Johannesburg - South African gold producers AngloGold Ashanti and Gold Fields will receive a cash-flow boost after the UK’s vote to quit the EU prompted a rally in gold prices, according to Moody’s Investors Service.
AngloGold could make $305 million (R4.7 billion) of free cash flow in the second half of this year if the metal averaged $1 300 an ounce, a 65 percent increase on the $185m it was forecast to make with bullion at $1 200 an ounce, Dubai-based analyst Douglas Rowlings said yesterday.
Gold Fields’ free cash flow could rise 37 percent to $185m by the same measure.
Gold, a haven in times of economic and political crises, has surged 13 percent since the “Leave” campaign won the UK’s referendum on membership of the EU on Thursday.
The precious metal rose 0.8 percent at $1 325.70 an ounce at 11.07am in London.
AngloGold and Gold Fields also benefit from the weaker rand and Australian dollar, the currencies of the nations where they produce most of their output and in which they pay costs.
“The contagion-related uncertainty that Brexit brings to the global economy is likely to continue to support demand for safe-haven asset classes, keeping gold prices high and the US dollar strong relative to the Australian dollar and South African rand,” Rowlings said.
AngloGold’s $750m of bonds due August 2022 are rated Baa3 by Moody’s, the lowest investment grade. The yields dropped to a three-year low of 4.93 percent on Friday, after falling from a record high of 9.53 percent in January.
The yields on Gold Fields’ bonds due October 2020 dropped to the lowest since April 2013, yielding 5.73 percent. In January they were at 12.6 percent.
Moody’s said: “The next few months will likely be bumpy for the gold and currency markets as Brexit’s effects materialise. AngloGold Ashanti’s and Gold Field’s credit profiles remain well-positioned to accommodate any volatility over this period, given their liquidity sources and strong credit metrics.”
Fred White, the head of balanced funds at Sanlam Investment Management, said yesterday that once the dust of the initial knee-jerk reaction to the Brexit settled, the markets were likely to reflect that not much would change overnight and that the longer-term impacts would take time to reveal themselves and were likely not to be catastrophic. He said South Africa imported 2.9 percent of its goods from the UK in the opening four months of this year, while exporting 3.4 percent of its goods to the UK.
“We still have two years to negotiate trade agreements with the UK. The overall direct impact is, therefore, not large. But there is likely to be an additional impact, given South Africa’s exposure to Europe more generally.”
He said when the Brexit vote was announced on Friday morning that the British pound declined by 12 percent. Some shares were sold aggressively, such as Barclays, which was soon down about 30 percent and financial markets were littered with red screens – there was turmoil everywhere.
White said when this kind of panic last hit markets in 2008, banks were littered with toxic assets which threatened their existence and with it the functioning of the global system.
“Brexit will have some ramifications, but in all likelihood, less than what the markets reflected on Friday. Investors should not be spooked by the volatility that the Brexit outcome caused and make hasty trades based on an emotional response, but rather take time to reflect on the severity of the likely longer-term impact.”
Andrew Golding, the chief executive of Pam Golding Property, said some points of debate as a result of the Brexit included whether Britain’s exit from the EU would result in short- or medium-term pound weakness and in the process make London property less expensive and as a consequence, represent a buying opportunity for South Africans and other investors.
“On the flip side, the attraction of South African property to British and European investors is likely to remain unchanged although a weaker pound will make it slightly more expensive for UK investors.”
* With additional reporting by Bloomberg
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