South African Gold Miners Downgraded by HSBC on Labor Disputes

AngloGold Ashanti Ltd., Harmony Gold Mining Co. and Sibanye Gold Ltd. were downgraded to sell by HSBC Holdings Plc, which said the lower price of the metal is cutting margins at South African miners beset by labor disputes.

The mining industry in the continent’s biggest economy failed to contain costs during a decade-long bull market in gold to 2012 and are now badly placed to manage the pressures that come from lower prices, HSBC analysts led by Johannesburg-based Derryn Maade wrote in a note released today. AngloGold, Harmony and Sibanye were all reduced from hold.

“We expect a 12-month period of extremely tough operating conditions given the current tensions between management and labor, as wage negotiations enter dispute, and the negative implications of potential restructuring on industry jobs,” Maade said. “This period is likely to place momentous pressure on the industry.”

AngloGold, Harmony and Sibanye, through industry lobby group the Chamber of Mines, are in dispute with South Africa’s four-biggest labor unions after their offer of a 5 percent wage raise was rejected by workers. Bullion’s 23 percent drop this year made 60 percent of gold operations in South Africa, the world’s sixth-largest producer of the metal, unprofitable and means companies can’t afford to give employees above-inflation wage increases, the chamber has said.

South Africa’s gold industry focused on increasing production by investing in higher-cost mines during the 10-year bull market, leaving it with “a significant proportion of uneconomic or borderline assets,” Maade said.

Gold Fields

Gold Fields Ltd., which spun off Sibanye earlier this year, is HSBC’s preferred stock among major South African gold miners with a hold rating. The company hived off all except one of its operations in the country to Sibanye and kept the higher-growth mines in Australia, Ghana and Peru.

“The company is focused on further asset optimization, disposal options for the exploration project pipeline and preservation of the balance sheet,” Maade said.

To counter the lower gold price, mining companies will cut capital expenditure, jobs and seek to sell assets, Maade said. AngloGold yesterday suspended its dividend, announced plans to cut 800 jobs at its corporate office and reduce its exploration budget by 60 percent.

The restructuring “is a necessary baptism of fire that will likely result in a leaner, fitter and stronger set of companies with an altered mindset focused on quality as opposed to size,” Maade said.

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