Gold could reach US$1 500/oz by the end of this year and $1 650/oz by 2021 as global political and economic fears show no signs of abating and US interest rate hikes are likely to be "slow and low", Afriforesight chief energy economist and CEO Charles Kieck says.
Gold is one of the commodities that Afriforesight is most bullish about over the next five years, though its economists are also forecasting steady and gradually improving prices for some steel-making materials and platinum group metals (PGMs).
This means that apart from those who have already invested in SA’s most efficient gold producers, investors might also take a second look at companies with a more industrial metals focus, such as South32, Assmang, Kumba Iron Ore, Merafe Resources and Tharisa.
Heidi Sternberg, mining and beneficiation sector specialist for the Public Investment Corp, says timing is everything in the commodities cycle, and the substantial write-downs of assets bought at the top of the cycle by the biggest companies shows even experts misread cycles.
Between 2011 and the present, the commodities sector has absorbed the excess capacity created during the previous 11-year, Chinese-led boom.
But history suggests the next commodities peak will be higher than the last one, says Sternberg.
The JSE’s leading gold shares more than doubled between January and July, as the spot gold price ran up from about $1 068/oz to $1 366/oz in early July. Though it has since pulled back to $1 324/oz, taking gold shares with it, Kieck says uncertainty over Syria and the US presidential election, tensions in the South China Sea and, on the financial front, the question of whether other European nations will follow Britain out of the EU, continue to give gold appeal as a safe haven. Negative real interest rates also make gold a relatively more attractive investment than assets such as bonds.
But gold shares can gyrate wildly on sentiment, which makes them unsuitable for inexperienced investors.
DRDGold CEO Niël Pretorius told investors at last week’s results presentation that the recent surge in DRDGold’s share price to more than R12 on the Brexit vote (and subsequent pullback to R7.62) did not reflect the way the business was performing.
"Our ambition is to sustain our share price based on fundamentals," he says. "The bottom line is, don’t go to sleep on this stock."
Afriforesight’s head of research, Kobus Lamprecht, says steel-related commodities have seen dramatic changes recently. The manganese price has doubled over the past year and miners are making better margins. The world’s biggest iron ore miners in Australia and Brazil are still making gross margins of about 50%. Kumba’s first half gross margin was 41%.
Iron ore generates about 10% of SA’s total mining revenue and manganese about 4%.
Lamprecht expects manganese prices to retreat from current levels for the rest of the year as more supply is coming onto the market and Chinese steel production is seasonally slower in the second half. But prices should recover next year, as Afriforesight expects global steel production will start to increase on infrastructure investments planned in the US, Canada and emerging markets.
SA’s share of the global manganese export market is about 42% and, though it has the capacity to bring more production on stream, Lamprecht believes producers will be restrained.
Though Afriforesight expects iron ore prices to fall to about $50/t from $59/t over the next few years, local producers will be cushioned by higher grades and a weak rand.
China will also support smaller suppliers for strategic reasons, Lamprecht says.
Afriforesight’s processing and PGM markets analyst, Ayanda Makupula, says the outlook for platinum is good but not exciting, with investment and jewellery demand the main drivers of the price over the next few years, rather than the autocatalyst industry. He sees the price at about $1 150/oz by the end of next year from $1,050/oz at present, rising to above $1 300/oz by 2021, driven partly by more fuel cell production.
Impala Platinum CEO Terence Goodlace told shareholders last week that, from 2020 onwards, the lack of investment in new platinum projects would start to be felt.
Kieck says asteroid mining, which has the potential to upset the platinum market, is not as far fetched as it seems.
The US’s National Aeronautics & Space Administration is aiming to bring an asteroid back to earth by 2025. While it costs about $50bn to put 500t of material on the moon, it would cost only about $2.6bn to drag a 7m diameter, 500t asteroid back to earth. Platinum would be one of many elements in asteroids, but potentially the quantities would be huge.
Gerome Marrian, GM of marketing at Sasol Mining, says though coal is declining as a portion of the global energy mix, most analysts expect modest future growth in demand, mainly from developing countries. Consensus forecasts are for coal to be at $50-$55/t for the next few years, but not lower. Many SA coal assets are at the lower end of the cost curve and local producers benefit from currency weakness.
Kieck says India, SA’s biggest market, is expected to need SA coal for some time, as Coal India looks unlikely to reach its target of 1bnt of domestic production by 2020.