SA gold mines facing medium-term existential crisis if cost headwinds continue unchecked

THE medium-term feasibility of South Africa’s remaining deep level gold mines had been thrown into doubt by cost headwinds including the latest three-year wage agreements and the possibility Eskom could hike electricity costs 15% a year.

“Given the current macro environment, with further headwinds facing the industry on the back of Eskom’s push for a 15% electricity price hike, we are of the view that the medium-term sustainability of mining companies offering above-inflation increases are at risk,” said Yatish Chowthee, an analyst for Macquarie, an Australian bank.

Margin erosion was therefore likely notwithstanding the weakening of the rand against the dollar in the second half of this year and the rally in the US dollar gold price, he said. On back of the wage and Eskom (potentially) headwinds “… We reiterate our sector thesis of steering clear of deep level assets,” said Chowthee.

Chowthee’s comments come as Sibanye-Stillwater prepares for a strike by the Association of Mineworkers & Construction Union (AMCU). The union issued a 48-hour ultimatum earlier today demanding it improve a wage offer extended to it, or face significant strike action. Neal Froneman, CEO of Sibanye-Stillwater, categorically ruled out bowing to AMCU, as an agreement had already been reached with other unions.

“The agreement we reached with the other unions is fair and final and considers the current challenges facing our gold operations,” he said in a statement. “We will honour this agreement and have made a commitment that we will not increase the offer.” The other unions represent nearly 51% of employees at Sibanye-Stillwater’s gold mines and therefore was extended to AMCU in terms of labour law.

Froneman said it was “unfortunate” that AMCU had chosen to strike, especially as it was nearing the year-end holidays. “The fact that AMCU national leadership is willing to take its members out on strike ahead of the December holiday period, is very unfortunate and irresponsible, given the financial consequences a strike will have on our employees and their families,” he said. Striking employees would not be paid.

The prospect of industrial action – the second on the West Rand gold belt after members of the National Union of Mineworkers (NUM) decided to down tools at Gold Fields’ South Deep more than a fortnight ago – presents significant social risks ahead of Christmas. There were violent scenes at South Deep at the onset of the strike.

Bloomberg News recently reported that Gold Fields had resorted to “smuggling” essential service employees to the mine under cover of night in order to keep the mine functional.

Some 43% of Sibanye-Stillwater’s employees are represented by AMCU in the bargaining unit which also consisted of AngloGold Ashanti, Harmony Gold and Village Main Reef. The company employs about 32,200 people in its gold division.

According to Chowthee, Sibanye-Stillwater’s agreement with the NUM and other unions implies an 8.6% compounded average growth rate (CAGR) over the next three years for its category 4 (or lowest category) workers. This compares to CAGR’s in wages for the same level of employee at 9.1% and 9% over three years for Harmony Gold and AngloGold Ashanti employees respectively.

Harmony and AngloGold cut their own deals with unions several weeks before Sibanye-Stillwater which has had a particularly hard year at its gold division, mainly owing to the effects of seismic activity and other related safety interruptions.

Sibanye-Stillwater said the average basic wages for category 4-8 employees had increased by more than 65% since Sibanye-Stillwater was unbundled from Gold Fields in 2013. “This is significantly above inflation and represents a very real improvement in the standard of living of our employees,” it said. “The current wage agreement reached with NUM, Solidarity and UASA is again well in excess of inflation, but takes the longer term sustainability of the gold operations into consideration,” it added.

It might be possible that AMCU was angling for an agreement with the Sibanye-Stillwater outside of the bargaining unit, an outcome reached in 2016 when the union issued similar strike threats despite its rivals having agreed wages. In that instance, Sibanye-Stillwater agreed to pay R25 extra per month for AMCU employees.

2 COMMENTS

  1. The South African gold mining industry will soon be nothing but a memory of a glorious past (for some at least). The safety issues cannot be ignored and cannot be averted, especially the seismic event related fatalities. On top of that the sense of entitlement of the Unions and the “workers” is just heart breaking. They have become convinced that they should be compensated for an increased cost of living, regardless of the position the business that employ them is in. They also hold the belief that the employer can be forced and in fact is compelled to increase their salaries above even the aforementioned inflation… This is simply not true. The mines will close, no doubt about that, and soon…. The higher than inflation increases have not been the case for the past 3 years but the past 30 years. In the same period labour efficiency have reduced dramatically. The truth that will have to be faced by all South Africans is that no one is responsible for providing jobs, not government and not business. You may not like this reality, but you will have to learn to live with it…

  2. Comment modified. (Many thanks for pointing out the typographical error).
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    Harmony and AngloGold cut their own deals with unions several weeks before Sibanye-Stillwater which has had a particularly hard year at its gold division, mainly owing to the effects of “seismic” activity and other related safety interruptions.

    The seismic activity did seem strange given that the surrounding mines, which are very close by, were not affected to the same extent.

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