Precious Metals: The High Cost Of Deep Mining

Isabel Turner And Erin Hamilton - Fri 10 Aug, 2007

Not the headline today but could be tomorrow. Can you imagine what this sort of news might do to a share price? Take Anglo Platinum (Angloplat), the worlds biggest platinum producer. This month Angloplats share price fell as much as 2.9% just because it warned on higher in-pipeline stocks and labour issues aka wage negotiations, strikes and MINE DEATHS! That is what you might find yourself reading. Mine deaths are a very fraught issue. It is awful when someone is killed for the families, fellow workers, and, of course, the mining companies. And for shareholders it means that production costs must rise to make the mines safer.

Not the headline today but could be tomorrow. Can you
imagine what this sort of news might do to a share price?
Take Anglo Platinum (Angloplat), the world’s biggest
platinum producer.

“This month Angloplat’s share price fell as much as 2.9%
just because it warned on higher in-pipeline stocks and
labour issues aka wage negotiations, strikes and MINE
DEATHS!” That is what you might find yourself reading.
Mine deaths are a very fraught issue. It is awful when
someone is killed – for the families, fellow workers,
and, of course, the mining companies. And for
shareholders it means that production costs must rise
to make the mines safer.

Now the South African government is exploring the idea
that the responsibility for mining deaths should be
placed firmly on the shoulders of company CEOs.
Furthermore, it is being suggested that remuneration of
the big bosses be linked to safety standards.

If Ms Sonijca Buyelwa, the minister of the department of
mineral and energy (DME), who is blazing this particular
trail, gets her way, this is what could happen. But
mining companies are lobbying hard to point out that she
may kill off South African mining altogether. Who on
earth would want to head up an operation where the risks
are so high!

Certainly not the chiefs at mining giant Anglo! They have
been the biggest culprits of late. Frankly they should
know better – this the line that Ms Buyelwa seems to be
taking. Twelve workers have died at Anglopat’s Rustenburg
mine this year already. If that wasn’t enough bad news, a
report by non-governmental body, the Bench Marks
Foundation questioned the group’s commitment to safety
saying there was more emphasis on blame than on fixing
problems underground.

Angloplat has already had a run in with government this
year. In January the minister accused the company of
failing to address transformation, particularly black
economic empowerment issues. Things have settled down a
bit though with the arrival of a new chief executive for
AngloPlat, who happens to be a woman!

So, when the Rustenburg incident hit the headlines this
year Cynthia Caroll closed up shop and stopped production
– a first in South Africa’s mining history. It was a
clear statement from Angloplat – “we don’t think life is
cheap!” Needless to say, the mine’s closure hit 2007
production by some 10,000 and 15,000 ounces and
company had to report this to the Johannesburg
Securities Exchange.

But Angloplat is not the only culprit in this growing
safety saga. In a high profile incident last October five
miners were killed in a rock fall at one of AngloGold
Ashanti’s Tautona mines. Since then safety at AngloGold
has been on a bit of a slippery slope. In spite of
conducting a review after the October disaster, it had
its worst quarterly safety performance in 2007 since the
formation of Anglogold Ashanti.

What is Anglogold Ashanti’s chief, Bobby Godsell, doing
about this? Bobby is well-known as an unconventional
shoot-from-the-hip kind of guy. Known to turn up at a
stuffy-demanding-a-black-tie do in an open neck shirt,
Godsell was at one time a political darling of the
industry and a man who plays a shrewd political game.

But, not even he seems likely to be able to stomach the
sort of pressure Ms Buyelwa is suggesting. Especially if
he wants to have a stab at getting to the 40,000 tonnes
of gold reserves believed buried in South African ground.
To be fair to Bobby, none of South Africa’s gold
companies have been faring too well on the safety front.

Between 2005 and 2006, although the gold mining sector
only employed 35% of all mineworkers, it was responsible
for 51% of all fatalities and 56% of all injuries.

Frankly though, the ugly reality of mining in South
Africa as elsewhere is that it kills people. Hundreds
every year! That is the nature of deep mining and this is
where the deepest mines (and they are going deeper!) in
the world exist. In 2006 199 deaths were recorded (113
from gold operations and 40 from platinum). From May to
June this year alone there have been nearly 50 deaths on
South Africa’s mines. If these two months are an
indication of number of deaths to expect in 2007, things
are not looking good.

If Ms Buyelwa gets her way more mines may have to close
to address safety issues. While death per se is never a
good thing, this could have a material impact on SA’s
metal production.

There is every reason for the mines to take safety very
seriously indeed – for moral and financial reasons.
Statistics from 2004 show that there were 244 lives lost
in South African mine accidents at a cost of $1.1 billion
or 6% of turnover or 30% of profit. For gold mining
houses, in particular, which are under substantial cost
pressure, safety is an issue that can’t be ignored.
The current run in precious metals prices is good enough
reason for the guys to dig deeper and revisit long
forgotten, and very often unsafe, mines. But putting
profits before people’s lives is simply not good enough.
That is the party line and it is a line that needs to
be toed.

So far Ms Buyelwa’s department (of energy and mineral
affairs) has not been the best at enforcing new
legislation and regulation. Back in 2003, the South
African government set the industry a target of improving
the incidence of fatality by 20% that year. But in 2003
the mining industry claimed the lives of 217 mineworkers.
With some 199 deaths in 2006, the industry has clearly
missed these targets.

It now seems that Ms Buyelwa means business, and
according to Isabel’s contacts, she wields a fair amount
of power. This is Africa though. Staff shortages to
enforce these laws within government have often meant
that laws and regulations are rendered entirely useless.
In one year the DME lost 75% of its top managers to the
private sector.

At some point, however, the department is going to show
its metal on safety. When it does there might be a reason
for investors to be worried. South Africa may be seen as
the African country with the lowest political risk for
investors. But who knows how long this might last when
government keeps changing the goal posts?

Regards,

Isabel Turner and Erin Hamilton
For The Daily Reckoning 

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