Mines take strain as gold price plummets
As economists dole out sober predictions about the future of the gold price, unions fear that the scramble by mining companies to cut costs will affect wage negotiations that are only weeks away.
Following Monday's price plunge, the shares of all the country's major gold mines have taken a significant knock. By lunchtime on Thursday, AngloGold Ashanti's shares had fallen 13.6% from the same time last week.
Harmony Gold Mining shares had plummeted 18% over the same period, and Sibanye Gold had seen a 20% dive in share prices.
Mines say that cost-cutting is the only way to weather the storm if prices remain where they are, or worse, fall lower than the $1380 an ounce that was recorded on Wednesday.
"The drop in the gold price is concerning to us," said Sibanye Gold's corporate affairs official, James Wellsted "If it falls a lot lower, we would have to relook at some of our plans on a longer-term basis."
His worries are echoed by AngloGold Ashanti, whose spokesperson, Alan Fine, said the dive in the gold price "clearly places margins under pressure".
Grant Stuart, deputy president of investor relations at Gold One International, said the gold price "dropping $100 an ounce in a day" meant the company was "absolutely concerned".
The apprehension consuming the industry centres around a well-founded fear: some economists predict that the gold price will stabilise at levels that are lower than mines need to achieve their current outputs. Conservative estimates anticipate that it will stabilise at $1500 an ounce, but one analyst says the real value may be closer to $600.
Sibanye Gold is banking on the price trading largely between $1350 and $1 400 an ounce in order to maintain its output levels. According to Wellsted, the price would need to stay there in order for the company to continue to invest at its current rate.
Despite that, Sibanye Gold operations would not necessarily feel the price slump, he said. "We try to manage our operations as best we can and keep our costs as low as possible so we aren't as affected by volatility," he said. "We've got operational lives of 15 years plus, so that's where our planning is. We're not affected by these kinds of daily moves."
Wellsted said it was impossible to predict where the price would settle. Nevertheless, "if it goes a lot lower [than $1350 an ounce] and settles there, clearly we will then have to rethink our plans and make some changes," he said.
Harmony Gold said it had already felt the effects of the steady decline over the past year, and was factoring new price assumptions into its plans. "Our mine plans are based on certain gold price and rand price assumptions, which we determine annually," said Harmony's chief executive Graham Briggs.
"For the past year our planning was done at a gold price of R340000 a kilogram [about $1251 an ounce]. For the first six months of 2013, our total all-in cost was R393354 a kilogram (or $1 446 an ounce). We are currently in the next planning cycle and will obviously take the new gold price level into account."
Although all the mines cited cost-cutting as a major priority, they claimed it was part of a long-term plan rather than in reaction to prices alone. Fine said AngloGold had announced its intentions to cut costs late last year. "We announced that focus would be placed on cutting costs across our global corporate structure, while reviewing each of our 20 operations to extract operating efficiencies wherever possible to ensure each operation remains sustainable," he said. "That work is under way and the result remains as important now as it was then."
Harmony took a similar line. "Our approach is not to continue changing our plans as the gold price changes," said Briggs. "At current levels, we have already assessed our costs and capital expenditure and will be reducing these where possible."
But the unions are sceptical that these events will not affect workers in the long term. "Gold mines make plans for volatility that might not always be large enough, as we have seen in the past," said Paul Joubert, senior economic researcher for Solidarity. "The decreased gold price would certainly affect negotiations."
Based on commodity prices
National Union of Mineworkers spokesperson Lesiba Seshoka said he suspected that the mines would use the floundering price as a bargaining chip to keep salary increases for mine workers minimal. "This may have come at the right time for them." He said the unions may negotiate to keep increases small "based on commodity prices".
"It's totally unreasonable, but we suspect they might try such a thing."
Such an approach, however, would be unacceptable, said Seshoka. "When the gold prices are doing very well, we don't see any improvement on the workers' side. And therefore we don't expect that, when the price goes down, any such thing should happen. We are quite confident that the mines will be able to be deal with this. We don't expect that it should be passed over to the poor worker."
And despite having planned for the effects of gold-price decreases, several of the mines said that the price of the yellow metal might indeed become a factor for wage negotiations – especially for marginal mines that were struggling to bring down costs. Gold One's Stuart, who acknowledged the vulnerability of several marginal assets acquired by the company over the past year, said that the wage talks called for a "certain level of maturity".
"We can't afford to have strikes like last year, that we know for sure," he said. Unions needed to realise that if they drive a hard negotiation for price increases mining companies might become less able to ride out other external pressures. Mine management needed to communicate honestly the constraints they faced, said Stuart.
But Leshoka said that company constraints were not reasons to suppress the workers' salaries. "Everything has been increasing on the worker's side: costs of transport; petrol; food has sky-rocketed. And [the workers have had to absorb those higher costs]," he said.
"So any market-related reason that will be passed on to us will be a declaration of war."