SA gold output continues to tumble

Allan Seccombe | Tue, 08 Sep 2009 16:16
[miningmx.com] -- SOUTH African gold production is showing no real signs of recovery, with second quarter output down 9.3% from a year earlier when the industry was grappling with power shortages.

Quarter-on-quarter, however, production showed a small lift of 0.4% to 51,634 kg (1.66 million oz) from an adjusted first-quarter figure of 51,411 kg, the South African Chamber of Mines said on Tuesday.

The major factor in the decline has been the electricity crisis, which manifested itself in January 2008 when the mining industry shut down for a week because state power utility Eskom could not guarantee supply. The mines were subsequently reduced to 90% of their normal power allocation.

"For the gold mining sector, the damage has probably been more permanent through premature downscaling," Roger Baxter, the chief economist at the chamber, told Miningmx.

The argument is that some gold miners shut down marginal shafts at the height of the crisis, ending the life of those workings perhaps three or five years earlier than would have been the case with normal power supply. Once deep-level working areas are shut it's very difficult and costly to restart them because the shafts close up.

"It's a bit sad, really. So much had gone into increased capital expenditure of the industry, a lot was sustaining capex, but I was of the view ahead of the electricity crisis last year that the rate of decline in the South African gold production would slow," Baxter said.

The chamber estimates the electricity crisis cost the industry up to 15 tonnes or nearly half a million ounces of production in 2008.

The other factor that weighed on gold production was the temporary closure of working areas in the event of fatal or very serious accidents. AngloGold Ashanti, for example, estimated it lost 15 production days due to safety-related closures in the second quarter of the year.

The gold price broke through $1,000/oz on Tuesday, but South African gold firms have not realised the benefit because of the strong gains made by the rand against the dollar, which has basically kept the received rand gold price steady at around R240,000/kg.

In the March quarter, the estimated all-in cost to produce gold in South Africa was around an average R230,000/kg.

The gold companies are also dealing with rapidly rising input costs like electricity, which has risen by 32% and should increase again by at least a similar amount next year and the year after as Eskom scrambles for cash to fund an ambitious capacity expansion programme.

Harmony told the market in mid-August winter electricity tariffs added R40m extra per month for the winter months between June and September. Eskom's recent price hike bumped the cost of electricity up to R230m per quarter from R170m, excluding the winter tariff.

South African gold production has been in steady decline for nearly four decades from an annual peak of 1,000 tonnes in 1970 as mines grow older, deeper and more expensive to operate.

There was a 5.6% decline in the average grade to 3.2 grams per tonne during the June quarter, which was not offset by a small increase in the number of tonnes milled.

The chamber revised upwards last year’s fourth quarter production figure by 424 kg to 55,665 kg and raised its full-year 2008 figure by the same amount to 220,551 kg.

The first quarter of 2009 output figure was lifted by 1,698kg to 51,411 kg. The chamber said it had made the revisions based on “upgraded information”.

The large increase in the first quarter figure was a result of improved data collection from one company that wasn't being measured properly.