South African gold output continues to fall – how much further?

LONDON (Mineweb) -

How the mighty have fallen! Not so long ago South Africa dominated global gold output with the rest coming nowhere in comparison, but the country’s gold output has been on the decline since the 1970s.

It fell to fifth largest gold producer in 2012 when it was overtaken by Russia and on the latest output figures the country has drifted downwards towards being now only the world’s sixth largest gold producer, having been overtaken by Peru as well – however that is on production so far this year.

In yesterday’s publication of minerals output and revenues, Statistics South Africa noted that the country’s gold output fell again in May commenting that its ‘overall mining production decreased by 0.7% year-on-year in May.The largest negative growth rates were recorded for ‘other’ metallic minerals (-32.3%), diamonds (-19.7%) and gold (-14,6%). The main contributor to the 0.7% decrease was gold (contributing -2.4 percentage points). Manganese ore (contributing 1.5 percentage points) was a significant positive contributor.’

But will there be any recovery in South African gold production ahead? The short answer is that, barring a huge gold price increase, the country’s gold output will likely continue to decline at a rapid rate.

South Africa has some of the world’s highest cost producing gold mines – a recent estimate has suggested that at current gold prices around half the industry is operating at a loss – and this would suggest that gold production could continue to decrease at an escalating rate as companies will no longer be able to afford to keep unprofitable mines and shafts open.

Add to this the pressures on the companies from massive wage demands brought on by mining union competition for membership between the NUM and AMCU, and this is a recipe for the potential annihilation of the country’s gold mining sector in its current form.

Some of the production fall may be mitigated, though, by selective mining of higher grade ore to try and maintain profitability at the expense of mine longevity.

South Africa’s gold sector though is not the only part of the country’s vitally important mining industry to be affected. The platinum miners are facing many of the same problems as the gold sector although this year’s figures may end up being a little better than in 2012 given the levels of labour disruption that year.

South Africa’s gold sales have now for some time lost their dominant position in terms of revenue. The country’s No.1 revenue earner nowadays, according to Statistics South Africa, is coal, followed by platinum group metals with gold languishing in third place – and could even be knocked into fourth place by iron ore sales if the production decline continues.

The relative figures in terms of unadjusted sales in April – the latest available – according to Statistics South Africa are as follows:

Metal Mineral Sales Value (million ZAR) Sales Value (million US$)
Coal 8 506.6 847.1
Platinum Group 5 612.6 558.9
Gold 4 877.6 485.6
Iron Ore 4 875.3 485.4

Between them these four accounted for almost 80% of the total value of South African metals and minerals sales in April.

The South African government has to be particularly concerned about the fall off in the volume and value of the minerals produced, particularly with regard to gold and pgms, given that it is very much a resource economy and heavily dependent on the sector for its export earnings. Both the gold and platinum sectors are in crisis and with the mining unions set on what the industry will see as untenable demands and prone to unacceptable militancy and inter-union rivalries, things may well get worse before they get better.


A Legend Speaks Out About The Gold & Silver Takedown

On the heels of extraordinary turbulence in the gold and silver markets, today legendary Pierre Lassonde spoke with King World News about the takedown in these key markets.  Lassonde also told KWN what to expect in the gold and silver markets going forward.  Lassonde is arguably the greatest company builder in the history of the mining sector.  He is past President of Newmont Mining, past Chairman of the World Gold Council and current Chairman of Franco Nevada.  

Lassonde is one of the wealthiest, most respected individuals in the gold world, and as always King World News would like to thank him for sharing his wisdom with our global readers during this critical period in these markets.

Eric King:  “We obviously had another smash in gold and silver.  What are your thoughts here Pierre?”

Lassonde:  “Every year in June or early July is always the point of maximum stress for gold and silver.  This year is no exception.  When I look at gold in particular, if you go back 1974 to 1976 we saw a 47% retracement in gold.

If we were to see something like that today, gold would go slightly below $1,000.  Could it happen?  Yes, of course anything can happen, but I doubt it.  A 40% retracement is slightly below $1,200.  We’re almost there on gold already….

“So my feeling is we are seeing the maximum stress right now.  I think $1,200, plus or minus $30 is where you are going to see the bottom in gold.”

