The waxing and waning fortunes of the rand have South Africa’s gold mines in a fix, even overshadowing wage demands that carry the threat of the first industry-wide strike in 16 years.
Already, further development of the country’s rich ores has come under pressure as most mines base expansion plans on a price of about R90 000/kg. Industry growth will not happen even if the rand-gold price sticks at its current R83 000/kg, based on a gold price of $345/oz and a rand/dollar exchange rate of R7,50.
Although only two mines — Durban Roodepoort Deep’s (DRD) North West mines, Hartebeestfontein and Buffelsfontein — have a cloud of imminent closure hanging over them, analysts count at least six others with “marginal” status.
If capital expenditure is taken into consideration to judge the margins between revenue and costs, AngloGold’s Savuka operation, Harmony’s Free State division, Evander and Elandsrand mines, ARM’s Welkom mine and DRD’s ERPM also become marginal.
DRD has been under the heaviest pressure, stating earlier this week that it had put its North West mines on a 60-day review because of the weak gold price.
DRD’s board also rejected an offer from empowerment company Matodzi Resources to buy its North West operations for one rand, saying it would not entertain any offers until negotiations with trade unions had been concluded.
The outcome of this review will have to “take cognisance of the prevailing gold price level and the rand/dollar exchange rate,” the board said in a statement.
Deep underground in South Africa’s gold mines pressure is always a risk — that’s why the tunnel walls have to be supported and monitored around the clock.
This phenomenon explains why a prolonged strike would spell disaster for an industry whose fortunes are tied to an unholy trinity: the rand, the dollar and the gold price.
On the other hand, if the National Union of Mineworkers goes ahead with its planned strike — still an uncertainty at the time of going to print — the rand could weaken and, paradoxically, help the industry. The scenario is not that far-fetched in an industry riddled with intrigue.
“Gold rushes” in Johannesburg and California gave birth to the largest economies in Africa and the world. But time changes everything. The gold standard was abandoned in the 1970s and the metal lost its lustre.
The September 11 terrorist attacks on New York restored gold’s traditional role as a a haven in times of crisis. Demand rose steeply as people across the globe put their trust in the world’s hardest currency.
In South Africa, the industry has changed dramatically since the largest mining strike in history took place in 1987. Since then employment has nearly halved, from around 400 000 to around 200 000.
To top it all, the industry’s stake in the economy is no longer pivotal to the well-being of South Africans, as the primary sector now constitutes less than 10% of gross domestic product.
Gold accounted for 41,5% of total goods exports during the second quarter of 1987, just before the strike. In contrast, in the first quarter of this year, gold exports’ share was limited to 12,4% or R8,9-billion, compared with non-gold exports that amounted to R63,1-billion.
This, however, does not detract from its continued role as single biggest export earner — R45-billion last year. Platinum clinched second place, earning R35-billion.
Analysts have warned that the rand poses a bigger challenge now than any wage increases. The currency’s volatility has created havoc since the last round of wage negotiations in 2001.
Then, the first quarter’s average rand/dollar exchange rate was R8,83, the average gold price stood at $268 and earnings totalled R416-million. During the same period of 2002, the dollar was worth R11,93, gold $290 and earnings sky-rocketed to R2,5-billion.
For the first quarter this year the figures were R8,36, $353 and R1,4-billion respectively. The second quarter saw the rand strengthen to R7,75 to the dollar, gold drop to $347 and earnings fall dramatically to R800-million.
Gold producers are now expected — for the first time in two years — to report a lower average price received over the previous quarter — about $346,73 compared with $352,13 in the first quarter.
Junior miner Avgold, the first to issue its quarterly results this week, reported a headline loss per share of 15c compared with a headline profit per share of 6c in the quarter to March.
The results and the reasons for the losses — the strong rand, the company’s hedge book, a decline in output and lower yields — came as no surprise to analysts.
Helping to soothe the results, though, was the revelation that while gold sold during the June quarter dropped from 105 021 ounces in the March quarter to 84 335 ounces, sales for the year jumped 185% from 134 348 ounces to 382 561 ounces.
That translated into an increase in revenue from R363,8-billion to R999,5-billion, even though revenue for the June quarter shrank from R278-million to R219,1-million.
Nick Goodwin, gold analyst at local stockbroker Tradek and widely viewed as South Africa’s gold “guru”, has turned bullish on gold, calling for a run in bullion to $400 an ounce before the end of the year.
Goodwin’s belief is anchored in the assumption that the world’s largest stock index, the Dow Jones Industrial Average on the New York Stock Exchange, will fall from its current levels of around 9 000 to 8 000, leading the dollar weaker.
Goodwin, however, adds that the gold price’s recuperation will be short-lived, as the globe’s overall bearish sentiment is likely to continue.