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SA gold production sees 17 consecutive months of decline

As labour issues, policy uncertainty and production costs bite.

NOMPU SIZIBA: South African gold production declined for the 17th month in a row in February, and not by any small measure, either. Gold output fell by 21% in the month, having declined by 23% in January. Stats SA came out with the mining production figures for February, with output as a whole declining by 7.5% – a total decline level that was last seen in March 2016.

On a positive note, platinum group metals, which have had a good run, rose by 18%, the sixth month of production growth.

To take us through the numbers and what’s been happening generally in the mining sector, I’m joined on the line by Peter Major, the head of mining at Mergence Corporate Solutions. Peter, 17 consecutive months of decline for gold production – that tells us a story.

PETER MAJOR: Oh, it’s a scary story. You are right. When you’ve got 17 months in a row, that’s a secular trend, it’s not a cyclical trend.

NOMPU SIZIBA: To what extent has the nearly five-month strike by Amcu members at Sibanye Gold’s Driefontein mine affected production there? Do we know?

Read: Sibanye freezing new SA capital spend on uncertainty

PETER MAJOR: Oh, we do know. It has affected it by almost two-thirds. I think in the last quarter they had 100 000 ounces produced, and it should have been in all 300 000 ounces. What happens is, when you are producing at full production – and the mines are designed for a lot of people, a lot of production – you can cut your costs pretty well, it’s cost-efficient. But when two-thirds of them are not producing, the costs are very high and it’s going to force you to shut down other parts of the mine. You don’t want to start shutting down shafts and other parts of the mine, because reopening is hard. We can’t stress enough how detrimental this is to everybody, to all sides – to the workers, the management, the country – and to the individual workers and all their dependants. Nobody is winning here, nobody ever wins in this.

NOMPU SIZIBA: With all the to-ing and fro-ing to courts, it seems as though Sibanye has managed to pretty much win on most counts against Amcu, but now they are trying to actually stop the strike happening. What do you think their chances are of success?

PETER MAJOR: It’s almost like telling the patient to kill the disease. And if this strike is [rolled out], here we go, then they are allowed to let go of the men and hire other men to take their place – and you don’t want to do that. You don’t want to get rid of people who know the operation really well, know the job really well. It’s demoralising and it doesn’t help anybody. But if you kill the patient, and the patient here is the mine, if you kill the patient, what good is that going to do anybody? These mines used to employ four times more people than they do now, and they should employ four times more, because the rest of the world keeps increasing gold production year after year after year, and we keep decreasing. We’ve gone from 550 000 men to 100 000, and this Driefontein/Kloof/Beatrix complex – there’s another 50/60 000 men. There is no reason this thing should close because of economics or mineral reserves, but it could actually close because of labour relations and Eskom.

NOMPU SIZIBA: Let’s talk about more positive issues. PGMs have had quite a good run, particularly palladium, from a price perspective. What are the dynamics at play there, and could we see PGMs being supported for some time to come?

PETER MAJOR: I’m not sure about that – supporting product prices. The palladium price to me is insane. I was at the Platinum Indaba on Tuesday, and we heard all the people telling us why there is no replacement for palladium immediately, and there is definitely no new production coming on. So there could be a squeeze and the price could certainly stabilise, which is about three times its long-term average. That would be good news. It has fallen from $1 600 to below $1 400, and that might just be letting off some steam. It’s still a fantastic price.

Rhodium is at a very, very good price – that’s helping. So platinum, which used to make up 65-70% of revenue for a platinum mine, is not even at 40% now. It’s 36%. So it’s all the other metals that are doing well; palladium, ruthenium, iridium, rhodium, even nickel and copper are helping. Chrome is helping. So these are good prices, and that is the good news, as you’ve pointed out. Even though we had another big fall on production this last month, the metal prices have more than made up for it.

NOMPU SIZIBA: Just tell us what happened with the PGMs. I thought that the production was up by 18% on the PGMs.

PETER MAJOR: Well, it was from this time last year, and it’s mainly because the metal prices, all these PGM metals except platinum, have gone up hugely in the last 12 months. The chrome price has recovered a bit and the base-metal price has gone up. So, because palladium has almost doubled, because rhodium has gone up 50%, because those little ones, iridium and ruthenium, have gone up – I don’t know offhand, but probably 30/40% – platinum mines are almost all making money now, whereas a year, year-and-a-half ago, two-thirds were losing money. Now almost all of them are making decent money. That’s probably been the biggest reason you’ve had a production increase, because they don’t have to be so selective on the ore. Now they can actually produce more, each man can move more tonnes, because it’s all possible.

NOMPU SIZIBA: Going forward, is platinum still going to be relevant and significant, particularly in the motor sector?

PETER MAJOR: I think so. There were a lot of good presentations on Tuesday. And, no matter how fast they produce electric vehicles, it’s coming off such a small base. The world sells something like 100 million new internal combustion engine vehicles a year. So, no matter how fast they can produce electric cars and start replacing them, PGMs are going to be important in the automotive sector for at least the next 15/20 years. At least. That’s because they put them on other vehicles like heavy-duty vehicles, trucks, loaders, and in mines and railroad trains. And they are even talking about putting them on ships.

