AngloGold Ashanti Limited (ADR) (AU), Gold Fields Limited (ADR) (GFI), Harmony Gold Mining Co. (ADR) (HMY): Will a Drop in the Rand Help These South African Miners?

The South African rand has declined more than 17% year-to-date. The country has recently released its first-quarter GDP results, which came in worse than expected. Gold miners in the country faced rising costs and labor unrest. In addition to that, gold prices are down 18% year-to-date. Would the depreciation of the currency help them perform better?

A handful of problems

AngloGold Ashanti Limited (ADR) (NYSE:AU), Gold Fields Limited (ADR) (NYSE:GFI) and Harmony Gold Mining Co. (ADR) (NYSE:HMY) are gold miners that are based in South Africa. These companies have faced rising operating expenses during recent years. Operating expenses rose 32.5% in just two years for AngloGold Ashanti Limited (ADR) (NYSE:AU), while revenue rose only 19%. Gold Fields Limited (ADR) (NYSE:GFI) and Harmony Gold Mining Co. (ADR) (NYSE:HMY) saw expenses rise at a pace of the revenue growth.

The labor situation has never been easy in South Africa. The country has several workers’ unions, which constantly battle for power. Labor unrest is typically violent and spreads over industries, and there is a lot of negotiation happening on the wage front. Management has to spend their time on dealing with workers and unions rather than focusing on production and costs.

The latest big strikes happened back in 2012 and lasted for two months. The deals were set and the wages increased, but South African miners operate in an environment where unions and workers will always want more.

The outlook for gold prices is dubious. According to the latest World Gold Council report, gold demand was down 13% in the first quarter. The major reason for this was the outflow from the gold exchange-traded funds (ETFs). Technology demand was down as well, losing 4% as the dental industry shifts from gold to new materials. The latest price action in gold does not promise a fast recovery from current levels.

Can the rand save the game?

Since the wages are paid in local currency, rand depreciation means lower wages in dollar terms. If the rand manages to stay as low as it is now, it could help offset wage increases. The main problem is that every major accident or wage negotiation starts a strike. Recently, platinum miners went on strike when a union official was killed. The strikers threatened every worker who tried to work during the strike.

The South African economy is very dependent on its resource sector, but the government does not seem to fully control the situation with strikes and production stops. It takes time for the miners to restart their production after strikes, and this negatively affects productivity.