When the mining sector releases its quarterly results this month, the effect of one of the worst strike seasons in South Africa's history is expected to weigh heavily on earnings, with losses in production recorded across the board.
Finance Minister Pravin Gordhan, in his mid-term budget speech in October, estimated the total value of production lost to the platinum and gold sector since the beginning of the year at R10.1-billion. But one fund manager estimates that the figure is a lot higher, with at least R10-billion lost in production by the platinum sector alone.
Months of strikes have cut production in the gold and platinum sectors, although the bulk of the gold sector's striking miners returned to work in October under threat of dismissal.
Gordhan told Parliament in October that the industry had contracted by 6.3% in the first half of 2012, compared to the same period last year, following a sharp decline in platinum group metals output before the start of the strikes in August.
The latest figures show that production in platinum group metals is down by 15.3% in the year to August, compared with a 3% drop in mining output overall.
Ironically, the reduction in the supply of platinum group metals experienced a rebound in the platinum price in September. Some fund managers believe the platinum sector could present long-term opportunities for investors, especially because the shares are now at their lowest levels in 20 years (See "platinum's buying opportunities come knocking").
Fund managers and analysts expect earnings from gold producers AngloGold and Gold Fields for the quarter July to September to reflect losses in production because of strikes. But smaller rival Harmony was expected to post improved earnings on the back of a 3% increase in the gold price and a weaker rand.
The higher gold prices are not expected to be sufficient to offset losses in AngloGold and Gold Fields.
The weaker rand and an increase in the gold price had a greater impact on Harmony than the others because South Africa accounts for about 90% of its output, whereas Gold Fields gets about 50% of its global output from South Africa and AngloGold about 40%.
Harmony lost no production during the quarter because of strikes, as its staff at Kusasalethu only went on strike on October 3. Production was up 8%, but was expected to fall in December because of strike action.
AngloGold Ashanti has already said it expects its production for the September quarter to be 4% lower than its previous forecast of 1.07-million ounces because of labour unrest in South Africa and lower-than-anticipated production in Obuasi in Ghana.
Gold Fields has disclosed that its production will be 6% lower because of a fire at its KDC mines and illegal strikes there and at Beatrix. Its management has said that cash costs in South Africa will be negatively affected by lower production.
Two gold mine companies likely to see increased production, according to JP Morgan, are DRDGold with a 16% increase and Randgold Resources with a 2% increase.
Strikes hit the platinum sector hardest and it is also struggling with weaker demand from Europe and the United States.
Borrowing too heavily
Impala Platinum (Implats), the world's second-largest platinum producer, announced in August that its annual profit had dropped by 38%. It will publish its quarterly production figures this month. Adjusted earnings for Implats fell from R6.64-billion the year before to R4.15-billion.
A fund manager said that both Lonmin and Anglo Platinum (Amplats), the world's largest platinum producer, were borrowing too heavily to keep operations going, although Amplats had an advantage because it could borrow from Anglo American, which owns 80% of the platinum company.
Lonmin, which was hit hard by the Marikana strike, announced at the end of October that it planned a rights issue to raise $800-million to pay its debts and buoy its balance sheet while it stabilises and grows production. Forty-six people died in the six-week strike and 110 000 ounces of platinum were lost.
Lonmin's shares have halved in value since the start of the year, but were starting to show a slow recovery at the end of October. The company said its production was down by 50.4% compared with the same period in 2011, a decrease of 1.63-million tonnes. It attributed the fall primarily to the strike.
Amplats said in its quarterly review for the period July to September that wildcat strikes had cost it 42 000 ounces of production during the period and another 96000 ounces were lost since October 1. It said production fell by 6% year on year to 626 000 ounces in the three months to September, compared with the 667 000 ounces produced in the corresponding period in the previous year.
In comparison, Amplats's production at its own operations fell by 5% year on year, from 447 000 ounces in the three months to September 2011 to 426 000 ounces in the period under review. It said it expected its data for the next quarter to bear the brunt of the work stoppages that had been going on since September.
Gordhan has said in the past few weeks that he believes the crisis in the mining sector is past, but fund managers and analysts believe that the impact of the unrest will still be felt in the December quarter and further job losses could still be seen.
AngloGold and Gold Fields fired 12 000 and 8 500 wildcat strikers respectively after they ignored a deadline to return to work, Xstrata has dismissed 400 workers and the Bokoni Platinum mine in Limpopo 2 000 workers.
Old Mutual's mining and resources fund head, Ian Woodley, said the continued labour unrest in the sector would have a negative impact on confidence, because most investors believed the labour issues would continue into 2013.
A fund manager said the view in the market was that further retrenchments could depend on whether Amplats's restructuring plans involved job losses.
"Amplats is expected to complete its restructuring study this month or in December and if it decides that more job losses are needed, it may give the sector the encouragement it needs to cut more jobs."
Gordhan has estimated that the crisis in the mining sector will affect South Africa's gross domestic product target for 2012, which has been revised down from 2.7% to 2.5%. He said a depressed mining sector affected related industries, including manufacturing, logistics and services.
The mining sector is under pressure, but this raises questions about whether there are opportunities for investors wanting to take advantage of the lower share prices.
The gold mining sector shares lost value as it grappled with labour unrest and higher labour costs, but the platinum sector experienced the biggest losses with shares reaching 20-year lows.
Analysts differ on where they believe money is to be made and whether it might be better to buy the metal itself. But this would mean that investors could miss out on the benefits of gold shares, which see significant gains in times of uncertainty.
Some analysts regard the platinum companies as a good investment because the strikes reduced output by 10% this year, creating a better supply and demand ratio that could push up demand and the share price.
Analysts are listing Aquarius Platinum, previously the worst performer of the four largest platinum producers, as a buy, which is an example of how the fortunes of a company can change.
On Tuesday this week the stock rose by 8.6%, the biggest intraday gain since October 5, after reports in the British media that Anglo American, owner of the world's largest platinum producer, and BHP Billiton may be among possible bidders for Aquarius. It did not say where its information had originated.
Aquarius was already regarded as a good option by some brokers, because it was largely unaffected by strikes. Its mines had also been put on care and maintenance before the strikes began.
One analyst felt that the price environment for gold was better than for platinum because his company was selling more gold.
Harmony was seen by some analysts as a good investment, despite the company falling by 26% in 2012, making it the worst performer on the five-member FTSE/JSE Africa gold mining index. The July to September quarter was unaffected by strikes and it said in August that it planned to increase production by 45% during the next four years. But, according to the latest estimates, Harmony's production in the final quarter of the year will be down. DRDGold and Randgold Resources, on the other hand, are expected to show production increases of 16% and 2% respectively.
The platinum mines are feeling the pressure of reduced demand for vehicles in Europe because of its economic woes, but a shortage of supply in time could see greater demand in countries such as China and India.
Besides Aquarius, Northam and Amplats are seen as offering good opportunities in this sector. Amplats is restructuring, which analysts believe offers the company room for more growth.
Investors need not only consider platinum, gold and coal options – the demand for iron ore is increasing, spurred on by demand from China. It is expected that continued growth in demand for iron ore could be sufficient to offset some of the decline being seen at present in the gold, platinum and coal sectors.