million /149,000 = $326 $/oz.
Importantly, Durban Deep is implementing a program to REDUCE cash costs by a further $20 per ounce within this year... (but we will ignore this for now).
The cost of $326 was at an average exchange rate for the quarter of R4.95/$. If we simply pro-rate this to the current prevailing rate of R6.30, the new cost expressed in dollars becomes 326*4.95/6.3 = $256/oz. Thus, if everything else remains the same, Durban Deep is transformed from a mine that makes a slight loss to one that makes (326 - 256) = $70/oz profit.
This translates to $70/oz * 149,000 = $10.4 million for the quarter or 4*10.4 = $41.6 million annually on 40 million shares - or $1.04/share... roughly a dollar per share. However, if the plan to reduce costs by another $20/oz come to fruition, the EPS become (90/70) * $1.04 = $1.30/per share. Assigning a modest PER of only 10 times, projects a market price of $13/share. Compare that with the current New York ADR price of a mere $2 and change… and we therefore have a substantial gold producer selling for pittance. Durban Deep is obscenely under-valued.
Harmony Gold MinesNow let's look at Harmony. It made a profit of R0.57/share in the 3rd quarter on production of 190,000 ounces. And Harmony has 49 million shares outstanding. The mine's revenue was $57.3 million or $ 302/oz. Since their profit was equivalent to 0.57 * 49 = R28 million, or 28/4.95 = $5.6 million, then their average costs were (57.3 - 5.6)/190,000, or $272/oz.
Harmony's forecasted profit prior to the exchange rate change would have been $5.6 million for the quarter, or 4*5.6 = $22.4 on 49 million shares - equivalent to $0.46/share. Their new cost will then become 272 *(4.95/6.3) = $214/share. Per the new exchange rate, this sets Harmony's profit at (302 - 214) = $88/oz… 88*190,000/49 = $0.34/share for one quarter - projecting $1.36 per share annually.
Harmony's profits will have risen by a factor of 1.36/0.46 -ALMOST 3 TIMES as a result of an approximate 25% reduction in the Rand/$ exchange rate. Consequently, this would project a Harmony market value of $13.60, reflecting a modest 10X PER. Compare the adjusted (projected) share price to its current trading price of ONLY $4.50. NASDAQ ADR price does NOT reflect projected windfall earnings increase due to the fall of the Rand.Moreover, these numbers ignore the huge resource base advantage Harmony Gold Mines enjoys over Durban Deep, as well as the extra PROFITS they will gain as a result of adding the Bissett mine in Canada, plus the big Evander resource and production - once the acquisition is consummated.
Randgold & ExplorationRandgold may well be the "dark-horse" in the whole Rand/$ exchange rate play. Whereas it does NOT enjoy the impressive fundamentals of Durban Deep or Harmony Gold Mines, it should be remembered Randgold owns a sizable chunk of stock of Durban Deep, Harmony Gold Mines, and controlling interest in both Crown Consolidated Gold and Randgold Resources - which own many very interesting resource plays in numerous African countries.
Another enticing aspect of Randgold & Exploration (listed as RANGY on the NASDAQ) is that its New York ADR sells for less than a buck/share - down almost 90% (from $8/share) in the last 15 months. But perhaps the most cardinal reason for investment potential is the fact that Randgold & Exploration's Net Asset Value is $2.00/share - more than 100% more than what it is currently trading. Furthermore, there is talk at the corporate level that the company will be divided into its separate entities well before yearend, thus shareholders should realize the full NAV of $2 -- which can be bought today for less than a dollar!
Therefore, it is NOT far-fetched to imagine a North-American, Australian or even an aggressive acquisition-minded RSA gold company sniffing around RANGY. It would be a very cheap way to acquire resource exposure at numerous potentially interesting venues in Africa.With only 41 million shares outstanding, Randgold & Exploration CURRENTLY has a total market capitalization of less than $41 million!! Mere pocket change to the big international golds.
Randgold & Exploration represents an interesting speculation - and a good way to diversify the risk/reward ratio of an investment portfolio comprised of Durban Deep (DROOY), Harmony Gold Mines (HGMCY) and Randgold & Exploration (RANGY).
In essence RANGY may be considered a pile of good and diversified assets selling at half price.
New York Listed ADRs of South African Golds:
http://www.dbc.com/cgi-bin/htx.exe/dbcfiles/SOAFRAt.html?source=core/dbcJohn Disney
Cape Town - South Africa
9 July 1998
Back to Regional Analysts Copyright © 1997 - 1999 vronsky and westerman
