Mines face costs catastrophe

Dewald van Rensburg | Sun, 08 Nov 2009 08:40

[miningmx.com] -- THE South African mining sector, and in particular the country's deep and costly gold mines, are furiously crunching its Eskom numbers.

By the end of this month, they have to make provisional written representations regarding Eskom’s application for a 45% a year tariff increase over three years which amount to a 200% hike on a compounded basis.

The “spectre” of Eskom’s envisaged tariff increase looms large, said Harmony Gold’s CEO, Graham Briggs, on the release of the group's quarterly results last month.

His counterpart at Gold Fields, Nick Holland, said the increase should be disallowed, while Mark Cutifani, CEO of AngloGold Ashanti, warned that the entire economy would collapse if the National Energy Regulator, Nersa, approved it.

They conservatively estimated that by 2012 their electricity bills would push up their South African cost of production by a quarter to a third.

This is much more than many marginal mines' profit margins can absorb.

The spread between cash costs and the rand gold price has already disappeared for marginal gold mines such as DRDGold’s Blyvooruitzicht, which earlier this year asked Eskom – in vain – to postpone the recent hikes.

The hike will also threaten Simmer & Jack’s Buffelsfontein mine and it is difficult to believe that newcomer Aurora Empowerment Systems’ recently acquired old gold mines on the East Rand continue to offer the promise they did a few months ago.

The tariff increases come in the wake of Eskom already having added 67% to electricity tariffs since the onset of the power crisis.

If the three 45% hikes are factored in, by the middle of 2012 electricity will have risen 410%.

Mining projects take years to come to fruition, and anyone who planned mining projects before the power crisis is now staring at a completely different cost scenario.

Mines that are already teetering on the edge will be ruined and projects that until recently seemed sustainable will be cancelled.

In its most recent financial year, Eskom reduced the power supply to mines, and no-one can argue that tariffs need to be increased.

But the Chamber Of Mines' annual report, which was released last week, said that massive price shocks are tantamount to power disruptions.

Broadly, there is only one alternative that the chamber and its members can propose.

This is that a portion of Eskom’s R375bn-odd capital requirements should be financed by the National Treasury itself, or from loans. Holland last week proposed a broad-based electricity tax.

For major power consumers, like mines, such proposals amount to having the country's taxpayers help shoulder their burden.

- Sake24