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SA’s mining own goals work in Ghana’s favour

‘The worrying part of South African gold mining is you can’t see the future,’ says mining analyst, Peter Major.

NOMPU SIZIBA: South Africa has lost the title of being the leading gold producer on the African continent to rival Ghana. South Africa led global gold production for over 100 years, but output has been shrinking in the recent past on account of deeper, geologically challenging mines, higher costs and labour unrest issues. Ghana has overshot South Africa in production, with international miners viewing it as a country with a favourable policy environment.

Read: Gold output has longest losing streak since 2009

Well, to talk about this latest development and other mining issues I’m joined on the line by Peter Major. He’s the head of mining at Mergence Corporate Solutions. Thanks very much, Peter. South Africa’s very own Gold Fields and AngloGold Ashanti are some of the players who have gone into Ghana. What edge has that West African country got over South Africa, such that it has now overtaken us?

PETER MAJOR: Well, they’ve made a lot of changes, because Ghana was originally a rich gold producer 1 000 years ago,  2000 years ago – and even 100 years ago. But with the coups, change in government, change in regulation, change in policy, breakdown in civil obedience and so on, it became less and less attractive.

So about the time that AngloGold bought Ashanti, I think in 2002/3, that was almost unfortunately the worst time to get into gold mining as far as the environment there. It was good to get in, because the gold price was going up. But AngloGold eventually had to abandon it. They lost hundreds of millions of dollars there, and they couldn’t get the environment favourable enough with electricity, rampant corruption, change in legislation, zama zamas, all kinds of problems. But yes, Ghana realised they were losing all this potential – we’ve got a lot of gold here, companies aren’t going to come and exploit it and mine it and hire us if we can’t get all these difficulties straightened out.

So the fact that Anglos is going back there for a second shot – it is very technically complex and even socially complex – shows they are more attractive than us. That’s a loud clap, that’s a load bang, that’s a bucket of cold water on us.

NOMPU SIZIBA: Interestingly in Ghana, while it hosts big international miners, much of its production actually comes from smaller producers – which is obviously very positive for that economy. Is that just the way that that sector has evolved, or has there been a deliberate policy decision that seeks to ensure that local small players get their fair share of the game?

PETER MAJOR: Nompu, policy usually follows what’s on the ground. And so what you said at the beginning is correct. They are now changing policy to try and accept the reality that there are thousands and thousands of small miners mining, and they think, well, if those are leading the charge, let’s try and get something out of it. Let’s try and legislate and bring these people into the loop, so that we can account for the gold that they produce so that we can make a little bit of margin on it, make sure that the money isn’t going out of the country, but is going in. You don’t want your small gold miners selling on the black market at 30 to 40% discounts – and that margin goes overseas. Get your small miners to sell as close to the LME [London Metal Exchange] price as possible, so that all the money stays here.

So, yes, policy is having to catch up with the miners, just like in America. They had to write policy after the frontiers ran out and grabbed all the Ghanaians property illegally and they had to write the policy about who got what. But Ghana does have a lot of gold, and the policy has now become a lot more accommodating than it was, and more accommodating than ours.

Read more: Nation built on gold loses its African crown to rival Ghana 

NOMPU SIZIBA: For some time AngloGold Ashanti had the problem of illegal miners taking over their Obuasi Mine, which has a capacity of some 350 000 to 450 000 ounces per annum. Have matters been resolved there? Has the government stepped in to help that company?

PETER MAJOR: It has. It utilised the army and started controlling the people that were running wild over the mine. There are still lots of negotiations between the government, Anglos and the community, but there going to be certain laws, there are going to be certain parameters – who can do what – and we [the Ghanaian government] are going to enforce those laws. Mark Bristow, as we know from Randgold, he worked really hard at getting into Obuasi a few years ago. He told me and lots of people at the Indaba on screen, on stage. It seemed very close; it was a hard decision because it’s a wonderful ore body. The mine is not that bad as far as its potential, but there are too many of these social policy and regulatory issues, and they couldn’t ensure certainty. So he left it.

I think the Ghanaian government has realised: we have to ensure there’s a very attractive climate here, and make the people feel this climate will stay – if we want them to bring in money.

NOMPU SIZIBA: Does South Africa still have a lot of gold that could be extracted, but the problem is that now it’s too deep to try and get, and of course the associated costs – not to mention to life and limb – in trying to make it happen? And how much of a factor is regulation as well?

PETER MAJOR: Well, regulation and policy play a much bigger role than the depth. We were mining gold 3.5 kilometres [down] back in the early sixties – that’s 40/50 years ago. So the technology has really improved. Safety is tremendously improved. America is now putting some of its mines over three kilometres [down]. So it was never a technical problem. It’s definitely not a technical problem now.

But, if your productivity is going down every year, if your costs are growing up at double-digits when inflation is 4%, you are going to wedge yourself into a corner full of debt and high costs, and we’ve just launched ourselves into that. We have lost control of our costs – and out-of-control electricity [costs] does not help, because underground needs a lot of electricity.

NOMPU SIZIBA: Sibanye-Stillwater is the only major gold player left [here] now, and it has been cutting a lot of jobs in the process. What are the expectations about what Sibanye will be producing annually?

PETER MAJOR: Gee, I don’t know. They lost well over 100 000 ounces with this strike that they’ve just concluded. Are they going to get that back? A lot of the sections have been closed for good. Some of the shafts have been closed for good.

The worrying part of South African gold mining is you can’t see the future. You don’t have certainty. You don’t have certainty on what your electricity costs are going to be, you don’t have certainty about whether the union is going to settle for a double-digit inflation increase. Is government going to back up some of the difficult policies and regulations, or are they going leave them in place? You don’t have certainty about the zama zamas. The crime is out of control around our mines; the poor police can’t handle it – is the army going to come and help?

So there are so many uncertainties that you are just not going to get any capital investment to keep these mines alive.

NOMPU SIZIBA: What about Gold Fields’s South Deep mine? They’ve pumped around R32 billion into that mine, but they haven’t really made any money from it. In fact, it’s been a loss-making project. What’s the future for that particular mine? And, of course, shareholders must be very despondent.

PETER MAJOR: They struggled to cut losses, they struggled to stem the bleeding; if you continue bleeding you lose more of your body. That’s how shareholders have got now. Nobody wants to write off R60 billion. R30/40 billion was injected into it. Then, when you add the billions that they paid for it – billions and billions. The gold is there, but nobody knows how to get the gold out economically in the current environment. That’s a conundrum. And unless we can keep a couple of our gold mines alive so they can prove how we can still get gold out in the environment we’ve got, nobody will risk it. So, we’ve got to keep alive the few gold mines we’ve got, and we’ve got to help them grow.

We’ve got to nourish them, whatever it takes. If it’s change in regulation, change in policy, if the unions have to negotiate more realistically, if Eskom has to operate more efficiently – all these factors making our gold mines close, will have to be turned around and the few sustaining ones kept buoyant for a few more years. Because, if they close, nobody will risk ever trying to start one up.

NOMPU SIZIBA: Peter, there are a lot of variables that you are citing there. But we have run out of time. It’s always such a pleasure talking to you.

 

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“The worrying part of South African gold mining is you can’t see the future”. This was very true for more than just the gold mining sector in SA. Unfortunately, lately i feel i can see the future in many areas, and it’s not pretty.

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