Gold mines face radical downsizing

[miningmx.com] — THE decline in SA’s share of world gold production is
hardly a new phenomenon, but according to a series of reports from SBG Securities,
the latest of which was published on July 5, the prospect of a structural shift in the
industry’s composition has swung into view for the first time.

For readers who have only a casual interest in the gold industry, it’s worth noting
that it’s been shrinking for years. In 1966, for instance, the country produced about
three-quarters of the world’s gold output. Last year, only 7% of new supply came
from South African mines. More sobering still is the thought that in the same year
the Oppenheimer family sold its century-old investment in De Beers, the
Witwatersrand’s remnant mineral bounty is being eked out. That’s the contention.

SBG Securities analyst David Davis says the pressures forcing the change in the gold
industry include cost inflation and the fact that gold below depths of current
operation is uneconomical to mine. Gold Fields’ KDC mine, and Tau Tona, which is
owned by AngloGold Ashanti, can only break even at a gold price of $3,000/oz by
2013, he says. The gold price is currently trading at $1,585/oz.

As a result, Davis reckons that SA’s gold industry captains have between 18 and 36
months to restructure. This is not an option, says Davis, but a business imperative.
“The SA mining industry is now facing a radical downsizing of its mature operations,
which will most probably result in a significant reduction in production,’ said Davis.

“In our view, the company most successful in putting these strategic moves into
action is most likely to preserve value, which should attract the highest market
premium for shareholders,’ he said. “The restructuring is upon us,’ Davis added
later in a telephonic interview with Finweek.

All in all, 2.1 million ounces of current production will be affected, equal to about
36% of the SA industry. Gold Fields’ Beatrix mine, the Tshepong mine owned by
Harmony Gold and AngloGold Ashanti’s Great Noligwa and Kopanang gold mines are
also deemed mature and therefore at risk in Davis’s report.

Not helping matters are the government imposts, says Nick Holland, CEO of Gold
Fields. “It’s premature to say the gold industry is in its death throes, but Eskom’s
rate hikes, carbon taxes, royalties, and other cost pressures will certainly affect the
sustainability of operations,’ says Holland.

Output from Gold Fields’ mature mines will decline, he says. “But I can remember
hearing it said that Beatrix 1 and 2 shaft had limited time left, and that was eight or
nine years ago.’ Technology is a possible saving grace. “We’re all working on
technology. There are some 2 million ounces of high-grade pillars that were written
off in 2008 and 2009 that could be mined again,’ he says.

William Tankard, Research Director of Precious Metals Mining at GFMS Thomson
Reuters, says sustainability of the South African mines is a concern. “The
sustainability of many of the more high-cost, mature gold assets in South Africa is
far from guaranteed in their current structure.

“Over the medium-long term we expect to see downside from current price levels
that will force tough decisions for those operators at the top end of the cost curve.
Many of South Africa’s older mines do find themselves in that unenviable position
and, adding to the issue, continue to face high levels of cost inflation, by way of
sharp wage increases, energy tariff rises and latterly productivity losses brought
about by production stoppages beyond the control of the mining companies.

“Furthermore, unlike the platinum mining industry, where South Africa continues to
hold the overwhelmingly dominant position and the closure of a meaningful
proportion of output would drastically change the landscape of the market
fundamentals and have a price knock-on, a large percentage drop in SA gold output
would unlikely elicit much, if any, response in the gold price in our view.’

It’s not all doom and gloom, however. AngloGold CEO, Mark Cutifani, says that the
group’s SA mines sit on the country’s best orebodies and have the newest
infrastructure, and are “very cash generative’. While cost pressures are a constant,
as per mining globally, he remains optimistic about his business in SA, especially
given the research and development work AngloGold has commissioned. “We’ve not
been idle,’ says Cutifani.

At Tau Tona, one of the mines identified as being at risk by Davis, a sliver of gold-
bearing rock was extracted by selective drilling of the reef at a depth of 3km. The
pilot project was completed 12 months ahead of schedule and, in layman’s terms,
involves mining only the incredibly narrow strip of reef without removing “waste’
rock above or below the “reef’. “Simply put, we’re looking to use existing technology
to mine only the reef and reduce waste – effectively removing the hot dog from the
bun without spilling the mustard,’ he says.

– Finweek