Late offer by South African mining houses said to meet union demands

By Nicol degli Innocenti
Financial Times
Saturday, July 26, 2003

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South African gold companies are bracing themselves
for a difficult week, in which they will announce sharply
lower profits and may face the first nationwide
mineworkers' strike in 16 years.

Yet companies are finding these ominous clouds have a
gold lining: their share prices are moving up as the dollar
gold price has been rising, and this week reached a
five-week high of $361 an ounce.

quot;Shares are rising purely on the back of the dollar gold
price,quot; Allan Cooke, gold analyst at HSBC Securities in
Johannesburg, said. quot;There is an expectation out there
that the gold price will keep rising and a determination
to ignore earnings and the exchange rate.quot;

The June quarter's reporting season is expected to reveal
the extent of the damage that the stronger rand has
wreaked on companies' profits.

The rise in the dollar price of gold this year has been more
than offset by the South African currency's 12 per cent
strengthening against the dollar, which has slashed the
rand gold price.

Analysts forecast drops in earnings between 25 and 60
percent for the country's top three gold producers, which
report next week.

AngloGold, the largest, which has 42 per cent of its
production outside South Africa and has put hedges in
place, is expected to be the least affected.

The negative impact on Gold Fields, the No. 2 producer,
should also be reduced by the group's exposure to Ghana
and Australia. Harmony, which has specialised in marginal
mines in South Africa, is seen as the worst hit and could
even report a loss, analysts say.

Durban Roodepoort Deep (DRD), South Africa's
fourth-largest gold producer, on Thursday announced a 60
percent drop in net profit for the June quarter and warned
that unless the rand weakens substantially, it could be
forced to close two of its mines, with the loss of 13,000
jobs.

Other producers are saying they operate on paper-thin
margins, have already put drastic cost-cutting measures
in place and must reduce costs by cutting jobs.

Gwede Mantashe, general secretary of the National Union
of Mineworkers (NUM), says gold companies made huge
profits last year when the rand was weak, yet quot;the windfall
was cashed by managers but not workersquot;.

The NUM's request for a 20 per cent pay increase was
turned down by the industry, which has made a last offer
between 9.5 and 10 percent, well above the inflation rate.
Companies say labour charges make up half of production
costs and they cannot afford to pay more at a time when
they also face an impending 3 percent royalty on gross
revenue.

The NUM has called for a strike to start on Sunday unless
the industry increases its offer. In 2001 a deal was reached
just 24 hours before a strike was due to start.

Meanwhile, analysts say the threat of a strike is actually
supporting the gold price -- buoying share prices of
companies likely to be worst affected by stoppages.

quot;Gold share prices are so out of sync with valuations it is
scary,quot; an industry source said yesterday. Some say the
reason is that the buying spree has been driven by retail
investors, all gold buffs. DRD, for example, has 30,000
retail investors in the United States, a factor that has
contributed to the share price leaping nearly 7 percent to
R19.85 on the Johannesburg Securities Exchange yesterday
despite its poor quarterly results.