Adding Insult To Injury, South African Gold Mining Union Demands Up To 60% Wage Hikes

In case the complete disconnect of paper selling from physical hand-over-fist buying (see this chart to explain all the gold activity in Q1 which can be summarized in two words: paper liquidation) were not enough to send the price of precious metals to zero, then news that quite soon gold mining companies in one of the world’s largest producers of gold may be going out of business, leading to a collapse in physical product, should be sufficient to really send precious metals well into negative territory. The only question will be if the GDX gets there first. Reuters reports that South Africa‘s National Union of Mineworkers said it would seek pay rises of up to 60 percent from gold and coal producers, raising the prospect of fresh strikes as firms battle higher costs and falling prices in an already heated labor climate.

We wish the mineworker union godspeed, and the best of luck, as in the current full retard gold supply/demand environment, only a complete halt in South African mining production will accelerate gold‘s price plunging to sub-extraction costs, as miner after miner mothball operations, only to see even further paper liquidation taking the price to laughably low levels (and why not negative?) yet making purchases of physical product completely impossible as there simply will be none left in the supply channel.

More from Reuters:

Africa‘s biggest economy is hoping to avoid the 2012 wildcat strike action at platinum and gold mines that cost billions in lost revenue and production and killed over 50 people.

Mineworkers are mobilizing to assert themselves, with the NUM fighting a challenge to its once near monopoly in the shafts from the Association of Mineworkers and Construction Union (AMCU), which has poached tens of thousands of platinum miners from it in a violent struggle for members.

NUM said it was seeking an entry-level minimum monthly wage of 7,000 rand ($750) for gold and coal surface workers and 8,000 rand for those underground in a submission to the country’s Chamber of Mines, a copy of which was seen by Reuters.

Elize Strydom, the industrial relations adviser at the Chamber of Mines, said the minimum wage for surface workers is currently 4,700 rand and for underground miners it is 5,000 rand, so the demands for the latter are a 60 percent increase. NUM also said it wanted 15 percent increases for “all other wage categories,” or more experienced and skilled workers.

The chamber of mines said in a statement it had received the “proposals” from NUM and urged all parties to compromise in the talks which will begin around the middle of June.

“We appeal to all parties to explore every option in trying to reach settlement without resorting to damaging industrial action, and to reach agreements that will strike a balance between what is affordable to the companies and meets the expectations of the employees,” the chamber said in a statement.

Sliding precious metals prices have raised the pressure on miners as they ready for pay talks. Spot platinum on Friday closed at $1,450 an ounce, down around 35 percent from a record high of $2,240 hit in March 2008, and most South African shafts are losing money at this price.

Needless to say, miners can’t afford said hikes, and the most likely result will be a repeat of last year’s mining violence when many workers were killed, while mine production of platinum and other PMs collapsed. This year it appears the target will be gold.

The rivalry between the two unions triggered violence that killed over 50 people last year and tensions are running high. An AMCU organizer was murdered last weekend, prompting a 2-day strike at platinum producer Lonmin.

Anglo American Platinum (AMSJ.J), the world’s top producer, now plans to cut 6,000 jobs from an initial target of 14,000 as it seeks to restore profits after falling into a loss last year. It is hardly in a position to give big pay rises after scaling back its original plan under government pressure.

Gold and coal producers negotiate through the country’s chamber of mines. South African gold companies include AngloGold Ashanti (ANGJ.J), Africa‘s top bullion producer, Gold Fields (GFIJ.J), Harmony (HARJ.J) and Sibanye (SGLJ.J). Coal producers include Anglo American (AAL.L) and Exxaro (EXXJ.J).

At last check, gold was once more sliding as the silver margin liquidation has woken up correlation algos taking down the entire PM complex lower. Which only means that margins at miners, already razor thin, are about to turn negative, leading to inevitable mothballing and eventually, bankruptcies and permanent shutdowns. Which in a new normal should mean even lower prices, until such time as all paper liquidation is exhausted. Until then enjoy the ride as gold miner after gold miner (because the South African mining union’s demands will certainly be noticed everywhere else gold is mined) goes out of business.

For the sake of completeness, below is the gold cost curve of the world’s largest mines.



Bloodletting in SA gold stocks and some opportunity

The performance of the JSE’s mining counters since the Marikana massacre of August 2012 can, at best, be described as flat if one uses the FTSE/JSE Resources 10 index as a proxy, but it would belie the extent of especially gold stocks’ downward spiral and limited prospects of a nearby turnaround.

The Resources Index closed at 47,941.06 points on August 16 2012, the day of the massacre and again stood at 46,084.04 points on Thursday, following a rally which climaxed on February 13 at 53,995 points.

The fact that the index was able to keep within touching distance of its pre-Marikana levels at all could be attributed to the performances of BHP Billiton and Sasol, shares which respectively has very limited exposure to South Africa and whose core business do not resemble that of a typical mining company.

According to financial services firm Satrix, provider of an exchange traded fund which tracks the FTSE/JSE Resources Index, Sasol and BHP Billiton had a collective weighting of 52.7% of the entire index on December 31, and have respectively gained 3.4% and 10.4% since August 16.

The only other group in the index of ten stocks to increase in value over the same period was its smallest member, diversified miner African Rainbow Minerals, with gains of 12.7%.