Eric King:  “Pierre, what are you doing with your own money right now?  Are you buying?”

Lassonde:  “Yes.  Actually I started buying this week.  I think there are a number of gold equities that are absolute bargains.  The liquidity trap has forced a lot of funds to sell.  But money is still leaving the sector.  That’s one of the reasons you are seeing this amount of stress.

But I am absolutely 100% convinced that come September gold is going to be 20% to 30% higher than it is today and the stocks are going to be 50% higher.  So what am I doing?  Yes, now is the time to put money to work and that’s what I’m doing.”


Falling Prices Not End Of The World

Just when we thought things couldn’t get any worse for the miners, Ben Bernanke throws a ball at the dunk tank. On Thursday, after Bernanke signaled that the Fed may soon start turning down the printing presses, global markets across multiple sectors have sold off their holdings – most noticeably in the mining sector. Gold finished off the day down 7%, about $95 to $1,278 an ounce – the lowest level in 2.5 years and well below the psychological resistance point of $1,300 – and silver was off by even more than 7%. This article discusses the significance of the day and why investors should prepare for more falling precious metals prices.

Gold has declined almost 17 percent since mid-April driven by a benign global inflationary environment. Today, after Ben Bernanke‘s comments that U.S. bond buying could be slowed later this year, the appeal of Gold as a hedge against inflation has lessened significantly.

Gold Prices Headed Lower

Back in April I warned investors that Gold prices could fall to $900/oz by early 2014 and it looks like it will be headed in that direction. On April 15, a sharp fall in gold prices led to the Chinese buying 300 tons of gold-more than a third of the gold China purchased in all of 2012 – which helped the price of gold recover from that fall. The drop on Thursday was much greater and I don’t think the retail demand from China can help gold prices recover this time (not to mention the weak industrial demand coming from China and India as a result of economic slowdowns).

For those of you who regularly read my articles, you know I normally formulate investment decisions based on fundamental analysis. However, the technical chart below (200-week moving average) derived from Yahoo Finance figures reveals an interesting trend that investors should keep a close eye on.

Source: Yahoo Finance

If you had bought gold at the bottom of that 200-week moving average back in 2011 (at the white circle), you would have made a 600% return on investment. We now broke below the 200-week moving average, back in April (at the red circle), for the first time in over a decade. Again, I’m not much of a technical wizard, but this chart clearly shows the downward momentum that is pulling on Gold prices. In this market environment that we find ourselves in, momentum seems to play a huge part on stock rallies (take a look at virtually every single resource-based stock and technology stock).

Prices Could Fall Below $1,000

By the end 2013, I think gold prices are headed down towards $1,200-$1,100 an ounce (on the upside). In the downside scenario, prices could break below the $1,000 psychological resistance point. Having said that, I don’t think that is the end of the world for miners. Average production cost of gold worldwide is about $1,200 an ounce, therefore at spot prices of $1,200 about 10% of the world’s gold producers will enter a loss-making threshold. If spot prices fall to the $1,100 level, around 44% of the world’s gold producers will be operating at a loss. On the upside, some of the best gold miners in the world operate at below $800 all-in cash costs. Keep in mind that these all-in costs include administration costs, sustaining capital expenditures, depreciation and, most importantly, the cost of development and exploration.

Even as gold prices fall, I’m still looking for miners to invest in. I continue to like Silver Wheaton (SLW), Goldcorp (GG), Silver Standard Resources (SSRI) and Sandstorm (SAND) because I believe in the companies and their abilities to manage costs effectively. However, I’m currently sitting on the sidelines on the resource space not because of falling spot prices but because of the global slowdown in demand for gold and metals (and materials in general).

What Am I Watching For?

I’m waiting for demand in China and India to pick back up, or for some country to emerge and demand more metals. My concern is not on falling spot prices because I believe the costs of companies are much lower than reported. Companies have an incentive to reveal much higher all-in cash costs to ensure that prices remain high accordingly (as we’ve seen). Back in early 2000, gold prices were $300 an ounce yet producers still continued to mine gold and make money. It’s very difficult to imagine that production costs have risen about three times what they were since 2005.

I truly believe that once the global demand picture recovers, the best gold miners world-wide will be profitable whether the prevailing spot rates are $1,400 or $900.