100 GOLD IN SOUTH AFRICA

100 GOLD IN SOUTH AFRICA

FINAL PRODUCT: COINS, INDUSTRIAL END USES AND INVESTMENT CHAPTER 5 Contents: 5.1 THE SOUTH AFRICAN COIN INDUSTRY 102 5.1.1 The South African Mint Company (Pty) Ltd and Coin World 102 5.1.2 Other mints and coin producers 103 5.1.3 Employment profile of the coin sector 103 5.2 COIN PRODUCTS 104 5.2.1 Krugerrands 104 5.2.2 The Natura coin series 106 5.2.3 The Protea coins 107 5.2.4 The R1 and R2 coin series 107 5.3 DENTAL ALLOYS 108 5.4 ELECTRONICS 110 5.5 INVESTMENT 110 5.5.1 The JSE Limited s Krugerrand contract 110 5.5.2 ABSA s NewGold Gold Bullion Debenture 111 5 Photograph courtesy: Rand Refinery Limited GOLD IN SOUTH AFRICA 101

Apart from jewellery, other end uses of gold in South Africa include coins, dental alloys and electronic components. In 2004, the fine gold used in these sectors was: Fine gold usage in South Africa 2004 Non-Jewellery Applications t % of global fabrication Coin/medal fabrication 2.93 1.98 Dental alloys 0.04 0.07 Electronics 0.01 0.004 Total 2.98 0.49 Data source: Virtual Metals. In South Africa, these sectors are small, accounting collectively for 0.87% of South African gold mine output in 2004 and 0.49% of global consumption in these sectors. 5.1 THE SOUTH AFRICAN COIN INDUSTRY In 2004, fabrication of gold coins accounted for 2.93t of fine gold, about 1.96% of total gold consumed in coin fabrication worldwide... In 2004, fabrication of gold coins in South Africa accounted for 2.93t of fine gold representing 1.96% of total gold consumed in international coin and medal fabrication. The following tables show coin fabrication and sales in tons of fine gold between 2002 and 2004. South African coin fabrication 2002-2004 Fine gold - t 2002 2003 2004 Krugerrand bullion 0.76 1.81 2.34 Krugerrand proofs 0.22 0.19 0.18 Proteas 0.09 0.02 0.19 Naturas 0.18 0.15 0.18 R1 0.01 0.02 0.01 R2 0.03 0.02 0.03 Medallions 0.00 0.00 0.00 Total 1.29 2.22 2.93 Data source: SA Mint, Universal Mint and Gold Reef City Mint. South African coin sales 2002-2004 Fine gold - t 2002 2003 2004 Krugerrand bullion 0.91 2.18 2.87 Krugerrand proofs 0.19 0.15 0.17 Proteas 0.05 0.01 0.18 Naturas 0.13 0.15 0.18 R1 0.01 0.01 0.01 R2 0.03 0.02 0.02 Medallions 0.00 0.00 0.00 Total 1.33 2.51 3.43 Data source: Rand Refinery, SA Mint, Universal Mint and Gold Reef City Mint. Note: Annual sales exceed minting due to sales out of inventory. Medallions appear in these tables as zero fabrication and usage since the gold volumes involved are less than 10kg. 5.1.1 The South African Mint Company (Pty) Ltd and Coin World The South African Mint Company (Pty) Ltd is a wholly-owned subsidiary of the South African Reserve Bank (SARB). It was established on 1 September 1988 and in October 1990 moved from Pretoria to its current location at Gateway in Centurion. Its main function is to mint coinage under the Reserve Bank Act of 1989. The South African Mint can produce both legal tender and commemorative gold coins, although currently all the gold coins issued are legal tender. Decisions with respect to current and future coin programmes are taken by the Government at Cabinet level. The SARB requires Cabinet approval for planned coin issues, details of which are published annually in the Government Gazette. The coins are then struck by the SA Mint and made available for purchase by the public. The SA Mint currently 102 GOLD IN SOUTH AFRICA

