>Bush's gift to SA golds
By: Stewart Bailey
Posted: 2003/01/13 Mon 19:18 | © Mineweb 1997-2003
JOHANNESBURG – South African gold majors look set to receive assistance from an unlikely
quarter in their quest to outperform their larger North American rivals this year; President George
W Bush’s economic stimulus package. The cornerstone of the $670 billion economic
rejuvenation package – and the shot in the arm for South African golds - is the proposal that the
archaic double tax on company dividends be halted, which if approved will spin out more than
$364 billion to US taxpayers over 10 years.
Once the din from the growing number of near-bankrupt US states opposed to the deal dies
down – they fear the proposed cuts will reduce the attractiveness of their tax-free municipal
bonds – analysts expect punters to start hunting for high dividend-yield shares; and that’s where
the South African gold heavyweights Harmony, Gold Fields and AngloGold, come in.
South Africans; reliable dividend payers
A prophetic report published on 13 December last year by JP Morgan’s global precious metals
team, which predicted an imminent end to double taxation, flagged South African gold stocks as
monotonously reliable dividend players with attractive dividend yields.
Given the uncertainty of a global economic recovery and the dearth of corporate profitability
across all sectors, the relative attractiveness of the South African gold shares should for the first
time extend beyond the historical competition within the gold sector.
“In these uncertain times, a strong ongoing business delivering a 3 percent to 5 percent yield
should offer relative safety against further market downturns,” said the JP Morgan report. “Since
gold stocks within North America have been operated as growth stocks with small dividends, this
sub-sector does not automatically come to mind as one in which to seek yield,” said the report.
Newmont, the industry number one and the only gold stock to feature in the S&P500, has an
anaemic yield of 0.5 percent when measured against the South Africans, which start at 3
percent (Gold Fields) and end around 4.5 percent (Harmony and AngloGold).
Joachim Berlenbach, South African gold analyst at Citibank, says the pending double
dividend-tax relief is potentially bullish news for the country’s gold shares, particularly given the
disparity in yields compared to their US competitors. He says the attractiveness of the high
payouts is not limited to the gold sector, however, with the platinum and diversified miners also
regular payers. Berlenbach flags Impala Platinum as particularly attractive in this regard, given its
current dividend yield of about six percent.
He also stresses the massive imbalance in favour of the South Africans in terms of their
respective resource bases and the resultant growth opportunities. “Look at AngloGold and
Barrick. They have virtually the same reserves, but AngloGold has more resources ounces than
Barrick, and growth is going to come from resources, not reserves,” said Berlenbach.
South Africans favoured, regardless of tax cuts
Berlenbach doubts the change in tax legislation is unlikely to prod the North American majors to
up their dividend yields. “They are more likely to use their cash for expansion and exploration,”
he said.
Harmony, Gold Fields and AngloGold, however, will almost certainly continue their dividend
paying form.
“The exploration phase (of the South African gold industry) is largely over…the domestic South
African gold industry is concerned with extraction, rather than with further exploration and
growth, hence returns must cover the cost of capital invested,” said JP Morgan. The research
note said South African exchange control restrictions, which prevent the free expatriation of
capital unless in dividends, made it difficult for mid-life South African mines to develop mines
elsewhere. “(This) also encourages them to distribute dividends,” said JP Morgan.
London-listed Anglo American’s desire to expatriate cash from its associates AngloGold (54
percent) and Gold Fields (21 percent), should also ensure a steady dividend stream from those
companies.
One Johannesburg-based gold analyst, however, says the benefit of the new legislation is too
small to make a material difference to institutional investment decisions. “You would want to look
at the underlying performance before deciding whether or not to invest in South African gold
shares,” said the analyst, who believes the local stocks are still the better bet given his view that
the rand will depreciate against the dollar this year.
The strength of the rand is one of the key factors mitigating against a stronger performance by
the South African gold stocks this year. While the gold price rose more than 25 percent in 2002,
the higher price has been offset by a stronger rand, which gained more than 40 percent during
the same period. If, as expected, US interest rates rise and South African rates fall later this
year, reducing an enormous arbitrage opportunity that is credited for rand-strength, the currency
is likely to lose ground against the dollar. “A stronger rand could reduce (the dividend yield of
the South African trio) in the short term…However, we feel this negative is more than balanced
by our positive outlook for gold and the significant upside potential, in our opinion, for the
metal’s price to surprise on the upside,” said JP Morgan.
Against the broader market
The three South African golds also perform well against the broader S&P500; according to the
JP Morgan report the top quartile of the S&P500 has a yield of 3.5 percent, while the second
quartile’s yield is 1.9 percent, the third at 0.47 percent and the fourth weighs in at zero.
The competition to attract the investment dollar is becoming increasingly fierce, but according to
JP Morgan, the top dividend payers in the US market have growing concerns with financial
performance and mounting concerns over potentially bankrupting litigation. That, coupled with
the geopolitical strife in the Middle East and global economic uncertainty, increases the
desirability of gold as an investment.
“Looking at the list of the S&P500’s top dividend payers, we see company’s with sizable targets
on their backs. There are the big tobacco companies being hounded by lawsuits, and the
utilities struggling with litigation in California and their finances,” said JP Morgan. “Gold is a
sector that, in this environment, has attractive fundamentals, and the metal is still trading at the
lower end of its historical price range.”
Will it pan out?
While the tax relief will undoubtedly be a boon for the South African resource shares, Bush’s
proposal has yet to pass muster with US lawmakers. Bush can expect strong opposition from 43
of the 50 US states that are running deficits. California is a prime example, with its $34 million
revenue gap accounting for less than half of the total $85 billion budget shortfall being faced by
the states this year, the largest collective deficit in 50 years.
The strength of that lobby cannot be underestimated, but regardless of the merits of their
argument, there appears to be consensus among commentators that some tax relief for
dividends is on the way. It could be just the tonic to rejuvenate the US equity markets and
attract speculative cash back onto Wall Street. After all, the US must find some way to fund that
budget deficit or the dollar is going straight to hell. |
