The effect of input commodity price movements on the earnings of South African gold mining companies.

Abstract

Commodity producers in general typically have a commodity driven cost base as well as commodity price driven revenue stream. The research report investigates the correlation between input commodity price and gold price for gold mining companies, and how commodity price behaviour could potentially have been harnessed in managing the earnings of South African gold mining companies. The research is performed via a regression analysis to gain insight into how much of the underlying gold price is explained by movements in the input commodity costs. Furthermore a representative South African Gold mine is used to understand the earnings effect of simultaneous commodity input price and gold price hedging. The quantitative analysis confirms a sympathetic movement in gold mining commodity input price and the gold price. Furthermore, the research report has found that for the representative South African gold mining company, simultaneous commodity input and gold price hedging would have increased earnings for the years 2005 to 2008. To this end it is recommended that the comovement in commodity prices be instrumental in the price risk management of gold mining companies.