Why South African Gold Producers Are Suddenly Flush With Cash In A Tough Economy

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Written by Kevin Mwanza

South Africa’s gold mining sector, like its economy, has been facing serious challenges over the past year as metal prices tumbled on the global markets.

Once the world biggest gold producer, with more than 75 percent of all global reserves in 1970 that funded the construction of major infrastructure and made it the largest economy in Africa, has been reduced to only a symbol of desperation for both miners and producers.

In 2014 it produced only around five percent and had slipped to 7th place in the world gold rankings.

But there is some glimmer of hope for the industry as a quickly depreciating rand has sparked “a second gold rush” in the country pushing gold mining shares to doubled their values in 2016, according to a Reuters report.

“There has been a rerating of gold stocks but the South African gold stocks certainly stand out. We can put this down to the impact of the weaker rand,” Hanre Rossouw, portfolio manager for the Investec Global Gold Fund, told Reuters.

Despite the slowdown in South Africa’s gold mining, mainly caused by China’s economic slowdown and commodity prices sliding, the sector still churns out about $4 billion in revenue every year.

Along with platinum, coal and iron ore, it’s still an important part of the economy.

SA gold shares chartAt the Johannesburg Stock Exchange (JSE), gold stocks are rebounding from a slump in 2015 as prices for the metal climb while the rand weakens — nearly 15 percent so far this year –, pushing up local currency earnings for miners.

Gold producers, who were bleeding money just a few months ago, are now raking in profits.

One such company is Harmony Gold, which get a bulk of its gold production from South Africa. Harmony posted a $4.8 million profit in the last quarter of 2015 despite losing about $34 million in the previous quarter.

The good results have helped its share price more than double in value so far this year, Reuters reported.

Analysts have however warned that it will not just be all smiles to the bank for gold mining firms as the new found wealth could provide fertile ground for labor unrest, something that’s never too far in South Africa.

“That’s a recipe for trouble especially when the workers on the ground become aware of the windfall. Things could go south, especially when food price inflation builds to double digit territory which we see happening by the second half of the year,” said Bart Stemmet, an economist at NKC African Economics.

South African gold firms trimmed over a third of their workforce — over 180,000 employees — in the last decade, according to a Washington Post report.

Analysts says some gold companies will still need to trim more in order to stay afloat even with the sudden change of fortunes for the better this year.