Why Are South African Precious Metal Miners on Such a High in 2016?
Deconstructing Gold: What's Driving Gold Miners apart from Prices?
South African miners’ performance
While South African miners can be categorized under categories like senior or intermediate miners, there are unique factors driving South African miners that merit special attention.
Calendar 2015 was a very bad year for South African stocks due to falling gold prices and geography-specific problems like labor unrest and power issues. But 2016 has reversed the fortunes for these miners.
While Harmony Gold (HMY) fell by 51% in 2015, it has risen by a whopping 194% YTD (year-to-date) as of April 26, 2016. This uptrend is driven by gains in gold prices via the US dollar (UUP)(USDU) and weakness in the South African rand.
Are South African miners more leveraged?
Harmony Gold is much more exposed to South Africa than any of the other miners. It’s also the highest-cost gold producer. These factors have made the company much more leveraged to increases in gold prices and to depreciation in the rand. (To read more about Harmony’s gravity-defying rise, check out the series Defying Gravity: Decoding Harmony Gold’s 2016 Rally.)
Meanwhile, Sibanye Gold (SBGL) has gained 122% YTD while AngloGold Ashanti (AU) and Gold Fields (GFI) have risen by 91% and 36% YTD, respectively. These four South African companies together make up 10.5% of the Market Vectors Gold Miners ETF (GDX).
Correlation to gold prices
While this group has a strong correlation of 0.92, if seen from the start of 2013 until April 26, 2016, the correlation has somewhat waned, coming in at 0.78 YTD. This is mainly because, after a multiyear losing streak, in a higher gold prices scenario, their operating and financial leverages have led them to outperform.
The depreciating South African rand is another reason for this group’s outperformance of gold prices. Sibanye exemplified this in its latest quarterly results. With a 30.6% increase in average realized price YoY (year-over-year), Sibanye’s operating profit skyrocketed by 240%, and its margin more than doubled.
To understand this phenomenon in more depth, check out “ Gold Price Leverage at Full Play at Sibanye: How Far Can It Go? ” For latest Wall Street ratings on these names, you may be interested in the series Gold Miners: The Latest Must-Read Wall Street Ratings. For other updates on precious metals mining stocks, keep checking in with Market Realist’s Precious Metals Mining page.
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