No More Easy Gold In South Africa

Isabel Turner And Erin Hamilton - Thu 28 Jun, 2007

The sad fact, and not just for South Africa, is that the easy bits of gold have long been mined out. That applies to all metals all the way around the world. This is not surprising in South Africa, which has apparently been mined since at least a few years into AD. Now it is a struggle gold grades from existing mines have been declining, wages are rising as are social costs, equipment prices are soaring, skilled professionals are in short supply, but production and revenues have been falling...

Digging yourself into the deepest man-made hole in the
world is pretty radical. Not even a land-short South
African gold miner would shovel out his Rand unless he
had confidence that what is down there is going to go up!

Getting into the Guinness Book of Records on this basis
is too expensive unless the results are going pay off. So
it’s a pretty strong positive signal for gold that Gold
Fields, the world’s fourth biggest producer, and Anglo
Gold Ashanti, the world’s third, are both putting their
money into going 4km underground.

The sad fact, and not just for South Africa, is that the
easy bits of gold have long been mined out. That applies
to all metals all the way around the world. This is not
surprising in South Africa, which has apparently been
mined since at least a few years into AD.

Now it is a struggle – gold grades from existing mines
have been declining, wages are rising as are social
costs, equipment prices are soaring, skilled
professionals are in short supply, but production and
revenues have been falling. Those South African mine
companies have to work really hard for their, (and
shareholders,) profits.

They have special problems, ones that don’t normally make
it to the front pages of the mining news! South Africa’s
mining costs are already the highest in the world and it
seems unlikely that this will be waved away with a magic
wand any time soon. The gold industry may have grown rich
on the country’s cheap labour but those chickens are now
coming home to roost. Only a few weeks ago the National
Union of Mineworkers was demanding a 15 per cent wage
increase for its members. Going deeper means higher
medical insurance costs too.

Another labour factor, which seldom gets a mention in any
mining company PR, is the challenge of HIV/AIDS. This has
become endemic among South African and migrant workers
alike. So, medical insurance premiums and disability
cover are higher than elsewhere.

Then there are the technical challenges of going 4 km
down, including how to keep things cool enough for
workers to operate effectively, not to mention the design
of haulage systems.

At 4km below, the rock temperature nears a sweltering
56C. If talk of going to 5km ever materialises the
temperature rises a further 14 degrees! That is pretty
damn hot. Mining companies will have to look very closely
at improved cooling technologies. They are certainly
going to burn some electricity! Driefontein’s current
annual electricity bill is already ZAR250m ($35m) and
makes up 12% of costs.

Another issue will be the time lost travelling. (Makes
the London tube seem a doddle in comparison!) To get to
the bottom of Tautona mine currently takes around an hour
and a half. This is set to increase to two hours as the
mine goes deeper, which means only 4.5 to 5 hours out of
a nine hour shift will be spent working, says AngloGold
Ashanti. So that is another indirect labour cost.

The mines are considering new technologies, like using
linear motor systems. These are streamlined systems which
don’t need the use of a rope. But they are still in R&D.

Housekeeping for South African gold is tight just because
of all of this and its mining is becoming difficult.
According to South African gold research group GFMS,
local currency cash profit margins for the "Big Four"
producing regions are “South Africa, 58% of cash costs;
Australia, 85%; Canada, 87%; and in the United States,
69%. The increases in cash margins by comparison with
those registered in 2005 were 190%, 73%, 41% and 49%
respectively.” It latest figure (2005) overall for mine
cost of producing an ounce of gold is an average of
US$317. Now it will be more. Plus, deep mines cost...

Faced with top-of-the-league expenses, the gold price was
for a long time too low for the South Africans to bother
to dig on their home turf. The grass was definitely
greener, or at least cheaper, elsewhere. But, US$640 or
so an ounce puts a different complexion on it. Plus,
other countries have wised up on the value of their
resources. These days, be they dictator or president,
there is a tough bargain in profit sharing, road
building, or generally improving the country.

And digging deep into South Africa’s vast unexplored
reserves does not look as daunting, with technology
improving all the time. Summing it up, as Gold Fields CEO
Ian Cockerill said recently. “This means we should be
trying to acquire additional ounces.” So it is back to
the backyard.

First a bit of geography: the mines were we are talking
about lie near Carltonville on the Witwatersrand, South
West of Johannesburg. The Witwatersrand is home to the
richest deposits of gold anywhere on earth and is where
gold was struck by the Englishman George Harrison in
1886, starting the long-term European gold rush.

Gold Fields is forking out ZAR4.7 billion (US$663m) to
deepen its Kloof and Driefontein mine. This takes a bit
of time but it anticipates getting a further 10.8 million
ounces of gold out of this mine. Gold Fields believes
that this could extend the life of Driefontein, a
granddaddy of a mine which has delivered more gold than
any other in history, to around 2035.

Meanwhile AngloGold Ashanti is spending $160 million to
drill down at its Tautona mine to 3900 metres. This mine
is expected to yield a further 2.6 million ounces. The
deepening of Mponeng, another of AngloGold’s mines, to
3600m has been made possible by a ZAR2bn ($282m)
injection.

Even Harmony, the fifth largest gold producer in the
world, is at it - although its projects are not quite as
ambitious. It is deepening its Elandsrand mine to 3300m,
expected to yield an additional 6.22million ounces.

Aside from the capital costs to dig deeper at
Driefontein, running such a deep mine will cost
ZAR1886/oz ($269m/oz) over the life of the mine. At
recent gold spot prices which are hovering around the
$640/oz mark that is not bad going you might say. Butt
even at that level of operating expense, for investors it
depends on whether companies will be able to keep costs
on a tight rein.

So, why the optimism on gold when there is the prospect
of all these refurbished mines opening up for business!

Mines are worse than vines. It takes years before they
produce. Even the South African Chamber of Mines is not
very confident that the trend of declining supplies will
be reversed in the very near future. Lead times are very
long. At Driefontein, they are only expecting to get the
gold out the ground sometime after 2011, while at Tautona
it could be any time between next year and 2017.

Plus, those mining companies are not going to rush the
gold out. More than anyone they know the effect
overproduction will have on the price. You only have to
look at how clever the South Africans have always been at
managing precious prices – like diamonds.

Regards

Isabelle Turner & Erin Hamilton
For The Daily Reckoning

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