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Analysts bearish on SA gold production
Garth Theunissen
Posted: Thu, 29 Jun 2006
[miningmx.com] -- THE latest slump in the gold price may have gold bugs and share peddlers ducking for cover but, it's unlikely to have any major effect on South Africa's overall gold production for the year. And, ironically, even if the gold price were to rebound to its recent levels of more than US$700/oz, it would still not be enough to persuade SA's struggling gold miners to increase their production volumes.
The fact of the matter is that mine managers don't plan their operations around short-term price fluctuations. Any mine manager worth his salt plans according to a 10- or 20-year horizon and is thus more interested in the long-term gold price trend line than short-term gyrations.
"Gold miners don't really speculate on the gold price," says T-sec gold analyst Nick Goodwin. "They use a long-term target price to co-ordinate their planning and aren't dependent on short-term movements in price. Short-term movements might affect the price of shares but it doesn't really affect the management decisions of miners."
Alex Conradie, a qualified geologist and minerals economist at the Department of Minerals & Energy (DME) agrees. "Because of the extended lead time required to develop a new gold mine, short-term fluctuations in the gold price don't really affect production. Gold miners look at the long term gold price because they're interested in a mine's profitability over 10 or 20 years and not the next six months."
To put the position of SA's gold industry in better perspective, you only need consider the following:
Click on image to enlarge
According to Chamber of Mines economist Roger Baxter, in first quarter 2005, 86% of SA's gold mining industry was in a marginal position. While that situation has improved - thanks to a 32% increase in the rand gold price in first quarter 2006 to an average R109 219/kg - a full 24,5% of gold mines were still in a marginal position at end-March this year. And that was before capital expenditure needs were taken into account. So while short-term price movements might aid smaller gold producers and marginal shafts, the overall effect on SA's total gold production would be minimal at best.
By the same token Goodwin says that even if the gold price surged beyond its all-time record high of around $850/oz, it would still have no major effect on long-term production in SA.
Says Goodwin: "Unless the gold price shot up to a phenomenal price of, say, $2 000/oz and stayed there, I can't see SA gold producers increasing their production significantly beyond current levels."
SA's total gold production for 2005 was 294,7t and Goodwin says that should stabilise at an average level of around 250t to 270t/year over the next five years before resuming the trend towards long-term decline.
On recent media coverage that uranium production in SA could become a major industry, Goodwin is equally circumspect. "Though the uranium price may have gone up from about $9/lb in 1990 to $43/lb right now, it's not going to be a major industry. It will be a nice contributor to the gold industry and should bring in about R200m to R300m/year for the economy - but it's never going to replace gold, at least in terms of revenue. At $43/lb it just can't compete with a commodity that's worth upwards of $550 for a single ounce."
But despite the fact that SA still has as much gold left as it has mined over the past 100 years, most of the remaining gold is too deep to be profitably extracted. While it's generally accepted that on average SA gold miners need a rand gold price of around R110 000/kg to cover their working costs, Goodwin says that to cover capital expenditure, the same mines need a rand gold price of around R130 000/kg just to break even, though that does vary significantly from mine to mine.
And while gold mining doesn't make anywhere near the contribution to SA's GDP that it once did - even tourism and vehicle assembly are bigger foreign exchange earners - it's still a fairly major employer of unskilled labour. Unfortunately employment in the sector will inevitably fall over time.
The DME says that the total number of people employed in the gold mining industry last year was 160 634, against a figure of 551 935 in 1986.
That shows how dramatically employment in the industry has fallen along with production. So it stands to reason that the sector will continue bleeding jobs in the future.
As Conradie puts it: "At best, if the rand gold price were to remain high, then current production levels would stabilise. But even if that happens most of the resources that are left are too deep to be mined profitably - so there will definitely be a long-term decline. A few individual miners may keep producing in the next few decades but in general the gold mining industry isn't going to last very long."
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