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SA gold faces uncertain future - Business Day

Wednesday, 2 September 2015

WESTONARIA — At Sibanye Gold’s Kloof mine in the heart of the world’s largest known gold reserve, more than 10,000 workers toil daily at depths of about 3km — a striking image of the scale and ambition of an industry that until recently enjoyed booming profits and plentiful production.

But the golden era for SA’s producers now appears to be over. Upended by a toxic combination of falling prices, intensifying labour disputes and the surging cost of ever-deeper exploration, the country’s largest producers are flailing. Squeezed by tumbling profits and a lacklustre outlook for gold prices, several of SA’s biggest gold producers are even dialling back expectations for the lifespan of their operations.

"This is an industry that’s mature, old and in some degree of distress," said Dawie Mostert, Sibanye’s senior vice-president of organisational effectiveness.

"We need to make sure that there is sustainability" for the future.

Sibanye’s nearly 50-year-old Kloof mine, deeper at some points than six New York City Freedom Towers stacked end to end, is expected to close in 2033. The company faces increasing headwinds after reporting a 70% drop in net profit in the first half of the year.

Things aren’t looking much better for Sibanye’s peers. In August, AngloGold Ashanti, the world’s third-biggest gold producer, reported a net loss of $142m for the three months ended June, compared with a loss of $80m a year earlier. Miner Harmony reported a net loss of $352m for its financial year ended June 30, while Gold Fields reported an annual fall in second-quarter profit of 40%.

Although mining — like commodities in general — is often described as a cyclical business, the troubles that gold producers face in SA are more profound. If SA’s largest gold miners are going to survive beyond the next few decades, a radical reshaping of the entire industry is necessary, companies say. Most are investing heavily in new technologies to reduce labour costs, become more efficient at gold extraction and be able to work 24 hours a day, 365 days a year. Currently, miners in SA work about two thirds of the day, 275 days a year.

"All of the producers are working hard on things that they can control," said Meryl Pick, portfolio manager of Old Mutual Investment Group’s $20.9m gold fund.

"Unfortunately the things that they cannot control are going against them."

That includes electricity costs and labour. Any further increases in electricity prices could erode the life of Sibanye’s mines by 10% to 15%, Mr Mostert said. Harmony Gold recorded a total impairment of $271m in 2015 as the company reassessed the lifespans of its mines amid lower commodity prices.

"It’s just going to get worse," Ms Pick said. Her preferred company at the moment, and Old Mutual Gold Fund’s largest holding, is AngloGold Ashanti, largely due to its limited exposure to SA. About 70% of the company’s production comes from outside its domicile, and its stock is up 7% year-to-date, compared with a 30% drop for Sibanye, a 45% plunge for Harmony and an 18% decline for Gold Fields.

SA dominated global gold production in the 20th century, but in recent years it has dropped from the world’s top producer to sixth place.

"There is a lot of gold here, but it’s hell of a deep," said Nick Holland, CE at Gold Fields, the world’s seventh-largest gold producer.

SA’s mines, which include many of the deepest and oldest in the world, use a lot of electricity to hoist workers and rocks up and down its shafts, and to keep breathable, reasonably cool air pumping thousands of metres below the ground. Electricity costs more than tripled between 2008 and 2014, according to the Chamber of Mines of SA, largely because of ageing infrastructure.

In addition, the deeper the mines go, the more seismic activity that takes place, resulting in injury-related work stoppages. "I don’t know whether you want to send people down 5km," Mr Holland said.

As the mines have aged, mining activities occur further and further from the central shafts, increasing travel time for workers to and from the rock face, as well as the quantity of gold lost via transport to the surface and smelter.

One thing that’s helping gold companies stay afloat is the stronger dollar, which has provided some respite from gold prices, recently trading just above $1,110 a troy ounce, down more than 40% from 2011 highs above $1,900/oz.

South African miners’ gold revenue is typically denominated in dollars, while many costs, such as wages, are in local currencies. Even those with a significant portion of their operations abroad, such as AngloGold Ashanti and Gold Fields, have benefited from declines in other currencies, such as the Australian dollar.

The lifespan of mines such as Kloof can be extended beyond another 20 to 30 years, Sibanye’s Mr Mostert said, but that depends a lot on keeping other costs, such as labour, from also rising rapidly.

And that’s not going so well either. Wage negotiations in SA’s gold mining sector got under way in June, but the major producers and unions have declared a dispute after a final offer was rejected by the biggest labour unions last month. Gold producers have referred the matter to the country’s mediation body.

Meanwhile, analysts and economists say the likelihood of a strike is high, which could further dent the bottom lines of SA’s mining companies.

"It’s very sad when every time the mine workers are demanding a living wage, we have to be reminded of commodity prices not doing well in global markets," said Livhuwani Mammburu, spokesman for the Nation Union of Mineworkers, the majority union in the gold industry.

The average wage for an entry-level gold miner who works as deep as 4km underground is just under R6,000 a month, but with benefits such as housing, medical aid and a pension, that figure rises to about R12,000, according to industry participants. Wages already make up about half of the costs of SA’s major miners.

"What we don’t want to do is kill the gold mining sector," said Srinivasan Venkatakrishnan, CE of AngloGold Ashanti.

"I’m hopeful that we don’t end up in a strike scenario, because we have just seen what’s happened to the platinum industry."

A wage battle between platinum companies and unions representing the industry’s workers led to a five-month strike last year, the country’s longest ever. Platinum output plummeted 15% and companies are still struggling with the costly wage deal they made to end the standoff. In July, South African platinum producer Lonmin said it would cut 6,000 workers, or 17% of its workforce, over the next two years.

Mr Venkatakrishnan said the impact of a workers’ strike on the South African gold industry would be fewer mines with shorter lifespans, and fewer jobs.

But even SA’s only fully mechanised gold mine, Gold Fields’s South Deep, isn’t profitable.

"If you look at how we operate at the moment, we’re pretty horrific," said Nico Muller, executive vice-president for SA at Gold Fields.

He said if operations at South Deep, the company’s only remaining South African mine after it spun off three older mines to create Sibanye in 2013, could achieve even a "reasonable" level of operation, the mine would start to make money. That includes consistent leadership and hiring more skilled workers.

Gold Fields expects South Deep to start making money by the end of 2016. However, mechanisation of mines, which largely removes workers from the face of the rock — and danger — is unpopular because it requires fewer, although more skilled, workers at each mine.

But companies say that if they continue to mine in the current conventional fashion, the number of jobs would fall to zero in a matter of 30 or so years.

"I reckon we are doomed if we don’t embrace new mining techniques," Mr Muller said.

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