On Tuesday, September 25, analysts at Bank of America upgraded shares of Gold Fields Ltd. (GFI). The firm raised its rating on the stock from a Neutral to a Buy and did not set a price target. Despite the upgrade, shares of GFI reacted quite dismally, trading down at the mid-day point of the trading day by as much as 1.40% on Tuesday.
Gold Fields Limited engages in the acquisition, exploration, development, and production of gold properties. It holds interests in eight operating mines in South Africa, Peru, Ghana, and Australia. As of February 27, 2012, the company had total attributable precious metal and gold equivalent mineral resources of 217.0 million ounces and mineral reserves of 80.6 million ounces. Gold Fields Limited was founded in 1968 and is based in Sandton, South Africa. - Yahoo Finance
What type of catalyst is driving the stock down after such a strong upgrade by Bank of America? The answer seems to be the micro-economic issue of regional labor unrest, and is something that should not only concern the workers in question, but the investors and potential investors who may be looking to strengthen or establish a new position in the company, the Gold sector (GLD), and more specifically with the Gold Miners (GDX). I use the ETFs GLD and GDX in an effort to demonstrate the fact that sometimes variables such as labor relations and labor unrest may shy investors away from an individual stock, but not the sector as a whole.
The company has confirmed that:
"notwithstanding press reports to the contrary, the unlawful and unprotected strike at the West Section of the KDC Gold Mine (KDC West, formerly Driefontein) on the West Rand in South Africa continues. The strike started on September 9th 2012, and has lasted a total of 17 days. In addition, the employees at the Beatrix Mine in the Free State have also commenced with an unlawful and unprotected strike. The strike started at the West Section of Beatrix (formerly Oryx Mine) on Friday, September 21st, 2012 and has lasted a total of 4 days, and had spread to the rest of the mine on Monday, September 24th. The large majority of the 15,000 employees at KDC West and 9,000 employees at Beatrix are participating in the unlawful strikes and production has been halted at both operations. The company has received urgent interdicts for KDC West as well as Beatrix West, and is applying for an interdict for the remainder of the Beatrix mine. The company is evaluating all options to deal with the unlawful strikes."
From an investment standpoint, strikes of this nature, resulting in the suspension of operations as well as a work stoppage by as many as 24,000 workers could seriously hinder both quarterly and annual results for GFI. There are two very specific variables that would be affected by such a stoppage: earnings (both quarterly and annually) and production. In the case of GFI, earnings have missed estimates by an average of 10.825% in each of the last four quarters, and any stoppage directly related to production is going to diminish those figures even further.
If we examine the sector a bit further, we'll notice that strikes of this nature aren't as uncommon as we'd like to think and can cause some serious short-term issues. For example, workers at an AngloGold Ashanti (AU) mine were involved in several clashes with police that in turn resulted in the deaths of 34 miners, and previous clashes at the Marikana platinum complex resulted in the deaths of 46 workers. Although, AngloGold and its workers have reached a compromise, I'd still remain bearish on the stock until both sides have demonstrated better results under the terms of the new agreement.
Should potential investors consider the chance to establish a position in either Gold Fields Ltd. or AngloGold, considering the current unrest at various sites directly related to each company's mining operations? From an investment standpoint with regard to the workers striking in an effort to achieve a better level of wages, I see no reason to establish a position in GFI or AU at current levels until the parties have reached a solid agreement by which all terms and conditions have been decided upon. There is no real way of knowing how and when the strikes will end, and if we find ourselves in the midst of another clash resulting in the loss of life, the industry as a whole could be in for yet another black eye.
Where should potential investors turn to in the wake of the unrest concerning GFI? In my personal opinion, I happen to think Barrick Gold Corp. (ABX) is a more of a solid choice within the sector, especially from a fundamental standpoint, rather than a labor relations standpoint. The company has demonstrated strong margins and a very nice yield over the last 12 months. If we examine the margins a bit further, we'll notice that Barrick Gold outpaces Gold Fields in both profit margin and operating margin. In terms of profit margin, ABX had demonstrated a profit margin of 27.85% whereas GFI had only demonstrated a profit margin of 18.19%, which equates to a ratio of 1.53 to 1. In terms of operating margin, ABX had demonstrated an operating margin of 42.04% whereas GFI had only demonstrated an operating margin of 30.05%, which equates to a ratio of 1.40 to 1.