Mining Mirror May 2017 - Page 39

Finance South African gold price per ounce in rand, from 5 December 2016 to 9 February 2017. metal by 4% to this two-month high. European markets are facing further uncertainty following Brexit as the French election draws to a close. Electoral candidates look to adopt policies that will see the French nation following in the footsteps of England in exiting the European Union. Electoral candidates in the Netherlands share similar sentiments, which could raise further uncertainties in European markets. Demand for gold during these times of uncertainties is expected to rise as investors look to diversify and secure funds in alternative commodities.   South African gold supply South Africa has been one of the largest gold producers for over a century and has been the source of one-third of all gold ever mined. However, South Africa dropped to seventh place in 2016. A combination of diminishing reserves, increasing labour costs, frequent stoppages, and regulatory uncertainty have prompted major mining companies to rethink their presence in South Africa. Recently, mining in South Africa has proven to be a tough operating environment with wage inflation constantly eroding margins. As the largest mining companies shift their portfolios elsewhere, investors are valuing South Africa-focused stocks more cheaply than global peers. The FTSE/JSE Africa Mining Index trades at 1.3 times book value, compared with 1.9 times for the Bloomberg World Mining Index. The measure for South African stocks has been at a discount to the global index figure for the past five years. Local gold production declined by almost 50% to 144.5 metric tons in the decade to 2015. Labour costs, which make up a third of the industry’s overall expenses, almost tripled to R117-billion a year. The recovery of the gold price is depicted by an upward trend of prices over the past two months. With demand filtering through and increasing short-term prices, indicators show that investments in gold are likely to increase. Global market sentiment provides further support for this trend. Despite the challenges, South Africa has sufficient infrastructure and has developed good technical skills MAY 2017 MINING MIRROR [37] in its long and successful mining history. The country remains attractive where global mining capabilities are concerned, and considering that South African gold stocks are trading at discount, proves it to be an attractive investment. Opportunities exist for South African mining companies to reinvest in the industry and take advantage of the developing shift in market sentiment, as the demand for gold is on the rise in global markets. b