[miningmx.com] – SOUTH Africa’s National Union of Mineworkers (NUM) could be taking the country’s gold industry in an infamous race to the bottom. That would seem to be the upshot of the first wage negotiation installment, delivered yesterday by the NUM. Its wage demand for entry-level workers was 60%; these are employees who in October benefited from merging category three workers into the category four level.
The outcome of merging the categories was a 1.5% to 2% wage increase which was then backdated to July 1, 2012, and was in addition to the 8.5% to 10% wage increase of that year, also effective July 1.
That means gold miners are in line for three wage increases in a year. In a market of shrinking margins, that’s quite a victory for the unions. Surely, though, it also gives employers some negotiating leverage?
The blended percentage wage demand issued by the NUM earlier this week, however, is closer to the high teens – around 18% according to one analyst. While this is lower than wage demands made by the NUM in previous years – and therefore betrays on behalf of the union market sensitivity – it’s still too high a demand.
The all-in costs, including capital, for AngloGold Ashanti, Harmony Gold and Gold Fields is between $1,350 to $1,500/oz. It’s worth pointing out, however, that this all-in cost increase is stay-in-business, not expansionary capital.
With a gold price at about $1,354/oz, it’s clear that a double-digit wage increase will not only stop the South African gold industry from building access to new resources, but stop it mining existing resources. It will not only stop growing, but it will shrink.
“It’s obvious that the likes of AngloGold, Sibanye Gold and Harmony Gold are going to cut production, and probably expansion projects,” says an analyst. This means less workers and less members for unions, hence the race to the bottom.
Missing from the NUM’s wage demand increase is anything on productivity which has been on the slide for years now.
While compound average wage increases in the South African gold sector of about 7.5% has outpaced inflation for several years now, productivity has slipped to levels which make the country’s gold sector far less productive than continental Africa. There’s a yawning gap in productivity between the highly mechanised and efficient Australian gold industry and South Africa’s gold industry.
AngloGold said in its latest quarterly presentation that productivity per total employee costed for its employees at its South African mines was 4.23 in the first quarter of 2013. This compares to 5.85 in 2011 and 6.56 in 2008.
Over the years, AngloGold’s gold resources are getting deeper, while its South African assets will always be labour intensive. But you’d have to think ambitious productivity targets have to start figuring in somewhere this year. Labour costs in the South African gold industry used to be 30% to 40% of total costs a decade ago; it’s now closer to 60%.
The weakness in the rand helps offset the effects of above inflation wage increases – Sibanye Gold receives R413,000/kg for its gold currently even at a gold price of $1,350/oz, against planned production of R400,000/kg. But it is a slim margin and doesn’t help the economics of individual shafts which operate at costs high above the price received and run the risk of closure. Beatrix North for instance.
David Davis, an analyst for Standard Bank Group Securities, believes Beatrix North could, and should, soon join Beatrix West which is undergoing a Section 189 process and is likely to be closed.
“Our calculations imply that Beatrix North is not economically sustainable at current gold prices; given its current production, underground ground and cost and capital structure,’ Davis said. It needs a rand gold price of R533,000/kg to break-even which compares to a group break-even of 394,000/kg.
Sibanye may have to sacrifice some life of asset by mining higher grade areas in the short term. The company says this stops short of “high-grading’; but at the end of the day, it’s a question of survival.
Meanwhile, investors take flight. The share prices of AngloGold, Gold Fields and Harmony all crashed through five-year lows today. The last time these stocks traded so low, the world was hit by the economic crisis.
Back then, investors took a broadbrush to their investments, but then returned to gold as an asset class when the panic was over. It was a development that helped the gold stocks to some extent (more the gold-backed ETFs). Back then, macroeconomics supported the gold price. You can’t say that for the gold market today.
