The Gold Test – Can South Africa’s mining sector weather the storms ahead?

Windhoek – South Africa’s gold mining sector faces one of its biggest tests of times in the coming months as workers lock horns with management over wage and salary negotiations which are as high as 150 percent.
South Africa’s gold mining sector, once the world’s biggest bullion industry, has been in precipitous decline during the past years, partly due  to labour unrest, falling ore grades and rising overheads.
Market analysts agree that the South African gold industry, which thrived for more than a century on cheap black labour, has simply lost its lustre.
The “sun is setting on an industry that has produced a third of the bullion extracted from the planet”, Reuters reported this past week.
“Gold’s sliding price and surging costs are hitting an industry that laid the foundation for Africa’s largest economy but has been slowly dying for decades as ore grades decline and shafts reach depths of four kilometres, the world’s deepest,” the news agency said.
South Africa produced 177.8 tonnes of gold in 2012 (from 208 tonnes in 2011), accounting for six percent of world production.
During the past year, gold exports earned South Africa R72 billion, about 10 percent of the country’s total export earnings.
Historically, gold mining has been so big in South Africa that the commercial capital became known as the City of Gold.
At the height of South Africa’s love affair with gold in the 1970s, the country’s mines were producing 1 000 tonnes of the metal a year.
But that is all in the past.
Now South Africa’s Chamber of Mines admits that the country’s gold mines have been in decline as falling ore grades and the cost of mining at increased depths erodes margins.
While gold prices fall, the costs of wages and electricity among other key expenses continue to increase.
The chamber has said about 20 tonnes of gold in 2012 production was lost to labour unrest.
This week (ending July 13) workers unions – MUN and AMCU – and mining companies started negotiations for new wages and salaries.
The rival unions are also battling for members in the struggling mining sector, and this tends to fuel labour unrest.
Whilst MUN, an ally of the ruling ANC, demanded a 60 percent hike in wages and salaries of gold mine workers, AMCU upped the ante with a 150 percent wage and salaries demand for entry-level mining workers.
AMCU’s demands mean that an entry level mining worker in the gold sector would earn around R12 500.
This figure is within the region of the demands made by striking workers at Anglo’s Marikana platinum mine last year. That strike degenerated into serious violence, with police shooting dead dozens of workers.
AMCU was at the centre of that strike.
Bheki Sibiya, CEO of the Chamber of Mines, said sharp reductions in commodity prices – the price of gold has dropped by more than 20 percent in the past six months – have resulted in well over 50 percent of South Africa’s gold mines sinking into loss-making positions.
Sibiya warned that failure to strike a deal with workers would lead to disaster in the mining sector.
“Neither the industry nor the country can afford yet another wave of calamitous workplace disorder that delivers additional global uncertainty and becomes the cause of further downgrades of South Africa’s sovereign credit rating,” Sibiya said.
South African gold mining companies argue that due to rising costs, their operations are profitable if the precious metal fetches prices of more than US$1 500 an ounce.
“The precipitous fall in the price … has been the biggest decline that has taken place since the 1920s.
“At a price of around US$1 220 an ounce, our estimate is that about 60 percent of the industry is in loss making territory,” Chamber of Mines chief economist Roger Baxter said.
Mike Teke, deputy president Chamber of Mines added: “The industry is also facing a tough trading environment. I often refer to mining as an industry of short, beautiful summers and long, cold winters. Right now we are in the middle of a long, cold winter.
“The mining industry is facing global headwinds such as the recession in Europe, the slowdown in China’s economic growth and the potential slowdown in quantitative easing by central banks, which have reduced demand and prices for minerals.”
The chamber says during the last quarter of 2012, about 40 percent of the mines were classified either as unprofitable or marginal, based on cash costs and on an average gold price of R509.783 per kg.
It further argues that taking into account that 80 percent of South African mines capital expenditure is used to sustain production, then the entire industry might be classified as being sub-marginal.
“This is an industry in crisis, an industry whose productive capacity will be seriously threatened by excessive cost increases.
“It is an industry facing further cost increases with considerable trepidation,” the chamber contends.
This, coupled with fears that mining companies would soon resort to job cuts to remain afloat, have raised tensions in the sector.
AMCU, the rising militant union which is upstaging the traditional NUM, argues that the majority of South Africans have not benefitted from the country’s mineral wealth.
“The majority of the people have not yet benefitted from the distribution of wealth created within the mining industry. We believe the minerals of this country must now benefit the people,” AMCU President Joseph Mathunjwa said.
“It is time now to realise the plight of the working class. You see all these heaps of dumps and the minerals are gone, but the lives of those people who extracted those minerals-they haven’t benefitted. You want a huge income and a dividend but I think it is time to relax a little bit,” Mathunjwa says.

July 2013
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