sth african golds in deep trouble

A eulogy for a gold industry
By: Stewart Bailey
Posted: '09-JUL-04 14:55' GMT © Mineweb 1997-2004



JOHANNESBURG (Mineweb.com) -- The South African rand strengthened to its highest level in nearly five years today, prompting renewed eulogising for the imminent death of much of the country’s gold mining industry.

“It’s like going to a funeral every day,” says Nick Goodwin, a gold analyst at Johannesburg brokerage T-Sec. “It just gets worse and worse.”

The rand’s gains, which pushed the currency to R6.05 to the dollar, more than offset a simultaneous move in the gold price, which was trading at $406.90 before noon in London. The result was a lower rand-denominated price of gold, which at R78,500/kg means that most of the country’s gold mines are running at a loss, even before hefty capital commitments are taken into account. After capital expenditure, the picture is considerably worse. Goodwin says that at the current prices, 23 of the country’s 31 gold mines are unprofitable, while 78 percent of the 77-ton quarterly gold production is being produced at a loss. Of the three local majors, only AngloGold is in the best position to weather the storm with its flagship Moab Khotsong, Tau Tona and Kopanang mines still generating cash at the current prices – even after capex. Gold Fields and Harmony, however, are more precariously placed, given their thinner margins, lower grade operations and greater dependence on South African operations.

But South Africa is set to suffer if the industry is squeezed further. The industry provides more than 180,000 jobs, making it the country’s largest employer, and the sliding price of gold has raised fears that thousands of miners could finds themselves out of work as companies fight to restore margins. In a country where unemployment of about 40 percent is the single biggest threat to long-term stability, the prospect of large-scale job losses is a political hot potato; and even more so in an industry where more than ten peoples’ livelihoods are linked to each mining job.

According to Chris Hart, a senior economist at ABSA, South Africa’s largest retail bank, the importance of the gold sector to the whole economy is far greater than its contribution to South Africa’s gross domestic product, which is in single figures. “You could multiply that number by three to get the real impact,” he says.

Few mining executives will publicly threaten job losses for fear of a backlash from government and unions, but privately several mining bosses say that it is certain job losses will mount as more mines slip deeper into the red.

Harmony marketing director Ferdi Dippenaar puts on a brave face, despite recent decisions to close three shafts; Deelkraal, Orkney 6 and Welkom 1. Meanwhile the Elands and Meeiepsruit 3 shafts, which in April received a short stay of execution, are once again under the microscope as the company tries to cut its overall cash cost of production.

“It should be expected that we will relook at the profitability of those operations. We do know this business pretty well and we understand which of the areas are at risk,” says Dippenaar. He says Harmony will focus on remaining profitable at a cash operating level, though he admits that ongoing capital demands mean that the company will keep burning cash at the current gold price. The same holds for Gold Fields, which will see its cash running lower if it maintains its capital expenditure profile.

Dippenaar says Harmony will not cut back on capital expenditure and in particular on an ambitious list of South African projects, aimed at unlocking 18 million ounces of production over 15 years. The expansion comes at a cost of R3.1-bn.

“One thing we can’t do is shelve our growth projects. What we’ll do is focus on being able to harvest once the market situation improves,” he says. While the projects will bring new, higher margin ounces to account, the risk remains at the lower grade end of Harmony’s operations, where losses are beginning to mount. The same goes for its competitors – AngloGold has already decided to close Savuka and Ergo, two of its loss-makers.

But the decision to shut mines is not one the companies take lightly. Retrenching staff is an explosive and expensive business and there is a degree of permanence about closing shafts, which can only be reopened at huge cost; stopes close little by little each day and underground working areas are submerged as the water table moves inexorably higher.

The other view

But it may not all be doom and gloom. Hart believes the rand price of commodities is at an extreme. He expects the rand prices of commodities across the board to improve from current levels, though he does warn that the longer they stay here, the greater the likelihood of casualties.

“They should start going up in rand terms from this point,” says Hart, who believes that dollar weakness will be a feature of the macroeconomic landscape for some time. While the rand is expected to remain at around the current levels – or at least appreciate at a slower rate - he sees commodity prices marching steadily upward, with the net result that rand revenues will once again increase.

Hart says the higher rand revenues, coupled with the efficiencies that mining companies have been forced to squeeze out of their businesses during the lean times, will lead to a new boom in the mining sector. “This time next year, the mining complex will be leading the economic growth upward,” he says. South Africa will be hoping Hart is right, or as Goodwin says, “the consequences will be too ghastly to contemplate”.