produces several legal tender gold coins, namely Krugerrands, Naturas, Proteas and the R1 and R2 cultural coin series. Coin World (a wholly-owned subsidiary of SA Mint) is a retail outlet and museum on the premises of the South African Mint. All the analysis that follows regarding the SA Mint relates to the Coin World business of the Mint only, and not the Mint in its entirety, since the Mint s main function is to strike and distribute the country s legal tender coinage. CHAPTER 5 5.1.2 Other mints and coin producers In addition to the SA Mint, there are two other companies that strike gold coins. Their products are commemorative medals and medallions and not legal tender coins. These are the Cape Mint and the Gold Reef City Mint. In addition to the SA Mint, there are two other commercial minting facilities operational in South Africa... The Cape Mint, located in Cape Town, strikes commemorative gold coins to order for export. The Cape Mint collaborates with the Universal Mint, a coin sales broker with no actual production facility, on certain of these export projects. In 2004, these companies collectively struck coins for the Cook Islands and Uganda to commemorate various national milestones. The mark-ups for these issues are not made public but the manufacturing costs were reported to be R18 per coin irrespective of the coin size. These costs pertain to gold coins and exclude packing and shipping charges. Buyers of coins from the Universal Mint and the Cape Mint are required to pay up front for the purchase of the gold on placement of their order. The terms for the balance of the payment, including minting, delivery cost etc, are then 30 days after delivery of the coins. The Gold Reef City Mint in Johannesburg also strikes gold medals, medallions and commemorative coins for sale to local purchasers and tourists visiting Gold Reef City. The company purchases gold grain from Rand Refinery or other secondary refiners. It produces its own blanks and strikes its own coins and medals. Apart from marketing its own products, the Gold Reef City Mint also markets Krugerrands. While the client base for these Krugerrands is mainly local purchasers, tourists visiting Gold Reef City also buy from this source. The mark-ups applied to the coins sold to tourists also reflect a commission paid to the tour operators who ensure that tourists visit the mint. Interviews conducted with these mints indicated that they are operating at well under capacity although they declined to indicate their current rates of minting. Should demand for coin products increase, they would be able to meet orders through increasing existing capacity utilisation. 5.1.3 Employment profile of the coin sector An analysis of staffing in the South African coin sector follows. The figures associated with the SA Mint staff relate directly to Coin World and not to staff involved with the striking and issuing of monetary coins in circulation. Coin sector Staff profile Number % Men 40 48.0 Women 42 52.0 Total 82 100.0 Data source: From interviews. The age profile of the coin sector staff showed a statistically normal distribution. The demographic make-up shows a predominance of whites and coloureds at 37% each and blacks at 26%. GOLD IN SOUTH AFRICA 103

52% of the staff employed in the coin sector have a matriculation certificate (matric) as a basic qualification and another 19% have education after matric. Some 29% do not have a matric qualification. 64% of the staff in the coin sector are in manufacturing, specifically in preparing the blanks, striking the coins and polishing and packing the finished product. Another 16% are involved in marketing, leaving 7% and 4% involved in the administrative and technical sides of the business respectively. 5.2 COIN PRODUCTS Coins manufactured by the South African Mint Company are distributed for sale via Coin World, Rand Refinery and 10 local dealers throughout the country. According to the SA Mint, the active local market for gold coins totals 10,000 buyers of which 6,000 are regular purchasers. These buyers are either investors or collectors. 5.2.1 Krugerrands Krugerrands were first minted on 3 July 1967. They have been produced and sold locally and internationally every year since. They are legal tender coins of 22 carat or 916.67 parts per 1,000 gold (the remaining 83.33 parts per 1,000 made up of copper). Krugerrands have been produced and sold locally and internationally since 1967... Krugerrands were first minted in one size only one full troy ounce (31.1035 grams) of fine gold. From 1980, three other coins, termed fractionals, were introduced the 1/2 ounce, the 1/4 ounce and the 1/10th ounce. Since the launch of these fractional coins, the original Krugerrand is sometimes referred to as a full or one-ounce Kruger and within the local and international coin trade the word Kruger or Krugerrand refers to the original, full-sized ounce coin. In striking and marketing Krugerrands, the industry differentiates between the bullion Krugerrand and the proof Krugerrand. While the design of the coins is identical, there is a difference in quality and price. The term proof is not a grade, but a term applied to particular coins. These coins have the raised part of their design in a matt or sand-blasted finish while the background of the coin has a highly polished or mirror finish. The dies used to strike proofs are usually sand-blasted first and then the area of the die that corresponds to the coin s background is polished. Prior to striking proofs, the coin blanks are specially polished. The blanks are then hand-fed on to the stamping press and after being double struck (two stampings or strikings of the die to give a perfect finish with the sharpest image), the proof coins are then sealed in capsules or gift sets and allocated a certificate of authenticity which states the number of proof coins struck in that year. For a collector, a proof Krugerrand would be termed internationally FDC, which stands for fleur de coin a coin with no blemishes and of the highest quality. In addition to this, the proof Krugerrand has 220 serrations (raised demarcations along the edge of the coin), compared with 180 serrations on the bullion Krugerrand. In contrast, bullion Krugerrands are not double struck and they are sold not in sealed capsules but in presentation gift boxes. The coin blanks for Krugerrands are manufactured, and supplied exclusively by Rand Refinery... The coin blanks for Krugerrands are manufactured and supplied exclusively by Rand Refinery and coins are struck to order. The reason for Rand Refinery s exclusivity is largely historical since, in the early years of the Krugerrand, it was the only primary refinery operating in South Africa. On receipt of the coin blanks, the SA Mint strikes the bullion coins and then sends them to Rand Refinery or other outlets for distribution and sale. The conversion charge (the cost of striking the coin from the blank) levied by the SA Mint is R2.60 per coin, irrespective of the size of the coin. The SA Mint strikes and markets its own proof Krugerrands. Any coin blanks subject to mis-strikes during the minting process are returned to Rand Refinery for remelt. 104 GOLD IN SOUTH AFRICA

