Rand newly gained strength may negatively impact South Africa’s gold miners: BMI

Despite a relative pessimism regarding macroeconomic fundamentals, the South African rand is expected to gain strength over the next few months and that could mean bad news for the country’s gold miners, according to BMI Research.

In a recently published report, BMI forecasts a year-end exchange rate of ZAR10.9/USD, up from a previous forecast of ZAR11.6/USD. The firm says that not everyone will benefit from the currency’s appreciation.

“Our optimistic outlook for the rand will shift our existing positive view on South African gold miners over the coming years. In previous analysis, we outlined how rand weakness would aid South African gold miners’ currency-adjusted earnings over 2018-2021, despite the short-term boost to the currency prompted by Cyril Ramaphosa’s election as new ANC leader and President of South Africa. However, the renewed likelihood of a strengthening rand will mean that the negative impact on domestic gold miners earnings witnessed over 2017, will continue throughout 2018 and into 2019,” the document reads.

Despite its dim predictions, the market research company says that the effects of a stronger rand on gold miners’ profits could be mitigated by an expected upward trend in gold prices, which should average $1.300/oz this year and $1,325/oz in 2019, up from $1,259/oz last year.

A recent announcement by President Ramaphosa could also lessen the impacts of the rand’s growth. In BMI’s view, the leader’s intention to open a negotiation with the mining industry on last year’s much-criticised new mining charter will significantly improve investor sentiment surrounding the domestic mining industry.

Up until the 1970s, the rand was nearly as strong as the U.S. dollar, had a conversion rate of 2:1 to the pound and used to be pegged to the country’s gold reserves. In recent decades and for several reasons among them political instability, it has depreciated. However, the currency’s value has been recovering recently thanks to a newborn optimism following Cyril Ramaphosa’s election as South Africa’s fifth president and his decision to reinstate Nhlanhla Nene as finance minister.