Others in the group include Anglo American, down 9.9%, as well as its platinum subsidiary Amplats, down 9.8%. Impala Platinum, the world’s number two producer of the metal, lost 2.8% in value.

Most of the blood shedding, however, took place among South Africa’s major gold stocks which were hammered by investors’ increasing scepticism over escalating costs; the quality of South Africa’s remaining ore body, labour disruptions and regulatory concerns.

AngloGold Ashanti (29.8%) , Gold Fields (32.3%, including Sibanye Gold) and Harmony Gold (35.9%) all lost around a third in value during the period and, with many analysts of the belief that gold’s prospects are fading, are seemingly destined for a prolonged time in the wilderness.

Diversified miners
BHP Billiton Date Price Movement (since 16 Aug 2012)
16 Aug ’12 R254.18


02 Jan ’13 R307.49


04 Apr ’13 R263.07


Anglo American 16 Aug ’12 R254.44


02 Jan ’13 R277.42


04 Apr ’13 R229.18


Exxaro Resources 16 Aug ’12 R176.18


02 Jan ’13 R174.40


04 Apr ’13 R155.00


African Rainbow Minerals 16 Aug ’12 R161.00


02 Jan ’13 R191.00


04 Apr ’13 R181.50


Two stocks with potential upside are Lonmin and Anglo American.

Palladium’s Prospects Look Great

While the mainstream business news has been obsessing about the recent highs in the stock market, and while gold bugs have been lamenting about the flat performance of gold, a lesser known commodity has been manifesting excellent gains as well as stability over the past few months. That commodity is platinum’s little sister, palladium. Yesterday, palladium traded as high as $755, its strongest level since September 2011.
Pamp Suisse Palladium Bar 10 Ounce

Pamp Suisse Palladium Bar 10 Ounce

“The fundamentals of the market have always been pretty solid and have gained the attention of investors/speculators as of late,” said Robin Bhar, metals analyst with Societe Generale.

The supply-demand equation for palladium is the tightest of all the precious metals and top analysts such as Bhar and Bart Melek, a head commodities trader with TD Securities, believe this trend will continue into the foreseeable future. Said Bhar, “I’m very positive on the metal. I think this is just the beginning… On an annual basis, we expect palladium to be one of the best performing metals, if not the best performing commodity.”

Over the last quarter, palladium has gained 10%, contrasted with retreats in platinum, gold, silver, and commodities in general. The Standard & Poor’s GSCI Index of 24 raw materials declined 2.9% over the same period. Treasuries were down also, nearly .01%. The forces driving palladium’s recent rise hit both sides of the supply-demand paradigm.

On the supply side there are two principle factors involving the world’s two largest exporting countries, South Africa and Russia. Nearly 80% of all the palladium in the world is mined in these two countries.

The extended mining strikes that have hit South African mines full force last summer continue and have spilled over into the palladium sector, cutting into production. This labor dispute has been intense and with casualties, and analysts predict no quick solution on the immediate horizon. Furthermore, Anglo-American Platinum, the world’s largest primary producer of platinum, earlier this month proposed cutting back some output of platinum group metals so as to improve its profitability. Analysts believe that this could result in well over 100,000 fewer ounces of palladium being available in the marketplace.

The situation in Russia, which accounts for 43% of the world’s palladium mining, is much more grim. Last Friday, Johnson Matthey announced that Russian palladium inventory had dropped 68% in 2012, to 250,000, down from 775,000 ounces in 2011. Peter Duncan, General Manager of Market Research at Johnson Matthey, told reporters that Russian may be only able to supply 90,000 to 100,000 troy ounces this year. Said Duncan, “Russian state stockpiles have been dwindling and are now pretty much exhausted.”

On the demand side, several forces are propelling palladium’s recent appreciation. The US Commodities Futures Trading Commission (CFTC) shows that hedge funds and other large speculators have almost tripled their wagers on higher prices since the beginning of November. Their long positions are at their highest since the end of 2009. This renewed investment interest should be bullish for 2013.

In addition, worldwide auto sales moved up nicely in 2012. Why this is important is that palladium, rhodium, or platinum are utilized in all catalytic converters. Johnson Matthey estimates that, of the total world palladium consumption of 9.725 million ounces for 2012, 6.84 million ounces – over two-thirds – was used for catalytic converters. The record car sales of 2012 should extend palladium’s shortages. Global car sales in 2012 exceeded 80 million for the first time ever and are predicted to increase to about 83 million this year. LMC Automotive, a research company in England, predicts that Americans will buy more for a fourth consecutive year, equaling the longest run increases since the 1940s.

China’s demand for autos continues to surge as well. China’s economy rebounded from a slump in 2012 and along with it, the demand for autos by its ever growing middle and upper classes. Chinese sales figures for passenger vehicles in November were the highest in almost two years, the Chinese Association of Automobile Manufacturers reported last month. That agency is also calling for another 10% increase in 2013. All in all, palladium consumption will beat production by an estimated 500,000 ounces plus in 2013, about what the worldwide car industry devours every seven weeks, according to Barclays. This trend in palladium demand and consumption is forecast by Morgan Stanley to extend to 2017.

To learn more about the rewards of precious metals investing, including how to fund your existing IRA with gold or silver, call Liberty Gold and Silver seven days a week at 888.751.3330. To learn about the most generous referral program in the precious metals industry, please visit the Liberty Gold and Silver Referral Program.
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