South African gold producer margins are at record levels, which is normally the cue for a commensurate margin-damaging increase in unit costs. But perhaps not this time, argues RMB Morgan Stanley.
The bank picks out three reasons why cost pressures arising from gold’s gravity-defying ascent won’t immediately catch up with the JSE’s three largest gold producers: AngloGold Ashanti, Gold Fields and Harmony Gold — at least, not this year.
First, both total capex and exploration intensity among the big three have already risen by more than 80% in the past four years compared with the average between 2014 and 2020. While underlying mining inflation is still running at mid-single digits in US dollar terms, a lot of the cost inflation is now “in the base”; the likelihood of more is considered to be low.
Second, there’s also low expectation of new major capital expansion announcements from the three miners this year. Gold Fields’s escalation of its (delayed) Salares Norte project in Chile, AngloGold’s ramp-up of Obuasi mine in Ghana and the integration of Centamin — which AngloGold acquired last year — will result in a drop in all-in sustaining costs (AISC). Harmony has already provided AISC guidance of 13%-22% higher in rand terms.
But, third, it’s the price of gold that is directing matters, largely driven by US President Donald Trump’s tariff and trade war announcements. Apart from entrenching gold’s place as a safe haven investment, the geopolitical uncertainty is also contributing towards hesitancy among investors, freeing space in portfolios to add gold, says UBS precious metals analyst Joni Teves. On February 17 the bank upgraded its outlook on gold. “We think it is possible to see a high to $3,200 an ounce before prices gradually ease and stabilise at elevated levels over the next few years,” Teves said.
Central bank support has given a further boost to gold. After pausing in November, gold pushed on in December, owing, analysts say, to a build in stocks on the Comex market. Then, in January, the World Gold Council said central bank purchases had broken through 1,000t in 2024 for the third year in a row. Banks accelerated purchases sharply in the fourth quarter to 333t, it said.
In a report on February 14, Morgan Stanley said: “Given its role in decoupling gold from its usual drivers since 2022, the pace of central bank gold buying seems critical to the outlook.” It asked: “Gold unstoppable?”, adding: “With many of gold’s supportive drivers still in place, on balance we think we haven’t yet peaked.”
Given its role in decoupling gold from its usual drivers since 2022, the pace of central bank gold buying seems critical to the outlook
— Morgan Stanley
On other metals, the effect of the Trump presidency has been less clear. The administration confirmed on February 11 its intention to remove all exemptions and restore section 232 import tariffs on steel (25%) and aluminium (25%, up from 10%), effective early March, later changed to April. Based on similar tariffs of Trump’s first presidency, implemented in 2018, up to 80% of the increases will be borne by US importers, argues Goldman Sachs.
The balance may reflect on lower producer/exporter prices in order for the duty increase to be satisfied, it said. For companies such as Australian diversified miner Rio Tinto, that’s equal to a 1% hit on group earnings before interest, tax, depreciation and amortisation (ebitda) — 5% of ebitda of its aluminium division.
“Commodities [function] so early in the value chain that there are a lot of steps before [tariffs] flow through to the end price [for] the customer,” Julian Grieve, head of resources at RMB, tells the FM. “Steel pipe prices change every day, but the value of a Volkswagen doesn’t change so quickly,” he says. “But what is being alleged [by Trump] and what will be executed are very different things. Timing is so uncertain.”
South32 CEO Graham Kerr plays down the potential impact of the tariffs. As a portion of total group revenue, about 9% of sales is in the US. In terms of aluminium production, it’s about 13%, based on South32’s interim ebitda to end-December. Speaking to analysts this month, Kerr said there was “only one person” who has a sense of where US tariffs are heading.
Unless new aluminium production is incentivised in the US, there’s little long-term threat to the group’s business, Kerr said. “The last time we had tariffs in place we didn’t see an inducement of US production. Unless you see big inducements of new smelters in the US it’s probably not going to make a big difference on our book, from our perspective.”
Kerr acknowledged that tariffs, if they are implemented as envisaged now, could have a long-term effect on critical components such as palladium.
Like so much of the Trump administration’s economic approach, tariffs are inflationary and may ultimately manifest in a higher interest rate. Both developments would hurt the consumption of consumer goods, such as the buying of new vehicles. A significant slowdown in the automotive market is the very last thing autocatalyst suppliers such as South Africa’s platinum group metal (PGM) miners need right now.
The average rand basket price for PGMs for Anglo American Platinum (Amplats) declined 13% in the six months to December 31, driven by multiyear price lows for palladium and rhodium, which fell 24% and 30% respectively.
“Tariffs do result in higher costs, which are borne by the end users and will drive both inflation and interest rates higher,” says Amplats CEO Craig Miller.
“This may weigh on people’s ability to replace motor vehicles and affect PGM demand. But in terms of medium-term demand we continue to see people wanting to own a motor vehicle for their own mobility. The electrification of the drivetrain will slow down, in total percentage terms, against the number of internal combustion engine or hybrid cars that contain catalytic converters,” he tells the FM.
“It won’t change the deficits in platinum, palladium and rhodium for 2025.”
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