Category Risk Management

The less visible costs of mine strikes overshadow wage talks

20 July 2015 Volker von Widdern, Marsh
Volker von Widdern, Managing Director Marsh Risk Consulting.

Volker von Widdern, Managing Director Marsh Risk Consulting.

While platinum producers lost R24 billion in foregone production in last year’s five month strike affecting 70,000 workers, the actual cost to the industry was much higher, according to Volker von Widdern, Managing Director Marsh Risk Consulting.

“The mining industry is near crisis point in terms of its financial viability,” says von Widdern, commenting on the start of the latest round of wage negotiations in the gold mining sector, which commenced a week ago.

“Quite apart from the lost income from strike action, there are a host of operational and other issues that are not being factored into these figures.

A shaft that lies idle for several months due to strike action is not receiving the ongoing maintenance it requires, so you get a higher incidence of rock bursts and water flooding. This can be a huge cost to the mine, both in terms of finance and human resources.”

Von Widdern says most mines can survive the financial effects of strikes, but the disruption to production, combined with less visible costs such as the need for care and maintenance, forces mine management to overhaul their business plans. This may involve shifting production to higher yielding ore bodies to provide a quick jump in revenue to offset the financial damage caused by strikes which may provide a short-term burst in revenue, but may also shorten the life of the mine.

Mines may also have to lay off staff to keep costs down. Apart from operational issues, strikes frequently result in loan impairments and mine credit ratings being downgraded.

Strikes invariably result in degradation of mining assets, according to Debbie Geraghty, Divisional Executive Mining: Metals and Minerals at Marsh Africa. “From an insurer’s point of view, strikes only occasionally result in actual physical damage to assets, as happened post-Marikana. A far more significant cost is the degradation of assets that occur during strikes. Mines usually make working areas safe before they leave the mine for a period of time. If this is not done, it results in major rock falls once the miners return to work. This can result in damage to assets and fatalities which Insurers view as high risk.

Von Widdern says these less visible costs of strike action need to be fully understood as mining companies and trade unions start their annual wage negotiations. The loss of income for striking miners has a devastating impact on the communities where they live. A high percentage of miners in last year’s platinum strike had to take on credit just to meet basic monthly expenses such as food and clothing. Some retailers in Rustenburg, where most of the platinum production is concentrated, reported a drop in sales of 30% to 40% during the strike.
“The socio-economic impact of these strikes is perhaps the most damaging since it can ruin whole communities and towns,” says von Widdern.

Quite apart from the horrendous impact of the five-month long platinum miners’ strike in 2014, the Department of Labour reports that the mining industry lost 516,000 work days in 2013, accounting for 28% of the country’s total for that year.

Geraghty says mining companies and their insurers dread the annual wage talks with trade unions, which commenced a week ago. “The risks for insurers increases as we approach the annual wage talks, since no-one knows how these negotiations will play out and whether they will result in strike action.”

Mines have had to make a range of contingency plans for strike action, such as bringing in fuel and other basic supplies by helicopter to avoid harassment from striking miners, and accommodating non-striking miners in secure compounds within the mine site.

Other factors that impact on mine insurance costs are power outages, and unstable electricity supply. Von Widdern says one mine suffered a spike in electricity voltage that knocked its computers and underground air conditioning system out of action. “This kind of risk was not present in previous years, but now it is and all mines are having to make plans to ensure disruption to power supplies do not affect production.”

The range of risks facing South African mines has increased in recent years, but if there is one upside to all of this, it is the resilience of the industry and the ability of management to overcome obstacles.

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