There are two things the management of South African mines has been following very closely in recent weeks. The gold price and of, course, the rugby! Both the yellow metal and the green and gold team have performed pretty damn well this past month.
This has brought a degree of cheer to what has been a tough operating environment. Think about what has been going on. The miners certainly deserve it!
There has been the ongoing impact of the Harmony accident, which saw 1,000s trapped underground. Needless to say, that has raised safety concerns to new heights. Then there are the issues around empowerment, strike action and illicit mining, not to mention contending with rolling power outages.
In mining, as in rugby, there are two key words: hype and hope. And hope is the wave the guys are riding at the moment. You can see why. All the necessary fundamentals for backing the rise in the gold price are there. The dollar is weakening, demand from Asia and China is outstripping supply, there has been turmoil of late in the financial markets...we all know the score.
Gold price to hit $1,200... wishful thinking?
Old Etonian Adam Fleming, the chairman of South African gold explorer Wits Gold, has very high hopes for the gold price. He reckons that the price of our favorite metal is still in "the foothills". For him it is not a question of ‘if’, but when, it will hit "four digit highs".
We recorded in our diary last week what the banks are saying. Surprise, surprise, the Swiss bankers are most cautious coming in at $700 for 2009. Morgan Stanley reckoned $800 and Goldman Sachs was prepared to go for $850 per glittering ounce.
True to caustic form, Erin calls Mr. Fleming’s forecasts wishful thinking!
But hang on a second. He is not alone. Ian Cockerill, chief executive of Goldfields, the world’s fourth largest gold producer, is with him. He said recently that he reckoned gold price would go to $1,200. The polished and well-respected Mr. Cockerill even has a bet on it! For him to win, the yellow metal must hit those levels within two years.
Erin wonders whether the guys operating in South Africa have been drinking too much. Can hardly blame them!
Of course, no mining chief with any metal is going call a dip in the gold price. The forecasts from the chiefs of the two biggest players seem slightly more realistic. The CEO of Barrick, Greg Wilkins, the world’s biggest producer, reckons we’ll see $800 before the end of the year. Newmont’s CEO Wayne Murdy has said the gold price will top $850 in coming years.
So, Wits Gold... more hope than hype?
Okay, okay, four digits within two years would be nice!
What Wits Gold should be hoping, and praying for, is that gold continues to rise for at least ten years. That is absolutely the earliest that Wits Gold will be producing any real ounces. It could be a lot longer. This gold explorer has not even scratched the surface of its gold deposits!
Right now it is defining an ore body at its Bloemhoek-de Bron property in the Orange Free State. The goldfield here appears to be a world-class deposit. There’s an estimated 10 to 15 million golden ounces to be had, grading at six grammes/ton.
In the past Wits Gold has been written off because its resources lie deeper than 2.5km. So, a very expensive and risky dig. But chief executive Marc Watchorn now reckons these Free State ounces are accessible at a depth of 500m to 1.5km.
Drilling is expected to commence shortly. Another positive, says Mr. Watchorn, is that there are also significant deposits of the uranium, a byproduct of gold.
However - and this is pretty fundamental - the fact remains that much of Wits lies below 2.5km. True, this body is said to be a whopping 160million ounces, but depth is depth, no matter how gold there is at the bottom of it.
Looks good on paper... but paper’s destructible
By resource alone, Wits Gold looks good on paper — the numbers make it the sixth biggest gold company in the world. Management’s line is that with a market cap of $500m, investors are paying a ridiculous $3.30 for an ounce of gold.
But let us be clear, not one of Wits Gold 160 million ounces have made it into the coveted "reserves" category. All this gold explorer has is loosely defined "resources". A much inferior industry status!
They still have to sink some shafts and do development studies. Not one ounce is anywhere near being mined. A decade away is the earliest production could start, even if they start with the shallower deposits.
One of Isabel’s mining analyst contacts sums it up pretty well. "The market isn’t stupid. So the share price might look quite low at the moment, but that is all they are worth. Resources are a long, long way from production. Given all the work that needs to be done, of course they are going to be heavily discounted. Still, they are not that cheap if you look at the timelines to production."
So, nothing to write home about? Well, certainly nothing more than ‘speculative’.
Keep digging — there’s no rush.
Erin and Isabel
