For South African gold miners, it’s both the best and worst of times.
The metal started the year with a bang, rising 4 percent so far and trading near the highest since August 2016. But an equally impressive rally in the rand means that South Africa-focused producers are likely to miss out on the party.
Because mining companies pay most of their expenses in local currency, a stronger rand squeezes profit margins and can render some operations unprofitable. Many of South Africa’s gold mines date back to the 1950s and 1960s and much of the easily accessible metal has been exhausted, while labor-intensive mining methods compound the effect of currency moves.
“With the rand below 12 to the dollar, margin pressure is definitely building up,” Carsten Menke, an analyst at Bank Julius Baer & Co., said by phone. “Rand strength is the flip side of an improving economy, but it’s causing headwinds to miners because of costs going up -- they are not enjoying the tailwinds from rising gold prices.”
The rand traded below 12 per dollar on Wednesday for the first time since May 2015, extending a rally sparked by an improving domestic political environment. Sentiment has been buoyed by the election of Cyril Ramaphosa as head of the ruling African National Congress in December, setting him on a path to take over from President Jacob Zuma.
The gold price rally “won’t make a difference in the short term” to South African miners, Menke said. The need to maintain high capital expenditure also thins out profit margins, he said.
More than half of South African gold shafts may be operating at a loss and a stronger currency raises the risk of closures, said Rene Hochreiter, analyst at Noah Capital Markets.
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