JOHANNESBURG (miningweekly.com) – South African miners had the biggest exposure to the risk of falling gold prices, owing to high production costs that were rising further at a fast pace, ratings agency Fitch said on Thursday.
The agency indicated in a statement that, while prices could recover quickly if worries over the eurozone rose further, its base case was for prices to fall over the next two to three years.
Fitch added that unless miners implemented cost savings, yearly percentage losses in the low- to mid-teens over the next three years could be enough to place pressure on some ratings.
Labour-intensive mining practices, combined with sharply rising wages and energy costs resulted in production costs rising notably faster for South African miners, compared with other producers.
“The impact has been masked by rising prices in recent years, but is now likely to be much more obvious in company results as gold prices decline,” Fitch noted.
The agency said miner Harmony Gold was among those most exposed, as it had the highest percentage of labour costs. In contrast, miners that use less labour-intensive practices, such as openpit mining, were better positioned to cope with falling prices.
Meanwhile, Fitch indicated that, although reports that Cyprus could sell a substantial volume of gold may have triggered the recent sharp drop in prices, it believed the fall represented a changing sentiment towards the metal.
“Changes of this type tend to have a snowball effect, as investors head for the exit and we, therefore, expect prices to continue falling over the next two or three years. This trend could be temporarily reversed…if investors become more concerned about the outlook for the Eurozone,” Fitch stated.