People don’t think the price is going up too much more from here. They are pretty conservative on price.

NOMPU SIZIBA: Peter, iron-ore prices have been on a tear, due in part to that dam breach at the Vale mine in Brazil. Was South Africa able to take advantage of that on the production side?

PETER MAJOR: No, we weren’t, and that’s a shame because we produce a very high grade ore; it’s very well known throughout the world. There still is great demand for it. To take advantage of it we need a lot more train capacity. We shouldn’t be loading any iron ore on trucks; we are too far away. We need more train capacity.

All the attention has been focusing on Eskom, but Transnet has been seriously damaged these past 15 years, as well. The average person doesn’t feel it, but our freight rates are not competitive and the reliability is much better than Eskom, but yeah, we have not been taking advantage of it. If we had extra trains running we could be producing and exporting a lot more iron ore and taking advantage of these prices.

NOMPU SIZIBA: As much as coal is increasingly viewed as dirty and unsexy in terms of energy sustainability, how has that commodity been doing – production and pricewise?

PETER MAJOR: Both pretty good. Production of coal, even though it’s been flat for literally two decades, at least hasn’t fallen. And only recently, in the last month, have prices taken a big fall. They are still very, very high, but we’ve had insane coal prices for the last year-and-a-half, which is hard to believe. Coal is public enemy number one, and steam coal is trading at around $100/tonne. Now I see it has dropped down to around $80 – that’s a big drop. But, at $80/tonne, anybody who can’t make money on coal in this country should be fired, because it’s way above long-term averages, and we have a lot of coal resources here.

The world’s going to take a long time to wean itself off coal. We know it’s dirty, we know it’s bad. But, if you compare the new generators with the old ones, it’s like comparing new cars with old cars. The pollution of a new coal generator is only a percentage, literally 15, 20%, maximum 25%, of the pollution of maybe 30 years ago. So that’s another reason coal won’t disappear tomorrow. They’ll build more efficient smokestacks, scrubbers, baghouses, and ways of cleaning the exhaust before it goes out.

NOMPU SIZIBA: It does seem as though China, for example, is planning on going down that route as well, because they are heavily endowed in that area.

Just moving on, Peter, the mining sector is of course beset with its challenges, and the one that’s on the horizon is the carbon tax. The Minerals Council has warned that it’s going to seriously ratchet up their costs. But, at the same time, aren’t mining companies the world over being faced with similar taxes, given the fact that we need to take care of our planet?

PETER MAJOR: Definitely. They can do a lot if we can help them on the legislative side. They can do a lot if mining companies know that legislation and policies are always going to improve going forward, are going to be more helpful and beneficial. The companies will invest a lot more for the long term, like they used to. They are very happy to invest in wind farms, they are very happy to invest in solar panels – and then we would get counter-credits for all this carbon tax – as was brought out at the Platinum Indaba on Tuesday. But Eskom is so slow to allow people to sign up the independent power producers. Look how long it takes to put a few tiles on your house – you tell me how many months it takes and how much you have to pay to get that done.

So this Eskom crisis is hitting the companies in a lot of ways. If we had a good, stable, attractive environment, mining companies would have no problem investing for 10, 20, 30, 40 years out, they would be building these plants, and that would really lower the carbon footprint. But government and Eskom have to be onside; they can’t be bumping heads and they can’t be delaying things. They’ve got to be accelerating these modern changes.

NOMPU SIZIBA: Lastly, still on Eskom, they’ve warned that there is going to be load shedding today [Thursday], so this does indicate that we are certainly not out of the woods yet. I suppose this is yet another burden for the mining sector, which is a very heavily industrial sector.

PETER MAJOR: It really is. Imagine, in the sixties, when all our mining houses were going full-speed ahead, investing in deep-level gold mines – and, boy, they are really dependent on electricity – from Anglo American on down they spent tens of billions of dollars on 40/50/60-year projects, because they knew they were going to have reliable economic electricity. All other investment has stopped. In the last 20 years you’ve had none of that, because they don’t know if they are going to have reliable electricity; and, if they do, they know it’s not going to be economical. A 350% increase in less than seven years is a guarantee that nobody will sink capital into underground mines because they just know they’ll be uneconomic and the capital will be wasted.

NOMPU SIZIBA: Peter Major, thank you very  much for your time.

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The Zama Zamas probably had a production increase. No strikes, no halting of production following fatalities or bad safety practices, no minimum wage and no shift hours.

Just a production bonus. That’s because it’s the free market of mining.

Instead of the free market the big mines have the mining charter and viola….17 consecutive months of falling production.

Surely a cuti in production and supply will eventually drive the gold price up? It happens with oil, so why not with gold?

No. There is 100 years supply sitting on the earth’s surface. South Africa produces about 100 tonnes of the annual 2500 tones minned each year that is added to the above-ground stock of gold. SA is about 4% of the annual supply so lopping off 20% of this 4% is inconsequential. Gold and silver have very low declining marginal utility. That means despite all the gold around, the demand does not decrease.

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