[miningmx.com] — FITCH Ratings said on Monday that the growth in South Africa’s gold production output in the three months to end-August would unlikely be sustained over the long-term, given the growing cost competitiveness of gold mines located outside of the country.
Fitch believes that South African gold companies have responded to the buoyant gold price by ramping-up gold production to maximise output from existing operations, which is likely to improve short-term cash flow generation.
However, continuing cost pressures, such as high labour and electricity inflation, and scarce opportunities for new lost-cost gold mine discoveries are likely to constrain production growth over the long term (three to five years).
While domestic gold producers broadly focus on improving their production profiles in mines located in South Africa in order to support output, Fitch believes near-term output growth reported in 2010 could also potentially include production from previously mothballed operations.
These operations require increased levels of investment to sustain full capacity
production – which is likely to reduce some of the short-term gains in free cash flow generation.
South African gold companies have already planned significant production over the long-term – including AngloGold Ashanti targeting 5.4 million ounces to 5.6 million ounces by 2014, Gold Fields targeting five million ounces by 2015 and Harmony Gold Mining Company with a planned output of two million ounces by 2012/13.
Nonetheless, Fitch noted these growth objectives were generally challenged by existing high cost operations, and that one of the critical factor to future production will be these companies’ ability to successfully turn around high cost operations.
More generally, Fitch believed that companies with greater geographic diversification are better positioned to sustain future growth objectives.
While local gold companies have intensified their greenfield exploration efforts outside South Africa in order to diversify their production base, Fitch said that the industry’s core production assets are expected to remain in South Africa over the medium term.
Gold mining production released by Statistics South Africa (StatsSA) last week showed an increase in gold output by 3.7% year-on-year in August 2010.
For the three months ending August 2010, gold production increased by 0.1% year-on-year. Gold sales also increased by 23.5% year-on-year in the three months ending July 2010.
