The gold miners’ curse
Modern civilisation is obsessed with wealth. There’s something in the Anglo-Saxon culture that demands the continued accumulation of capital goods, regardless of cost. That’s why growth in household debt outstrips (or at least matches) growth in household
Thousands thronged to the area to give their lives to the dark pits from which the metal is extracted. It’s a senseless pursuit. While many of these individuals earned personal fortunes the only result after almost 125 years of digging is massive stockpiles of dully glowing metal in central bank vaults. China recently announced it had bolstered its gold reserves to 1 054 tonnes. It sounds like a lot of metal until you learn that Eurozone central banks hold in excess of 11 000 tonnes! South Africa holds little more than 120 tonnes.
A bitter struggle in the deep
It’s a paltry stockpile for a country that spent the last four decades losing the battle for global gold production supremacy. In 1970 South Africa produced more than 1 000 metric tonnes of the precious metal per annum, around 80% of global supply. But production has fallen steadily since, with the country slipping from first place on the world production table in 2006. The meagre 220 tonnes mined last year pushed South Africa into third place behind China and the United States. And if the trend continues we’ll soon be trumped by Australia, Peru and Russia too.
The main reason for this continued decline is the state of the country’s gold reserves. Although millions of ounces remain underground it’s become increasingly difficult to mine. South African mines are operating at depths in excess of 4 000m and faces numerous operational and safety challenges. For example, small miner DRD Gold had to halt production at its ERPM mine due to flooding and other safety concerns recently. It’s become so expensive to operate at these levels that many local miners are turning their attention to lower grade surface deposits for future projects, including re-processing the thousands of tonnes of sand dumped around shafts in the Witwatersrand area.
Destined to fail
Deep level operations aren’t the only threat to the local gold mining industry. Labour is also a massive concern. The industry seems to have skipped most major technological innovations in recent years, preferring to plug away with the tried and tested labour intensive formula that’s been used in South Africa since the beginning of time. The result is an extremely high cost beneficiation process. We’ve sacrificed cost effective technologies in favour of employment and have lost ground to other mining economies because of it.
How else do you explain the desperate situations at many of the country’s smaller gold mining operations despite the record R/kg prices achieved recently? The latest news from the beleaguered sector is the resignation of Pamodzi Gold’s chief executive officer, Peter Steenkamp. He leaves a listed mining company teetering on its last legs as management desperately tries to secure working capital to keep it going. They’re running out of time. If they don’t secure the R400m (a requirement which has surely ballooned as wages and other operating costs soar) by 26th May the provisional liquidation order at its mines will probably become final. Despite assurances from the holding company’s management that “prospects for Pamodzi Gold remain sound” and promises that “a long-term solution can still be found” we reckon the group’s 12 000 employees aren’t too far from the unemployment line.
And what on earth are the court-appointed liquidators doing? Their efforts to raise R45m for the Free State mine and other loans for the group’s East Rand mine seem totally misdirected. They’re borrowing money for day-to-day operations with scant concern for long-term viability.
You never see the car wreck coming
Against the dwindling South African output and rather dire situation at some of the country’s operations nobody sees the car wreck coming. Instead the journalists publish fuzzy sentimental pieces, including lines like: “the extra special good news [is that] the South African gold sector is looking pretty warm” right now. David McKay, executive editor of Fin24.com and Miningmx.com says the strong improvement in the spot gold price will ensure higher March quarterlies despite the period being traditionally poor. But in the same breath he brings readers back to earth. His comment that higher gold prices will go “a long way to offset the lower production and (consequently) higher costs” points to the real problems in the industry.
We’re not going to argue with the dozens of analysts touting the precious metal at the moment. Top gold consultancy GFMS’s prediction of $1 100 to $1 200 per ounce within the next 12 months will probably prove spot on. Our problem is with the notion that gold is a ‘safe haven’ store of wealth. Apart from glowing dully in giant underground vaults at central banks around the world, what purpose does the metal actually serve?
Editor’s thoughts:
The tricky gold mining business has driven many investors from ‘paper’ gold mining shares to the physical metal. Gold exchange traded funds allow investors to purchase real gold while avoiding the risk in mining operations and the exorbitant fees linked to gold coin. Nowadays exchange traded funds rival central banks as the holders of the world’s largest stockpiles of the precious metal. Do you view gold as a ‘safe haven’ store of value? Add your comment below, or send it to [email protected]
