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A South African Gold Industry Turnaround?

Hated, despised, overlooked, undervalued, unappreciated, ignored. These are terms that could easily describe the current South African gold mining industry, especially where U.S. investors are concerned. The SA golds have long since been swept under the rug of investor enthusiasm and have been forgotten in the wake of the broad market recovery as well as the outperformance of other senior and mid-tier gold producers outside of South Africa.

From the standpoint of a contrarian-minded turnaround investor, isn't this exactly the backdrop from which the best reversals of fortune are begun?

Despite the lack of investor enthusiasm for the SA gold stocks, the SA mining industry has been the focus of one very high-stakes battle. I am referring of course to the recent $5.9 billion hostile takeover bid between the two South African gold mining concerns Harmony and Gold Fields. Gold Fields had previously tried to merge its international gold assets with Iamgold of Canada, but was voted down by its shareholders. As reported in the London Financial Times, should Harmony succeed in taking over Gold Fields it will create the world's largest gold producer, overtaking Newmont of the U.S.

For the benefit of those intermediate-term traders and investors in DRDGold who have become weary of DRD's future prospects, I'd like to share an interesting insight that a trusted colleague sent to me recently. He began by quoting a recent news wire article:

"DRDGold, the former Durban Roodepoort Deep Ltd., fired 7,000 employees last year, a third of its workforce. Job losses in South Africa's gold industry may reach 20,000 this year, Harmony Chief Executive Bernard Swanepoel said in September. Gold is the biggest source of export earnings, according to government statistics."

He further commented, "Clif, the SA economy is being force-fed to perform well beyond its capacity to cope. The SA government have embarked on a path for the SA economy that will only end in complete and utter disaster and result in the annihilation of a currency that at current levels can only be described as profligate but whilst being allowed to continue at current valuations guarantees disaster.

"Mark my words, before too long the SA government will be looking towards the SA gold industry as the only source of hope and the SA gold price will become the best performing of ANY in the word bar none!"

I share his opinion that the South African mining sector is long overdue a turnaround, and 2005 should see the first stage of this turnaround get underway.

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