The price of the bullion Krugerrand is linked to the international gold price with a fixed premium, while proof Krugerrands, including fractionals, are offered in limited quantities at a price based on a fixed premium that is adjusted on a quarterly basis. The number of proof Krugerrands minted annually is a Cabinet decision; however, the total number of Krugerrands issued (both proof and bullion) is limited to a maximum of 500,000oz of fine gold per annum. The price of the bullion Krugerrand is linked to the gold price... Krugerrand specifications are as follows: Krugerrand specifications Face value Mass Gold content Gold Rand g parts per content thousand g 1 oz 10 33.9305 917 31.104 1/2 oz 5 16.9653 917 15.552 1/4 oz 2.5 8.4826 917 7.776 1/10 oz 1 3.3931 917 3.11 Serrations Min diam Max diam Min thick Max thick mm mm mm mm 1 oz 180 32.61 32.77 2.74 2.84 1/2 oz 150 26.93 27.07 2.12 2.22 1/4 oz 140 21.94 22.06 1.79 1.89 1/10 oz 115 16.45 16.55 1.25 1.35 Data source: SA Mint, www.taxfreegold.co.uk and www.24carat.co.uk. The mark-ups on bullion Krugerrands over the value of the contained gold are as follows: Krugerrand mark-ups % 1 oz coin 3 1/2 oz coin 5 1/4 oz coin 7 1/10 oz coin 9 Data source: SA Mint. In June 2005, the mark-up on a proof Krugerrand was calculated at 42% above the gold price. The level of these mark-ups far exceeds the level of mark-ups on gold bars, and gold coins are not a cost-efficient means of retail investment in gold, but therefore tend instead to be purchased as commemorative gifts or by collectors. The fractional coins have never been as popular as the full ounce coins and are usually purchased on a one-off basis with many of them destined to be set in jewellery, normally pendants. Krugerrands are also sold in full sets, containing one of each size coin. The ratio of full ounce Krugerrands to fractional coins (both bullion and proof coins) in terms of the number of coins minted is tabulated below. Krugerrands - fractional ratios - % Number of bullion coins struck 2002 2003 2004 1 oz 41.6 62.3 100.0 1/2 oz 0.0 16.1 0.0 1/4 oz 27.1 1.7 0.0 1/10 oz 31.2 19.9 0.0 Total 100.0 100.0 100.0 GOLD IN SOUTH AFRICA 105

