After the goldrush, coal addiction

(John McCann/M&G)

(John McCann/M&G)

COMMENT

Given South Africa’s exceptional mineral resource base, it is instructive to examine what we have made of this endowment, in particular gold.

Gold mining started towards the end of the 19th century, and was initially focused in the Barberton area. Things changed with the discovery of gold on the Witwatersrand, and Johannesburg grew rapidly on the back of these discoveries, as well as on the backs of a migrant labour force.

Apart from the break in production during the South African War (1899 to 1902), production rose steadily to peak in 1940, with a small drop-off coincident with World War II.

As post-war gold production from the central Witwatersrand Basin was declining, major extensions to it were discovered and large-scale mining of these areas was initiated, primarily in the West Wits and Klerksdorp areas, and the mines in the Free State.

The period from the 1950s through to 1974 heralded the golden years of gold production, and South Africa consistently produced more than 50% of global production, peaking at 62% in 1968.
This was the equivalent of the fillet steak of our gold endowment, and we gorged on it. Much of the road, rail and electricity infrastructure was built during this period. High growth rates fuelled an ever-increasing gross domestic product. Times were good, at least for the enfranchised segment of the population. An emboldened nationalist government rode the wave of this gold bonanza, with gold mine taxes contributing more than 12% of the total tax base.

The Republic of South Africa was instated in 1961 and the means were there to continue to refine the grand-scale sociopolitical experiment of apartheid. Money was not an issue.

South Africa mined, processed and sold the very best portion of its gold endowment when the gold price was pegged at less than $42 an ounce.

In 1971, the United States treasury cut the last threads that linked gold and the US dollar. Within four years, the price of gold had quadrupled from $40/oz to $160/oz, sending the South African economy into orbit.

Gold mines were taxed differently from other mines and businesses. A fairly sophisticated means of taxation encouraged gold mines to lower the average grade when prices increased, so as to maximise the long-term extraction of the resource. This had the immediate effect of lowering total gold output, although the net income in dollar terms increased dramatically.

Then came the first signs of trouble. In 1974 the oil price increased from $5 a barrel to $10 a barrel, which was still manageable for an oil-importing country flush with gold dollars. But at the same time, an oil embargo was placed on South Africa, a serious problem for a country that imported most of its oil requirements. There was the need to keep the economy moving forward, and attend to an escalating oil-hungry military operation.

It became necessary to procure oil under the table. Suppliers willing to break the embargo did so on two conditions: they were paid a premium (who knows how much) and they were paid in gold and not rands, which could be printed at will.

Annual gold production shrunk from a peak of more than 1 000 tonnes in 1969 to 750 tonnes in 1974, primarily as a result of the mines targeting lower-grade areas on the basis of the high gold prices and the tax formula.

Then the dollar gold price shed 20% in 1975, triggering a switch to mining higher grades again to sustain output. But the fillet was gone, all but depleted in the 1950s and 1960s.

There was still some good rump and sirloin to be had, but try as it might, the industry was unable to stop the inexorable decreases in gold production. By 1993, gold mining, which had once provided up to 15% of the total tax base, was contributing less than 2%, and the man in the street was picking up the missing tab to the tune of value-added tax (VAT) at 14%.

The madness had to end. The coup de grace was delivered in 1991, when the gold price slipped 5% and the oil price leapt up by 50%. All the government cards had been played, from tax rebates and the removal of tax ring-fences to the floating of the rand exchange rate, and still gold production declined.

The transition to a new democracy ended the madness. Embargoes and sanctions were lifted and South Africa could suddenly trade pineapples and mohair for oil.

False economics used in the conversion of resource to reserve during the last 20 years of apartheid, from 1974 to 1993, created an illusion of endowment.

Since the democratic elections the gold mining industry has struggled to keep alive those mines and shafts that were primarily developed to produce fool’s gold. One by one they have ceased operations and production has moved back into its predicted and rightful position on the distribution curve of an exhaustible resource.

The industry has shed three quarters of the labour force, down from 400 000 in 1994 to the current 100 000. This last phase of the gold production cycle has been sustained by a weaker rand. The rand price of gold increased 12-fold from 1994 to 2018, whereas the dollar price of gold has increased three-fold.

(John McCann/M&G)

Even at these current high rand gold prices, about 50% of the producing mines are marginal and continue operating on the hope of a gold price increase or an ever-magically weakening rand.

The legacy of the fool’s gold mines is extraordinarily difficult to deal with in a country beset by such high unemployment rates. The advent of ghost towns haunts, a frightening harbinger.

Let’s turn our attention to coal mining. Fillet gone — check; not much rump and sirloin left — check; production output past peak — check; down to spare ribs and chuck — check. The government is asking (pleading?) for reductions in the coal price — checkmate.

How about letting the rand slip a bit, further increasing VAT, arranging for tax rebates on new capital spend. Sound familiar? The problem is you can’t double down on 14% VAT because an extra 1% has already been introduced. Try increasing that and see what happens.

This time around, South Africa’s liberation will not be a political liberation from an abhorrent social experiment. This time, South Africa stands to liberate itself from an addiction to coal. The externality costs associated with the production of electricity from coal are so vast that we tend to steer clear of anything approaching full accounting. After all, what cost a human life, what cost the planet?

No more talking required. We have the solutions. This time around we have renewable liberation. It’s job accretive, costs less than the alternatives, has multiple times the value, frees up water resources and can lead to economic transformation that eluded us during political liberation.

Clyde Mallinson is a geologist who currently focuses on the energy sector

Clyde Mallinson

Clyde Mallinson

Clyde Mallinson is a geologist who has lectured in Earth history. He now focuses on Earth future, and to use his experience in fund management to channel pension funds into renewable living annuities Read more from Clyde Mallinson

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