South African gold miners have to grin and bear the crunch in the short term, because “gold’s day is coming”, according to mining investment analyst Dennis Mashile.
Mashile spoke to the Mail & Guardian in a week when figures released by the Chamber of Mines showed that gold production last year plummeted to 308 tonnes — a level not seen since the Great Depression.
The Chamber of Mines cited the strong rand and above-inflation cost increases as the main reasons for the decline in production.
Gold’s decline in influence was also underlined by mining production statistics released this week by Statistics South Africa.
The figures show that mining production in February rose 5,7% compared with February last year. The increase was the result of an increase in platinum and coal production. On a quarterly basis, gold production increased 0,3%, while non-gold production rose 8,3%.
January mineral sales rose 2,6% to R10-billion. Gold sales fell 20,2% to R1,9-billion, a fifth of the total.
The main problem with gold is structural. South Africa has vast ore bodies, believed to have been “only half” mined, but they are increasingly expensive to access and certainly not viable at current exchange rates. South Africa’s gold also requires higher capital expenditure and operational costs relative to open-cast mining in countries like Ghana.
The problem for local miners is the rand price of gold. At the height of rand weakness, in the first quarter of 2002, it stood at more than R107 000 a kilogram. It now stands at R84 000 a kilogram. Next week, when gold producers release their quarterlies, the ritual wailing will start afresh.
South Africa sits on 60% of known platinum reserves in its Bushveld Complex straddling the North West, Limpopo and Mpumalanga. This suggests that when production in this area takes off, it may create employment for at least some of the 90 000 threatened gold mining employees.
But Mashile sees very little of that happening. He observes that Anglo Platinum employment practices categorise a typical underground worker as “young, preferably local and with a matric”. The profile of a gold-mining employee, on the other hand, is semi- skilled and ageing. Mashile estimates a 10% cross-industry absorption rate.
He notes that the difficult decision mine companies will have to make in the short term is to weigh the cost of operation against absorbing losses, while hoping that their luck turns in five years. This is because if mines are closed now, they will be more expensive to reopen when the outlook improves.
Allan Williamson, gold analyst at HSBC Securities in London, told the Mail & Guardian that South Africa’s decline as a source of supply has not registered on the global radar.
Williamson notes that South Africa belongs to the “old” centre of supply, which includes the United States, Australia and Canada, where production is in decline. These sources are being replaced by increased production in countries such as Peru, China and parts of Africa such as Tanzania, Mali and Ghana.
Williamson notes that the industry has been in surplus since 1997 at an aggregate 324 tonnes. But this has not dampened the gold price, because it is driven by the dollar rather than by market dynamics. A weakening dollar drives the price up; the trouble is it also strengthens the rand.
South Africa may be missing out on a boom. Last year, for the first time since 1997, there was an increase in jewellery manufacturing, Williamson said. There is also a rise in the use of gold as an investment and dollar weakness is a feature of life for the foreseeable future.
This should drive the gold price to the $500 an ounce forecast by AngloGold Ashanti CEO Bobby Godsell this week. HSBC has an average forecast of $455 this year and $483 next year, suggesting that $500 can be reached within 18 months.
Mashile’s belief that gold will have its day stems from the metal’s status as an investment haven. He notes that poor economic conditions in places such as Germany, as well as the increasing number of countries that miss European Union membership benchmarks of economic fundamentals, will undermine confidence in the European capital markets.
The East is still in its infancy as a capital market and, with the dollar in the doldrums, this leaves gold as the only alternative. At current rand levels, Mashile believes gold will have to reach $510 an ounce for mining to become profitable. Until then, miners will have to grin and bear it.