For South African gold miners, it’s both the best and worst of times.
The metal started the year with a bang, rising 4% so far and trading near the highest since August 2016.
But an equally impressive rally in the rand means that SA-focused producers are likely to miss out on the party.
Because mining companies pay most of their expenses in local currency, a stronger rand squeezes profit margins and can render some operations unprofitable.
Many of SA’s gold mines date back to the 1950s and 1960s, and much of the easily accessible metal has been exhausted, while labour-intensive mining methods compound the effect of currency moves.
“With the rand below R12/%, margin pressure is definitely building up,” said Carsten Menke, an analyst at Bank Julius Baer.
“Rand strength is the flip side of an improving economy, but it’s causing headwinds to miners because of costs going up — they are not enjoying the tailwinds from rising gold prices.”
The rand traded below R12/$ on Wednesday for the first time since May 2015, extending a rally sparked by an improving domestic political environment.
Sentiment has been buoyed by the election of Cyril Ramaphosa as head of the ANC in December, setting him on a path to take over from President Jacob Zuma.
The gold price rally “won’t make a difference in the short term” to South African miners, Menke said. The need to maintain high capital expenditure also thinned out profit margins, he said.
More than half of South African gold shafts may be operating at a loss and a stronger currency raises the risk of closures, said Rene Hochreiter, analyst at Noah Capital Markets.