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What’s going on with South Africa’s gold mining industry? Gold Investing News lays it all out for you in this easy-to-follow guide to the issues.
According to media reports, the National Union of Mineworkers (NUM), which represents nearly two-thirds of the country’s gold miners, is planning protests after rejecting an offer to raise wages by 5 percent.
The union is pushing for much higher wages, including a 60-percent hike for entry-level jobs.
“We will be rolling out protest action in various mines,” Frans Baleni, secretary-general of the NUM, told reporters in Johannesburg on Monday. Strikes have not been ruled out, and the dispute will go to arbitration, a process that is expected to last about a month.
Both sides are trying to avoid a repeat of the labor unrest that plagued South Africa last summer, when workers seeking a pay increase walked out of mines owned by Lonmin (LSE:LMI), the world’s largest platinum producer. Protests led to violent clashes with police that caused the deaths of nine people and forced Lonmin to temporarily shutter its South African operations.
Conditions in South Africa’s platinum mines are notoriously bad, but producers are not in a position to improve them, considering the poor economics of mining platinum there, as explained to Platinum Investing News in a May interview with David Franklin of Sprott Asset Management.
While South Africa’s platinum industry has quieted down this summer following the resolution of strikes at Amplats, (OTC Pink:AGPPY) the country’s gold industry is in a funk and the wage demands are just the tip of the iceberg.
Losing its crown
The country that mined a third of the world’s bullion and once accounted for 79 percent of global gold production is now seen as an also-ran in the race for gold mining supremacy. In Gold Investing News’ annual ranking of gold-producing countries, South Africa finished fifth in 2012, behind China, Australia, the United States and Russia. Last year, a series of strikes caused South Africa’s gold output to drop to 170 tonnes, its lowest level since 1905, and an amount equal to just 6 percent of total gold production.
How did this happen? The reasons for South Africa’s problems are varied and complex, spanning issues that can broadly be characterized as technical, economic, workforce-related and political. In brief, here they are explained:
1. Technical: South Africa’s mines are some of the deepest in the world, with shafts extending up to 4 kilometers underground since most of the accessible gold ore has been depleted and mining companies are forced to dig deeper for the precious metal. That, of course, has increased costs for producers, despite a weakening local currency, the rand, that makes the purchase of goods and services cheaper. Added to the technical difficulties of going farther underground is the increasing problem of power in South Africa. Bloomberg reported in March that the country’s platinum and gold production was threatened by an impending electricity shortage predicted to be the worst in five years. Crimped power supply makes it difficult for mines to expand and can even lead to blackouts and mining stoppages, as occurred in South Africa in 2008.
2. Economic: The effects of a declining gold price and rising costs have had a predictably negative effect on South Africa’s gold producers, whose pre-tax profits margins are among the worst in the industry. Reuters said in a recent article that South Africa’s gold mines were profitable in 2008 and 2009, even when gold was at $1,000 an ounce, but labor and power costs have doubled the cash costs per ounce. That spells trouble with a declining gold price. The same article quotes the chief economist at South Africa’s Chamber of Mines as saying that the average price of gold in South Africa has fallen from 509,000 rand (US$51,868) per kilogram in the fourth quarter of 2012 to under 400,000 (US$40,761) rand/kg in the first six months of this year.
“This precipitous fall in the price … has been the biggest decline that has taken place since the 1920s,” he said. “At a 400,000 rand a kilo gold price, our estimate is that about 60 percent of the industry is in loss-making territory.”
3. Workforce: It’s a sad — and some would say shameful — fact that South Africa’s gold industry was built on the backs of cheap, predominantly black, labor. Now that labor, represented by the country’s two main unions, the NUM and the Association of Mineworkers and Construction Union, is seeking to redress perceived injustices through substantial wage increases.
The other significant labor issue is the declining number of workers in the gold shafts, whose numbers have fallen to around 142,000 last year from almost 500,000 in 1990, according to Reuters. A declining labor pool puts upward pressure on wage costs.
4. Political: The union-driven push for more pay is justified on the basis of allowing a more equal distribution of wealth from the country’s lucrative gold-mining sector. Baleni, the NUM official quoted above, said in a July 29 Bloomberg article that the unions aren’t going to allow South African gold mining companies to “plead poverty”, citing for example the 45.3 million rand (US$4.6 million) in salary and bonuses paid to Gold Fields (NYSE:GFI) CEO Nick Holland last year.
Mining has always been political in South Africa, and the industry has faced frequent calls for nationalization. The African National Congress, which has ruled South Africa since the end of apartheid, for years faced pressure from its leftist fringes to nationalize mines, and only recently put an end to such plans — announcing last December that mines will stay private but that mining companies will pay higher taxes.
A way forward?
The government clearly has an interest in solving the labor problems that continue to plague the goldand platinum mining sectors, especially with an election looming next year, but the industry has little wiggle room when it comes to negotiations. As explained above, the economics of gold mining in South Africa simply do not support the kind of wage increases the unions are seeking, which raises the specter of more confrontation in the coming weeks. How it will all turn out is anyone’s guess, but what is clear is that South Africa’s gold mining industry is in trouble and it will take some major substantive changes to turn the ship around. Let’s hope that ultimately, cooler heads will prevail, and that both sides are able to come up with solutions that work towards lowering costs, perhaps focusing on the non-labor side, while allowing room for wage increases that will attract more people back into the industry and satisfy worker’s justifiable demands for better pay.
Securities Disclosure: I, Andrew Topf, hold no direct investment interest in any company mentioned in this article.
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