RBC Capital Markets says the South African gold sector offers a very positive investment thesis on the back of its gold price outlook and expected operational improvements, particularly compared to the local PGM sector.Analyst Leon Esterhuizen said gold major AngloGold Ashanti laid a foundation from which the company could deliver a sustained improvement for years to come in 2008. The company's major objective was to deliver on promised production and cost guidance, to realise a targeted ROCE of over 15% and to become the most profitable mining company in the world. Esterhuizen said the bank believed this was possible, in particular under new management and given the exceptional gearing potential based on making its asset portfolio work harder and smarter.The company was expected to put all its bad news in the fourth quarter of last year's results, setting it up for a strong performance in 2009, which the market is currently buying.On our current numbers, we see AngloGold Ashanti as being in a position from where it could deliver quarterly earnings of 400c/share in 2009, said the analyst.Esterhuizen said Gold Fields still offered an opportunity since its implied forward P/E multiple of 13x to 15x was low compared to the industry's usual trading range of between 10x and 25x.Gold Fields was set for a very strong performance in first quarter 2009 given the return to full production at Kloof and Cerro Corona and the market was also buying this as in AngloGold Ashanti's case.We see Gold Fields being in a position from where it could deliver quarterly earnings in the order of 140c/share in 2009, said the analyst.Harmony, also under new management and undergoing restructuring to perform better in future, probably has the best gearing from the rand's weakness but still has too many niggles to reach its ultimate potential, according to Esterhuizen. These included missing targets at core operations in the third quarter of 2008 and lowering its production target for the fourth quarter, although it was partly due to underground fires in high grade areas of Bambanani.In addition, Esterhuizen feels that Harmony does not have the strong turnaround kickers it sees in AngloGold Ashanti due to its much reduced hedging exposure and in Gold Fields which has the benefit of full production at Kloof and Cerro Corona.By implication, Harmony's improvement in first quarter of 2009 is expected to be muted compared to both Gold Fields and AngloGold Ashanti, he said.Esterhuizen said the implied forward P/E for Harmony was approaching the top of the usual 10x to 25x band and illustrated an increased level of risk relative to the peer group.RBCCM currently rates Harmony as Underperform, Gold Fields as Sector Perform and AngloGold Ashanti an Outperform.It expects positive things from DRDGOLD going forward as the balance of the company's production now swings from mostly high-cost marginal underground ounces to surface production dominating.Given the new production from ERGO in 2009, the company is set for a very strong performance. On current numbers, we see DRDGOLD as capable of delivering quarterly earnings of about 25c/share in 2009.The bank's current rating of DRDGOLD is Outperform.Comparing the gold producers to the local PGM sector, Esterhuizen said the picture for South African PGM producers were anything but pretty. Although the rand weakened substantially towards the end of 2008, the decline in the metal price basket would result in markedly lower earnings than previously seen.The situation is compounded by current spot metal prices trading another 35% below the average recorded for the second half of last year, so the really bad numbers are yet to come - in the first half of 2009.The analyst said the implied average forward P/E ratio for the sector as a whole came to 23x - while he believed it should be closer to 10x in order to reduce the downside risk to acceptable levels.
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