Third par corrected to read 111,795 instead of previously stated 117,795.
IN the eyes of many, the South African gold mining industry has had its day. For over a decade, gold production has steadily declined. As mines have become deeper, working places are further and further away from infrastructure (and therefore less time is spent at the face), costs have spiralled, and profit margins have been squeezed, if not decimated.
By 2017, the country’s share of the world’s newly-mined production had reduced to 4.4%, ranking only seventh among gold producing nations, behind China, Australia, Russia, the USA, Canada and Peru. In the last decade alone, South African gold production has declined by 30% to 136 tonnes in 2017, and this was a period of stabilisation following the precipitous decline seen in the previous decade.
Inevitably this production decline has resulted in job losses. The average number of direct employees in the sector fell by 26% over the past decade, to 111,795 in 2017. By the first quarter of 2018, this number had declined still further to 98,965 – the first time employment levels have been below 100,000.
The constraints the industry faces are lower grades of ore and deeper mines (with their attendant challenges) and, without a fundamental new approach to mining at these depths, this decline will continue. Metrics monitored by the Minerals Council show that significant investment by the industry – largely stay-in-business capex – has not averted production declines; and that despite periods of higher gold prices, production has not responded.
What’s more, as a price taker, the gold sector’s fortunes are determined to a large degree by a fickle gold price, exacerbated by an even more unstable rand:dollar exchange rate.
It has been said in jest that illegal miners are the only ones with a sustainable business model in the South African gold sector today. This hits close to home.
An analysis of the profitability of South African gold operations, based on an average gold price of $1,257 per ounce, against the All-In-Sustaining-Costs (AISC) of 26 mines/business units as reported for companies’ 2016/2017 financial years, reveals that around 75% of these units are either unprofitable or marginal. It is inevitable that the AISC of these units will have risen further into 2018, and will soon be reported by gold companies. Together with a current gold price – at a four year low – and a higher-than-desired rand:dollar exchange rate, it would be expected that this number will rise further.
So, what can producers do to stay in business? For a number of years, domestic mining input costs have consistently increased at rates well above producer and consumer inflation. South African gold mines are now considered the most expensive to operate in the world at an average AISC of US$1,035/oz compared to the global average of US$818/oz.
Compensation to employees, at around 53% of total operating costs, is the largest cost driver in the gold mining industry, largely because of the labour intensive nature of the industry.
Over more than two decades, labour costs have continued to increase at rates well above inflation, while productivity, measured through output per employee, continued to decline. Again, this decline is largely a function of maturing operations. Electricity is the second largest cost component, of up to 20% when winter tariffs are taken into account.
So, what does all of the above mean for the wage negotiations that are currently underway between four gold companies – AngloGold Ashanti, Harmony, Sibanye-Stillwater and Village Main Reef – and four unions – AMCU, NUM, Solidarity and UASA? Some would argue that any wage increase will put more production and jobs in jeopardy. Others would argue that, since closure is inevitable, the highest possible settlement must be achieved to maximise benefits for those who continue to be employed – a type of zero sum game.
Far-sightedness, skill and pragmatism are going to be needed by all participants to achieve an optimal outcome that all parties can live with. Increases that are too low will not serve the just demands of those who work in this industry every day. Increases that are too high will accelerate closures – and consequently job losses – with substantial impacts well beyond the sector.
More than three million people – direct and indirect employees, and dependants – across southern Africa depend on the gold mining industry for their direct livelihoods. And the gold sector makes a substantial contribution to GDP and to foreign exchange earnings, it pays taxes and royalties, it contributes significantly to training and development, and to infrastructure and social development in its host and labour-sending communities.
It is an invaluable asset, past its prime, but with plenty still to offer South Africa. The 200-odd people engaging in draughty meeting rooms in Boksburg need to hold that front and centre.
Henk Langenhoven is Chief Economist of the Minerals Council South Africa.