Gold mining no longer glitters all that brightly for the South African economy. Reg Rumney reports
Working seven days a week will help gold mines survive in the medium term — but gold mining is in decline, says Amgold chairman Clem Sunter.
Gold mining, once the mainstay and still a central pillar of the South African economy, is in what Sunter calls “managed decline”.
Industrial unrest and public holidays were generally blamed for bad gold mining results in the second quarter of this year, but the results focused attention on the malaise in gold mining as well as the continuing importance of gold to South Africa’s economic growth.
The various mining houses have reported their results for the third quarter. Unlike the second quarter, which was uniformly disastrous, third quarter results proved a mixed bag, with Amgold, among other mining groups, showing some improvement.
Sunter warns against looking at one quarter’s figures in isolation. He uses a characteristically graphic metaphor to describe the plight of South African gold mining.
“We were like a 747 flying at 30 000 feet, in the early 80s to the mid-80s, when the gold price was coming down from $600 to $400.
“If you hit an air pocket in a quarter you reduced your margins slightly. and, OK, you made less profit, but you still made a very healthy profit. Now we’re flying at 500 feet. You hit an air pocket and you immediately run into a loss situation. We did that at Freegold in the previous quarter. And when you make a loss on revenue of R1-billion for a quarter its alarming.
“And that is why we concentrated on trying to turn Freegold around.”
Sunter pinpoints the problem: despite extensive exploration over the last 15 years, using sophisticated techniques, Amgold has found no new major gold field.
The new gold finds have been in the gaps between gold fields and near existing mines. And apart from one or two exceptions like Moab, for which Amgold is putting a shaft down adjacent to Vaal Reefs in the South East, those deposits tend to be lower grade and would require a gold price of say $450 to $500 in today’s money — for some time.
“You would have to have a confidence that the gold price had moved to a new higher plateau.”
“One should never say never in prospecting and there could still be a major gold field to be uncovered, but working on probabilities one would say we’re into the game of exploiting as efficiently as possible the remaining gold from existing mining areas and areas not viable at the current gold price.
“Given that all mines start with the sweeter grades and gradually work down to the lowest grade portions, we are in a state of managed decline.”
Gold production has already almost halved from the 1 000 tons a year achieved in 1970 to around 550 tons of gold now.
“I think it is inevitable that it will continue down from 550 tons. And that is difficult to manage because of the ‘stepped function’ of overheads.”
Sunter explains that when gold production on a particular shaft falls below a certain level, unless a quantum of overheads is shut down, that reduced level of production does not cover the cost of shaft.
So if production falls, the rand per kilogram cost of the mine can actually rise because overheads are not being shed at the same time.
Many of Amgold’s old shafts have fairly uniform grades. If they do not cut the mustard, they will have to be closed. There has been speculation that as many as
50 000 jobs might be in jeopardy at Anglo American mines.
Sunter is cautious. Out of 33 shafts, around a third are “endangered”, although Sunter is at pains to point out that the situation can be changed.
One of the things that will change the picture is Full Calendar Operations (Fulco).
Sunter is on record as having said at the beginning of the year that gold mining must be one of the only industries in the world with 275 working days out of 365.
His warning then, that costs would exceed revenue by the second quarter if something was not done, have been borne out.
“We’ve had a fairly flat price this year, costs have continued to escalate in rand/kg terms and the margin has been eliminated on many of the mines.”
Will Fulco not merely shorten the life of the mine? Sunter emphasises it will do the opposite. Fulco will lower the pay load because of the increased economies
“The grade of the ore you can mine can actually drop and you can bring into play a greater proportion of the ore body than if you had stayed on the present 11-shift fortnight. By mining seven days a week you can actually increase the amount of gold you get out of a particular ore body.”
Fulco has been virtually negotiated with the workers, although the National Union of Mineworkers still has to give its imprimatur. “They seem prepared to allow negotiations to proceed on a shaft-by-shaft basis, even though they won’t give their agreement at the centre. All the mining groups are negotiating Fulco at shaft level”
Sunter cautions that Fulco is not a panacea. Many old shafts are not appropriate for Fulco because only mining pillars and bits and pieces are left to mine. Fulco mainfly benefits new shafts where mining can continue uninterruptedly on ore bodies, such as with Freddies No 1 shaft at Freegold.
Moving the appropriate shafts in Amgold’s portfolio to Fulco will absorb labour from some of the other shafts which are in decline. In terms of slowing the rate of descent of South Africa’s gold production Fulco is important, but unless a major new gold field is found, there will not be a major turnaround in South African gold production
Fulco itself, could probably pre-empt a drop of 10 percent to 15 percent in gold mining production.
Given that fixed overheads constitute around 75 percent to 80 percent of mine costs (labour constitutes around 50 percent ), the marginal costs of working an extra 90 shifts a year is fairly low, although there will be additional labour, as a roster system will be in place.
Sunter conservatively estimates that the additional gold will cost 25 percent less to mine. He notes that Fulco is only one part of the solution to productivity improvement.
“To really transform prospects, we have to find either a higher dollar price of gold, that is $420, or change our management systems to produce a more participative approach”
At Elandsrand, he said a “Wheels of Change” initiative with different components, such as multi-tasking in the stope teams, leaves a good part of the handling of tasks to the team’s discretion, putting more of the decision-making in the hands of the people at the rock face. This has led to increases in productivity of 30 to 50 percent.
Vaal Reefs No 10 shaft, he adds, has also gone in for modern participative management systems. Bonus systems, which pass part of productivity improvements back financially to the employee, also help. Yet in the end, barring the discovery of a major gold field, gold mining will decline.
Sunter says Fulco might mean that the 30 to 35 percent contribution of gold to South Africa’s foreign exchange earnings remains for a while longer, but the country must start diversifying now.
South Africa must move further away from dependence on a single foreign exchange earning commodity than it has already, and towards manufactured exports, which have higher margins and are more sustainable than the gold, which is finally, it seems, running out.