Krugerrands - fractional ratios - % Number of proof coins struck 2002 2003 2004 1 oz 31.0 26.2 25.5 1/2 oz 25.1 19.1 17.8 1/4 oz 19.0 26.0 30.2 1/10 oz 25.0 28.6 26.5 Total 100.0 100.0 100.0 Data source: Calculated from SA Mint. Sales of Krugerrands are split equally between local buyers and those destined for export... According to the SA Mint, sales of Krugerrands are currently split equally between local buyers and those coins destined for export. This ratio is affected by two factors, namely the international gold price and the Rand/Dollar exchange rate. The performance of the Rand against the Dollar affects investment decisions on the part of local buyers. The international gold price affects offshore investors buying decisions. When the Krugerrand was first introduced in 1967, it was the first bullion legal tender coin of its kind. It was the leading gold coin sold worldwide at the time that gold coins were the principal medium for retail investment in gold. Peak sales of 187t occurred in 1978, but falling retail interest in gold and progressive sanctions imposed on South African goods saw Krugerrand sales decline. Between 2002 and 2004, sales of Krugerrands again increased off a low base at a rate of 45% per annum. Sales of the US Eagle bullion coin 1 showed similar but not quite as strong growth, at 30% per annum. Buoyant international gold prices and heightened interest in gold as an investment throughout this period appear to have encouraged greater interest in these coins. The SA Mint holds inventory of Krugerrands for up to one year. After this, the unsold coins are remelted at the SA Mint and restruck into new coins with the current date. They are not returned to Rand Refinery. Rand Refinery also holds inventory of Krugerrands and hence the Refinery s reported sales of coins can be in excess of the reported levels of coin minted in any one year. Under the Reserve Bank Act of 1989, the South African Reserve Bank is obliged to buy back Krugerrands from the general public. These coins are not resold but are either taken back into the country s gold reserves 2 or are sent back to Rand Refinery for remelt. By law, members of the public can return unwanted coins to any branch of the South African Reserve Bank. In practice, this rarely happens since the holder of the coin would receive only the fine gold Rand value of the coin and would lose the premium initially paid for the coins. 5.2.2 The Natura coin series The Natura gold coin series was launched in 1994 as South Africa s first 24 carat gold coin. Three series have been issued since: the Big Five from 1994-1998, the Monarchs of Africa from 1999-2001 and, in 2002, the Wild Cats of Africa. The details are as follows. Big Five 1994 Lion 1995 Rhinoceros 1996 Elephant 1997 Buffalo 1998 Leopard Monarchs of Africa 1999 Kudu 2000 Sable 2001 Oryx Wild Cats 2002 Cheetah 2003 Lion 2004 Caracal 1 Directly comparable, as the Eagle is also 22 carat. 2 See Chapter 6 for further details covering South Africa s gold reserves. 106 GOLD IN SOUTH AFRICA

Natura coin specifications Face value Diam Mass Metal content R mm g parts per thousand 1 oz 100 32.69 31.107 999.9 1/2 oz 50 27.00 15.553 999.9 1/4 oz 20 22.00 7.777 999.9 1/10 oz 10 1.50 3.110 999.9 Data Source: SA Mint. 5.2.3 The Protea coins The Protea gold coin series was launched in 1986 and was initially struck in 22 carat gold. Since 1998, however, the series has been struck in 24 carat. In the years 1987, 1989 and 1990 no Protea coins were issued. The details of the Protea issues are as follows: 1986 Centenary of the Gold Rush 1988 500th Anniversary of Bartholomew Diaz s Circumnavigation of the Cape of Good Hope 1989 300th Anniversary of the Landing of the Huguenots 1990 150th Anniversary of the Great Trek 1991 Tribute to 100 years of SA Nursing 1992 Centenary of Minting in SA 1993 200 Years of Banking in SA 1994 Centenary of Nature Conservation in SA 1995 Centenary of Railway Links 1996 The New Constitution 1997 South African Women 1998 Year of the Child 1999 The Mining Industry in SA 2000 The Wine Industry in SA 2001 The Tourist Industry in SA 2002 Soccer and World Summit 2003 Cricket 2004 10 Years of Democracy Protea coin specifications (24 carat coin) Face Value Diam Mass Metal content R mm g parts per thousand 1 oz 25 32.69 31.107 999.9 1/10 oz 50 16.50 3.11 999.9 R1 Silver 1 32.70 15 Ag 925 Data source: SA Mint. 5.2.4 The R1 and R2 coin series The R1 gold coin was introduced in 1997 as a legal tender 24 carat proof quality coin. The coin depicts cultural diversity in South Africa as follows: 1997 Heart transplant (30th anniversary) 1998 The San the Lost People 1999 The Zulu culture 2000 The Xhosa culture 2001 The North and South Sotho cultures 2002 The Tswana culture 2003 The Tsonga culture 2004 The Venda culture GOLD IN SOUTH AFRICA 107

