LONDON -A few months ago, Mineweb published a thought-provoking article suggesting the South African Gold Mining industry as we know it might not survive beyond the end of the decade (See: Could SA’s gold mining industry be gone by 2020?).
In it Patrick Cairns reported on a talk by Peter Major, mining specialist at Cadiz Corporate Solutions, to JSE’s Power Hour in Cape Town, where he laid bare the serious problems facing the industry which have almost brought it to its knees. The current gold price is now around, or below, many of the miners’ latest AISC guidance levels and if the forecasts of most mainstream analysts are to be believed – the future of the industry looks bleak.
Major’s talk pointed to numerous political and union-related changes that have already seen the industry reduce to a fraction of the size it was only a decade or so ago. And unless there is a major pick-up in the gold price there would seem to be little prospect of any recovery. A combination of further falling prices and the implementation of a higher wage agreement will undoubtedly result in more closures and/or fewer jobs.
As Major pointed out, issues like government interference, the power of and conflict between unions, and BEE legislation, have all contributed to a situation where domestic gold mine productivity has dipped dramatically, and all this in the face of a declining gold price over the past four years.
While the fall in the value of the South African Rand against the US dollar has helped mitigate potential earnings losses (gold sales are in dollars while most local costs, particularly labour, are in Rands), the miners are, without exception, on the brink with respect to their South African production.
With most South African mines operating at such extreme depths, while grades have also been on a declining path, and with the breakdown in wage negotiations between the unions and the major mining companies suggesting a possible strike, the domestic industry is at a tipping point.
Indeed, one suspects the longer term future of the mining companies may lie in overseas operations where AngloGold, in particular, seems to be coming up with some positive results.
Let us look at the mining companies individually:
Major South African Gold Stocks
|Global Rank 2014||Company||2014 Gold Output (t)||Latest quarter AISC||2015 Guidance|
|3.||AngloGold Ashanti||138.0||$928||$1000 – $1050|
|16.||Harmony Gold*||33.5*||$1233*||Not reported|
*Harmony has a June year end, so latest figures are for its Q4 and for its year to end-June 2015 gold output.
In terms of combined gold production from domestic and overseas operations, AngloGold is the world’s third largest gold miner in terms of global gold output. Like its North American counterparts, AngloGold is going through a process of cutting costs and debt and with the recently announced sale of its Cripple Creek and Victor mines in Colorado, USA, to Newmont Mining for $820 million is making some significant inroads. But the company’s debt remains high with gross borrowings of $3.6 billion at the end of June.
In the company’s 2nd quarter results executives tried to put a positive spin on things, noting that it managed to generate some $71m of free cash flow in the quarter. Production and costs beat guidance on the back of another strong performance from its international mines and a recovery from its South African operations.
From the South African gold mine perspective, All-In Sustaining Costs (AISC) was still a worrying $1,098/oz from its SA mines – actually above some recent global gold price levels and with a significant wage increase commitment likely on the horizon.
The profitability prospects for its domestic mines are not exactly favourable bar a sharp gold price increase or a further substantial fall in the Rand/Dollar exchange rate. The saving grace on costs are its international operations where AISC were an impressive $844/oz – down 17% on a year earlier, with the new 45% owned Kibali mine in the DRC (operated by Randgold Resources) the best performer with AISC of only $601/oz. Read: AngloGold Ashanti climbing its mountain of debt.
Perhaps ominously, the company warned at the end of its financial results that production and cost estimates ‘assume neither labour related interruptions, power or other disruptions at our operating mines. Other unknown or unpredictable factors could also have material adverse effects on our future results.’
Gold Fields is the world’s 7th largest gold miner by annual production, but its operations now largely fall into the international category with the technically challenging South Deep, its only remaining South African mine. The rest of the South African assets were floated into what is now Sibanye Gold a couple of years ago. Even so its AISC in terms of both 2nd quarter figures and in guidance, are again far too close to the current gold price for comfort.
It is the only one of the South African gold majors not to have reported its latest financial figures so far – these will come out on the 20th, but it has reported its operating costs figures and guidance for the year already.
For the moment Sibanye Gold is totally reliant on its aging mines in South Africa for its annual production, which still puts it in the world’s No. 10 spot, and makes it South Africa’s largest domestic gold miner. Among its mines are some of the world’s biggest gold producers ever – notably Driefontein and Kloof – but these are now, like most South African mines, getting ever deeper with the main pay shoots mined out years ago. With ever greater technological and operational challenges, mostly because of depth of working and declining grades, even these top mines are running at AISC levels of $969 and $1068/oz respectively in the 2nd quarter.
The company’s overall 2nd quarter AISC were $1054/oz – again too close to current gold prices for comfort – as is guidance for the full year at $1050-$1100 an ounce. This is all despite Sibanye CEO, Neil Froneman, expecting a better second half of the year and is an indicator of the fierce cost pressures facing even the most productive of South African mining operations.
Interestingly the company, which has remained profitable overall, is looking at diversification with an eye on taking on platinum mines which may be sold by Anglo Platinum, and Froneman has also not ruled out looking outside South Africa for future gold mining projects.
Harmony is perhaps the most troubling of South Africa’s gold miners having been built up largely on the acquisition of what were even then mostly marginal gold mines. Its expertise over the years has been to take these and by dint of the implementation of efficient mining strategies, ride the gold price upwards and thus record some decent profits.
But conversely, at the recent lower gold prices it has been struggling. It has been exploring and developing some very promising international mining projects (partly in conjunction with Australia’s Newcrest). These have included exploring in the sometimes difficult political and social environment of Papua New Guinea, and it is with these that the company’s long-term future depends on, although financing such large projects there may be a challenge. These PNG projects now account for nearly half the company’s attributable gold and gold equivalent ore reserves.
Harmony’s latest operating results (it has a June year end so these are for its 4th quarter and 2015 financial year) must be worrying for management with overall AISC of $1,233/oz putting most of its operations heavily into loss-making territory.
The one positive is that it managed to make a headline profit for the latest quarter, although ultimately recording a significant book loss due to heavy impairment charges. While soon-to-retire CEO, Graham Briggs, says that the target is to bring all its mines on to a profitable basis in the new financial year, this is easier said than done. Perhaps of all the major South African miners it is the most vulnerable to forced closures of some of its domestic operations.
So overall, bar a significant gold price increase, South Africa’s once globally-dominant gold mining industry has to be seen as in its twilight years as the major miners cannot go on sustaining loss-making operations indefinitely.
While there are still some profitable South African gold mines at the current gold price, we will undoubtedly see some more closures moving forwards while the operating companies continue to battle to further reduce, or at least contain, operating costs. While the industry may not die completely by 2020, it certainly looks likely to continue to contract.