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Why Buy a SA Gold Share?. February 2013. Normal health warning!. I will try to equally offend everybody. This is a ‘cut and paste’ presentation, but I have no doubt the originators of the slides would prefer not to be associated with this!

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normal health warning
Normal health warning!
  • I will try to equally offend everybody.
  • This is a ‘cut and paste’ presentation, but I have no doubt the originators of the slides would prefer not to be associated with this!
  • I may not hold all these views by the end of this presentation.
  • I have spent 34 years in an industry where honesty is not an option.
why did people historically buy gold shares
Why did people historically buy Gold Shares?
  • Leveraged exposure to the gold price
  • Physical gold’s price was declining
  • All companies had growing production profiles
  • Everybody had falling cash costs
  • Growth came from acquisitions funded with shares


Investors had no choice but to buy shares if they wanted


who bought gold shares in the past
Who bought gold shares in the past?

Moms and Pops – 3G‘s (Believe in God, Guns and Gold)

  • Fundamentalist belief in Gold‘sintrinsicvalue
  • Bullish on Gold Price
  • Accepted and believed in the Gold multiple
  • Violently Anti-hedging

Specialist Gold Fund Managers

  • Theyspoketheirbook
  • Againstdiversification
  • Anti-hedgingordebt
life in a bubble
Life in a bubble!
  • Shares trade at multiples to NPV
  • Cash cost is our metric of choice
  • Shareholders wanted growth, growth and growth
  • Dividends meant you were ex-growth


We had no ‘cooking clue’ of what we were selling ……….

and who burst it
And who burst it?

“None of us are as stupid as all of us”

in 2004 the wgc created the etf
In 2004 the WGC created the ETF!
  • ETF’s were inevitable, but so is death
  • US$ 120bn of new money by-passed stocks
  • Management and Fund managers became redundant
  • With rising Gold prices no longer any justification for a Gold Multiple

Time will tell whether ETF buyers are better investors than Central Bankers

This overhang is going to result in a hangover

what should our multiple be
What should our multiple be?

There is no longer any justification for a Gold Multiple

PE : 6 - Caters for depleting nature and uncertainty

8 - If revenue is hedged

10 - If a credible growth story

12 -Bubble territory


issues we face as an industry
Issues we face as an Industry
  • We are caught in a redundant model
  • The gold bull market is mature
  • Investors can buy gold directly
  • We have lost the right to formulate strategy

Most majors are diversifying across the value chain of exploration, developing, operating and harvesting.

Investors want choice!

but we did this for you
But we did this for you…

We gave you what you wanted

  • Growth
  • Low cash costs
  • No hedging

You got paid well, we got paid even better and we have no investors left.


jpm s view january 29 th 2013
JPM’s view - January 29th ,2013
  • “The SA mining industry is in crisis, in our opinion. Tactically, we continue to prefer the ETF to the senior SA gold shares under our coverage while labour climate, costs and regulatory uncertainties persist”
the gold market and how we fit into it
The Gold market and how we fit into it
  • US$ 400bn with limited consolidation
  • Our product competes with our shares for investor Dollars
  • Our hedging activities show how wrong we are getting the gold market
  • Central bankers make us look smart
industry structural issues
Industry structural issues
  • Balance sheets were mismanaged
    • Cash generated was badly allocated
      • Bad ore bodies
      • Bad Capex control
      • Record write downs
      • Runaway operational cost
    • No Hedging
    • No Debt

And now the CFO’s who oversaw this are running the companies!

bloomberg january 30 th 2013
Bloomberg – January 30th ,2013
  • “The world’s biggest mining and steel companies have wiped about $50 billion off project valuations in the past year and the purge is poised to continue this earnings season as managers reassess expensive takeovers.”
marikana will change the game
Marikana will change the game
  • Coalbrook (1960) redefined SA Coal mining
  • NUM and 1984 strike changed SA mining landscape
  • Bloody mine violence of early 1990’s
  • AngloGold’s refocusing strategy
  • Cynthia Carroll
  • Marikana and Amcu

“A system that improves thru external shocks is

Anti-Fragile” Nassim Nicholas Taleb

specific sa risks
Specific SA risks
  • Licence to operate
    • Section 54’s
    • Society’s views
    • Societal cost, SLP’s, EIA’s, Eishkom
    • Political concerns
    • Creeping nationalisation and taxes
  • Licence to close
    • Inabilty to legally close mines
    • Impossible to quantify liabilities
    • Legacy costs
fund managers once again know the answer
Fund Managers once again know the answer..
  • “AngloGold could also unlock value if it split into two companies: a high growth international business, and a mature high dividend paying South African company,” Paulson & Co. said in the letter.”

“Idiocy – Never underestimate the power of stupid people in large groups”

even journalists know what is wrong
Even journalists know what is wrong

The other side of the coin is that the managers of the South African mining industry have been indolent. They have rested on hard-won laurels as the experts in deep-level hard-rock mining for too long. They have failed conspicuously to adapt to the new technologies that have been advanced with singular success elsewhere.

Entrepreneurial flair has been absent. An Ernest Oppenheimer, even in the vastly changed circumstances of the 21st century, would never have been permitted the Rip van Winkel approach of modern-day managers.inintransigence.

David Gleason BusinessDay 5 Feb 2013

is breaking up the answer
Is breaking up the answer?

Breaking up the majors may result in:

  • Focus
  • No blending of risks / rewards
  • No ability to fund ego projects


  • Some lazy fund managers will hate it
  • Stock pickers / traders will love it
  • Real people may actually run it
jpm on sa gold shares february 1 st 2013
JPM on SA Gold Shares – February 1st ,2013
  • The rand gold price is the key driver of this margin and we believe it is well supported at current levels.
  • Equities though have not responded due to the issues clouding the business environment in SA.
  • While the SA mining crisis prevails we see scant prospects for improved senior SA gold share ratings.
  • So we expect the large cap. SA gold equities to underperform the metal once again in 2013.
sa opportunities
SA Opportunities
  • Natural currency hedge
  • We should focus on harvesting of remaining mines
    • New structures – but not sure about Sibanye
    • New managers
    • Mine level cash cost should equate to total cost
    • Gold Price – Total Cost = Earnings = Dividends
sa gold investment themes
SA GOLD Investment themes
  • 3 Majors are like deer in the headlights
    • To split or not to split
    • To mechanise or not
    • To spend capex or not
    • Etc
    • Sibanye is not new, nor original and assumes SA is the problem…
  • Why would SA Inc support this?
sa gold investment themes continued
SA GOLD Investment themes (Continued)
  • We have had spectacular Junior failures
  • Mid-caps like DRD and PAR have been re-rated
  • After 120 years the rules are not flexible
  • Hard to run a SA mining company without SA shareholders
  • But I want to build a big company…..
exam question show me the cash
Exam Question: Show me the cash?
  • Are we really making cash?
  • What have we done with last year’s cash?
  • Do our investors trust us with their money?
pessimist s conclusion
Pessimist’s Conclusion

Let‘s live in hopeand die in despair!


Hope may not bewarrantedatthis time?

but i am an optimist
But I am an optimist

“I apologize for the mess my generation has imposed on yours.

I wish I could have left you a better legacy.

I just hope I have left you a measure of courage to face what we have done, and a measure of hope to do something about it.”

Nancy Kline Time to Think