R1 coin specifications Face Value Diam Mass Metal content R mm g parts per thousand 1/10 oz 1 16.50 3.11 999.9 Data source: SA Mint. The R2 gold coin was also introduced in 1997 as a legal tender 24 carat proof quality coin. The themes since then have been as follows: 1997 Mrs Ples Almost Human 1998 Coelacanth The Living Fossil 1999 Thrinaxodon The Mammal-like Reptile 2000 Little Foot Most complete skeleton found 2001 Gondwana Continental drift 2002 Robben Island 2003 Greater St Lucia Wetland Park 2004 Ukhahlamba-Drakensberg Park R2 Coin Specifications Face value Diam Mass Metal content R mm g parts per thousand 1/4 oz 2 22.00 7.777 999.9 Data source: SA Mint. The target market for the Natura, Proteas and R1 and R2 coins is the small investor and collector... The target market of the Naturas, Proteas and the R1 and R2 coins is the small investor and collector. With respect to Naturas and Proteas, the design is changed every three to four years. This is timed to maintain the interest of the collector but without offering too many new designs, which would price the collector out of the market. The R1 and R2 gold coins are re-launched with a new design every year. At 1/10th of an ounce and 1/4 of an ounce respectively, they are affordable enough to support annual issues. The fact that these four coin issues are struck in 24 carat gold not only differentiates them from the Krugerrand but also allows for direct comparison (in terms of caratage and hence, price) between them and other international bullion coins that are 24 carat for example, those bullion coins struck and marketed in Canada and Australia. The SA Mint buys 24 carat grain from Rand Refinery and produces its own coin blanks, from which it strikes the coins in-house to meet demand for the four 24 carat coin programmes. The mark-up on the coins is 30% and the gold represents 95% of input costs to the SA Mint. 5.3 DENTAL ALLOYS According to the South African Medical and Dental Council (now known as the Health Professions Council of South Africa), there are 3,500 registered dentists in the country. Dentists themselves do not have to hold permits to work with gold alloys since they work with pre-ordered, made-to-measure inlays only, supplied by independent dental laboratories. Only in instances where a dentist maintains his own laboratory will that practice require a permit; otherwise, it is the dental laboratories that hold the precious metal permits. The South African Police Service Diamond and Gold Branch reports that 427 valid dental licences had been issued in the country as at 2004. Of the total, 23 were issued in the year, implying an increase of 5.7% compared with 2003. 108 GOLD IN SOUTH AFRICA

A regional breakdown of these permits is shown below for 2003 and 2004. In terms of number of permits issued, this aspect of the gold business appears to be concentrated in the Cape region, with more than half of the dental permits on issue in 2004 issued in the Western Cape. Number of valid dental permits 2003 2004 % of total total 2004 total Western Cape 231 231 54.1 Gauteng 128 147 34.4 KwaZulu-Natal 24 24 5.6 Mpumalanga 11 13 3.0 Eastern Cape 10 11 2.6 North West 0 1 0.2 Free State 0 0 0.0 Limpopo 0 0 0.0 Northern Cape 0 0 0.0 Total 404 427 100 Data source: Virtual Metals analysis of South African Police Service data. CHAPTER 5 Gold usage in dental treatment cannot be expected to be a material growth sector owing to the downturn worldwide in the usage of gold alloys for dentistry purposes. This is largely because medical and dental insurance does not cover the cost of the gold as a dental material. A survey of medical insurers revealed only one that compensated members for payment of gold used in dental work, and in that instance, only to premium members. A similar lack of growth potential is mirrored internationally as medical insurers in countries such as Germany have, over time, amended their insurance cover to patients, discouraging the use of gold in dental treatment. Gold usage in dental treatment is not a growth sector... In terms of scrap generation, dental alloys are frequently returned to recyclers for remelt since the manufacture of a dental construction generates a very high level of wastage, estimated by recyclers at 75% to 90% per inlay. Dental alloy can vary in caratage and colour and is applied according to the customer s specifications. Dental products Description Alloys Star cast - 110, 200, 400, 550, 602 Starbond - 515G, 780G, 860G, 575G, 730G, 750G Data source: Musuku Beneficiation Systems. Discussions with refiners and recyclers revealed that, in 2004, no more than 0.04t of fine gold was purchased by the local dental industry. Dentists reported that this sector had shown no growth in recent years due to insurers exclusion of gold in dental treatment. GOLD IN SOUTH AFRICA 109

