Miners at Gold Fields' Driefontein mine, west of Johannesburg. Picture: SOWETAN
Miners at Gold Fields' Driefontein mine, west of Johannesburg. Picture: SOWETAN

JUST eight months ago, half of SA’s gold mines were bleeding cash as their losses and debts mounted. Now, profit is the highest in a decade, and producers who had been searching for ways to cut back are instead hunting for acquisitions to expand.

The about-face reflects a rare double-dose of good fortune for an industry that saw two decades of output declines, violent labour unrest and rising costs to sift out nuggets from some of the world’s deepest and most-dangerous mines. Not only has gold rallied in 2016 — outperforming every major asset — but profit on the sale of bullion for dollars has been turbocharged by a plunge in the value of the rand, which reduces the domestic cost of production.

Harmony Gold, which last year had the highest production costs of any major producer, will make about R160,000 on every kilogram ($326 an ounce) it sells in the first quarter, compared with a loss of R14,000 a year earlier, according to company data. Harmony shares, after plunging 28% on the JSE last year, have skyrocketed 489% since December 1, leading a surge among South African producers, including Gold Fields and Sibanye Gold.

"It’s been an incredible turnaround," said Andrew Lapping, the chief investment officer at Cape Town-based Allan Gray, which manages $28bn, including Harmony shares. "Gold companies haven’t had margins like this for at least a decade."

Bullion has surged 20% this year to $1,274.21 an ounce in London, halting a three-year slide that saw prices tumble as much as 46% from a record high in 2011. The surprise rally has been fuelled by a slowing global economy. Investors are buying gold as a hedge, betting central banks will keep interest rates low to spur growth.

At the same time, the rand has extended its slump against the dollar, dropping 22% in the past year. Over that same period, gold priced in rand surged 38%, touching a record-high of R636,000 a kilogram on March 3, beating gains in currencies for the top five producers — China, Australia, Russia, the US and Peru.

The prospect of higher revenue and lower costs helped the FTSE/JSE Africa gold mining index, which tracks five South African producers, to double this year. The companies now fetch a premium compared with peers outside the country, based on the ratio of share price to cash flow. Historically, they traded at a discount. The surge in valuation has emboldened executives to consider expansion by using shares to acquire overseas assets.

"Our relative valuation is showing that we have a currency that’s trading at a higher multiple than many others," Sibanye CEO Neal Froneman said of the company’s shares. "You can start using your currency, which gives us the opportunity to look at targets outside of SA."

The shift has been remarkably fast. In the middle of last year, almost half the mines of SA’s four biggest producers were losing money. Graham Briggs, who was the CEO of Harmony until last month, said in May last year that the company would consider winding down unprofitable operations by the end of the year. Harmony had negative free cash flow in 2013, 2014 and 2015, according to data compiled by Bloomberg.

In 2014, AngloGold Ashanti decided to spin off its local operations, partly because of rising costs and worsening market conditions, but held off after investors rejected an accompanying share sale. In July, CEO Srinivasan Venkatakrishnan said gold mining in SA would be a "sunset industry" unless major changes were made, such as making it more difficult for unions to call a strike.

A lifeline began to appear around June, when the rand began a freefall against the dollar, fuelled by a weakening South African economy and the prospect of higher interest rates in the US.

The rand slid to a record low in January, about a month after President Jacob Zuma unexpectedly fired finance minister Nhlanhla Nene. The slump reduced domestic costs for companies that report earnings in dollars and boosted revenue for those reporting in rand.

The currency slump was a "game changer" for South African gold miners, said Pan African Resources CEO Cobus Loots, who is considering making acquisitions elsewhere in Africa and boosting dividends.

Gold prices in rand rallied even more than metal sold in dollars, climbing 33% since June 1 and touching a record of R636,230 per kilogram on March 3. That was well above Sibanye’s estimate of its 2016 production costs, at R425,000, and Harmony’s forecast of R435,000 to June 30.

After 130 years of mining that has shrunk reserves, the South African companies are now looking to snap up assets from distressed producers abroad. Harmony is looking at Papua New Guinea and sub-Saharan Africa, while Sibanye’s Mr Froneman says he sees opportunities in Ghana, Mali and Tanzania. Gold Fields wants to buy preferably in foreign locations where it already has holdings, including Peru and Australia.

"The current environment for us is very good at this rand-gold price," said Frank Abbott, Harmony’s finance director. "It should be a good time for M&A."