Is the gold mining industry in decline?

A quick flight over Johannesburg and the old Witwatersrand area leaves little question about what the city was built on.

Mine dumps and slime dams from numerous mining operations litter the landscape. Johannesburg, like much of the South African economy, was built on mining profits. And gold has long been the backbone of this industry.

Yet a quick look at the numbers indicates that gold production has been on a steady slide for a number of years. The latest release from the South African Chamber of Mines confirms the trend. In the first quarter of 2007, gold production fell by 7.6% to 62,806 kilograms compared to the first quarter of 2006.

More worrying is that this decline occurred despite a significant increase in the quantity of ore mined. Reading between the lines: the grade of the ore mined is declining and the resulting gold yield is falling too.

Using numbers to paint the picture

We spent some time on the Department of Trade and Industry's website to get a better picture of South African trade over the last decade. The first thing we notice is that gold and uranium remain the major mining commodity export from South Africa. These commodities accounted for R35.6 billion of the mining export total in 2006.

Gold and uranium exports top the list of mining exports in 2006, contributing 27.5% of the total. The platinum mining sector contributed R35.1 billion to the total in the same year. Were it not for the big spike in the gold price in recent months, we would have seen platinum replace gold as the number one mining export in 2007. Further production declines and soaring costs in the gold industry should result in platinum and platinum group metals overtaking gold in the near future.

The real contribution of gold to the South African economy should be viewed by considering the mining sectors share of total exports. In 2006, mining exports represented some R129 billion, or 32% of South Africa's total export trade. A decade ago, the mining industry represented R47 billion, a more healthy 42% of the total. This decline shows in employment numbers too. According to bullion.org.za, the total number of people employed on gold mines in 1991 was 429,649. This number fell to around 197,091 in 2000 and is even lower today.

What the numbers confirm is that the mining industry continues to lose ground to manufacturing as the mainstay of the local economy. We have to go back to 1994 to find the last time that mining exports exceeded manufacturing exports.

High production costs make life difficult

Apart from declining ore grades, the cost of mining gold ore in South Africa continues to rise. Major input costs include steel, timber and energy, the prices of which continue to increase well in excess of inflation. Add to this the fact that many of South Africa's gold mines operate at extreme depths and the difficulties faced by the industry are put in clear context. South African mines are chasing scarcer gold at higher costs than mines in other parts of the world.

The recent steady rise in the price of gold has helped our industry. Increased cash flows have enabled mines to increase capital expenditure. The Chamber of Mines' report reveals a sharp rise in capital expenditure on gold mines in the first quarter 2007.

Production to plummet further if marginal mines close

Of great concern to the industry is the reliance on production from marginal mines. Marginal mines are those operations which produce gold at relatively high cost and are thus extremely sensitive to price movements in gold. If gold prices fall significantly, the existence of many marginal mines is threatened.

The Chamber of Mines report states that "despite the better financial position of the industry at an average aggregate level, some 10 percent of employees and eight percent of production [comes] from mines classified as marginal in the first quarter."

With gold currently changing hands at USD650 per ounce, most of these mines should be able to continue producing. Should the gold price reverse its recent bull trend, and head back below the USD500 per ounce level, the industry will face severe challenges.

Editor's thoughts:
Two decades ago, the gold mining industry was viewed as the mainstay of the South African economy. But the industry's importance has slowly eroded over the years, and looks set to remain on the decline. What new sectors should South Africa concentrate on to ensure continued economic growth? Send your comments to [email protected]