Quotable quotes: To work with a crown that will eventually weigh 5g of gold, the dentists have to begin with at least 20g of alloy. The balance gets recycled immediately. Recycler Quotable quotes: I don t see any growth potential in the South African electronics manufacturing industry. We import components from the Far East cheaper than we could ever manufacture them here. Electronic component manufacturer Historically, South Africans have been limited in the ways that they could invest in gold... 5.4 ELECTRONICS The level of gold usage in the manufacture of electronic components in South Africa is insignificant. The refiners reported that they supplied collectively 0.01t to South African companies manufacturing components for a variety of electronic hardware, including switches and connectors. This represents less than 0.004% of the global total of 250t 3 of fine gold destined for use in electronics. Research revealed five companies that either manufacture or assemble electronic components using gold. One, Bosco Printed Circuits (Pty) Ltd, dominates, although its exact market share could not be established. The company uses gold in manufacturing the fingers which connect external cards to computer hardware and in instances where superior connections are required in telecommunications hardware. The gold is applied through electroplating. Printed circuit boards (PCBs) are manufactured in South Africa but discussions with the industry revealed that these PCBs do not contain gold. Where high performance PCBs, which require gold usage, are needed, they are imported. 5.5 INVESTMENT Until recently, South Africans were limited in the ways that they could invest in gold. They could (and still can) buy coins in the form of Krugerrands, Proteas or Naturas. However, while bullion coins have a place for the collector, they are not considered a competitive alternative in an investment portfolio. This is because the premium levied on purchase is not recouped on sale of the coin. South Africans could and still can invest in gold equities and, in the absence of a Dollar or Rand denominated gold futures contract, they could trade the Krugerrand futures contract offered by the JSE Limited (discussed below). Recently, however, South African citizens have been offered access to a gold Exchange Traded Fund (ETF). These two investments vehicles are described below. 5.5.1 The JSE Limited s Krugerrand contract The JSE Limited offers a Rand-denominated futures contract based on the Krugerrand through which the public and institutions such as pension funds can take an investment exposure to gold, other than buying coins or gold mining equities. The contract specifications are: Contract Code Underlying instrument Expiry dates & times Quotations Expiry valuation method Settlement method Clearing house fees Futures R2.50 Data source: JSE Limited. Krugerrand futures KGRD 1 Krugerrand 17h00 on 3rd Thursday of March, June, September & December or previous business day if a public holiday In whole Rands to 2 decimals Official closing price as determined by the JSE Limited Physical delivery 3 Virtual Metals global industry estimates for 2004 110 GOLD IN SOUTH AFRICA

Krugerrand futures have failed to become a liquid and actively traded contract. The reason for this is not clear. It is possible that, in the past, private investors who were likely to invest in gold other than equities would have bought Krugerrands and therefore there was little reason for them to make use of the futures contract. In other words, those who wanted bullion coins would have bought them outright and those investors who might make use of a futures contract would not have an interest in bullion coins. This does not, however, explain why the institutions have not made use of this contract since fund managers are permitted to place up to 10% of their funds in Krugerrands. Discussions with portfolio managers reveal that they have invested neither in the physical coins nor the futures contract; turnover figures bear this out. A reason for this is the loss of the initial premium payable on the purchase of the coins once the coins are subsequently resold. In the fourth quarter of 2004 only 48 Krugerrand futures contracts were executed. In the first two months of 2005, the contract traded four times. 5.5.2 ABSA NewGold Gold Bullion Debenture An ETF allows an investor to trade shares or securities in an exchange listed fund (shares which represent small amounts of gold, usually 1/10th or 1/100th of an ounce) as simply as the investor could trade in the equities of exchange-listed companies. Gold ETFs are funds, the sole asset of which is physical gold, and the value of which is fully backed by physical gold, held as allocated metal by a nominated custodian. The shares are traded on a stock exchange just as any other exchange-listed security. The cost of buying into a gold ETF is the spread 4 as with a normal share purchase, plus brokerage charges. There is then an annual management fee of between 0.3% and 0.4% compared with the 3% premium over gold for buying a one ounce Krugerrand. Gold ETFs are designed to be cost effective and to provide investors with a secure way to invest in gold. CHAPTER 5 On 2 November 2004, ABSA Bank launched a gold ETF in South Africa called the NewGold Gold Bullion Debenture, the third such ETF after similar launches of ETFs in Australia (on the Australian Stock Exchange) and the United Kingdom (on the London Stock Exchange). Two similar products were launched in the United States shortly afterwards, one by State Street Global Advisors, called streettracks Gold Trust and one underwritten by Barclays Bank Plc called the ishares COMEX Gold Trust. Gold ETF launched in South Africa in November 2004... 4 The difference between the bid and offer (buy or sell) price on the underlying asset. GOLD IN SOUTH AFRICA 111

