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.

Source: http://www.mineweb.com/mineweb/content/en/mineweb-gold-news

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.

Source: http://www.zerohedge.com/news/2013-05-19/adding-insult-injury-south-african-gold-mining-union-demands-60-wage-hikes