The South African product 5, issued by a public company called NewGold Issuer Limited, is administered by ABSA Bank and Rand Refinery functions as custodian. Each debenture is valued at 1/100th of an ounce of fine gold and is priced in SA Rands. The price of the debenture closely follows the international gold price. The specifications are: NewGold Listing Issuer JSE Code Price Entitlement Underlying asset Custodian Administered Gold Bullion Debenture JSE Limited NewGold Issuer Ltd, Reg Number 2004/014 199/06 GLD ZAR price of 1/100th troy ounce of fine gold Initially 1/100th troy ounce of fine gold, reduced daily by the management fee Gold kept in 400 oz London Good Delivery Bars in allocated form Rand Refinery ABSA Investment Management Services (AIMS) Minimum investment Lump sum and ad hoc investments - R1,000 Recurring or monthly debit order investments - R300 Fee structure - NewGold Gold Bullion Debentures Fee structure - NewGold investment plan Data source: ABSA Bank. Management: 0.4%pa accrued daily debited in gold Creation and redemption: 0.15% Brokerage and statutory fee: standard brokerage fees apply Lump sum and ad hoc investments: Initial fee (excl VAT): 0.3%, annual management fee (excl VAT): 0.8% Debit order: Initial management fee (excl VAT): R2.50/order; Annual management fee (Excl VAT): 0.8% Immediately after its launch on 2 November 2004, purchases in the South African ETF took the assets to 3t of gold, before declining slightly. Buyers of the product were local pension funds and financial institutions. Since its launch, progress has been slow. The product is traded in the smallest of the four gold investment markets which are now home to ETFs and therefore it stands to reason that in comparison with the other ETFs, its offtake has been the smallest. The actual offtake of all four ETFs traded are compared in the accompanying table. ETF Offtake in Metric Tons of Fine Gold Launch Average Average daily Total offtake t Date traded daily offtake t (at 30 June volume t 2005) Australia 28-Mar-03 0.04 0.01 7.89 UK 9-Dec-03 0.75 0.14 46.95 South Africa 2-Nov-04-0.01 2.87 US (SSGA) 18-Nov-04 6.74 1.15 181.51 US (Barclays) 28-Jan-05 0.2 0.12 12.42 Total 251.64 Source: Virtual Metals calculations from company data. Note: Data as of 30/06/05, SSGA = State Street Global Advisors. In terms of offtake per day, the South African ETF is more comparable with the longer-running Australian ETF. Both products are nevertheless dwarfed by the UK ETF, and especially the State Street Global Advisors US fund offtake. 5 http://www.absabrokers.co.za/individual/0,2999,2762,00.html#newgold 112 GOLD IN SOUTH AFRICA

NewGold is currently subject to a ceiling on the number of debentures that ABSA can create up to 500,000oz worth of debentures per annum. Should the bank wish to generate more, it would require prior permission from the Minister of Finance. With respect to the ability to take physical delivery on redemption of the debentures, investors wishing to do so would need to hold a valid precious metals permit as required by the Mining Rights Act. Only blocks of 400,000 debentures or more (equivalent to 4,000oz of gold or more) can be redeemed at a time. In May 2005, Barclays plc bought 60% of ABSA. This development is considered by ABSA to be supportive of NewGold in South Africa, since Barclays has its own ETF in the United States, and is committed to the ongoing marketing and administration of these investment products. CHAPTER 5 GOLD IN SOUTH AFRICA 113