Mining: The golden days are gone

By Gregory Mthembu-Salter in Cape Town and Billie Adwoa McTernan in Accra
Posted on Tuesday, 18 February 2014 10:49

Gold miners in Africa looked for a crystal ball for last Christmas as the price of gold fell by more than 20% in 2013.

This was mainly due to concerns over when and how quickly the United States (US) Federal Reserve would bring to an end its programme of bond buying known as quantitative easing, which had helped push up the gold price.

Analysts differ about how the gold price will move in 2014, but gold’s decade-long rally is definitely over.

In Ghana, the fall in the gold price has sent shockwaves across the industry.

Joshua Mortoti, manager of US miner Newmont’s Brong-Ahafo mine, says the company is reducing its workforce, cutting back on mining exploration and chasing higher-value ounces.

“[It is] all geared toward value and not volume,” says Mortoti. Nevertheless, he adds, “We are bracing ourselves for a full recovery [of prices].”

Newmont’s new mine in Akyem began production in late October and is set to produce 50,000-450,000oz per year over the next five years.

Exemplifying the industry’s grim mood, in November the world’s third-largest gold miner, Anglo-Gold Ashanti, announced plans to cut 400 jobs at its mine in Obuasi by the end of 2013.

AngloGold, which also operates in South Africa, the Democratic Republic of Congo, Guinea, Mali and Tanzania, has embarked on a brutal cost-cutting drive across all its operations.

Chief executive Srinivasan Venkatakrishnan says he intends to cut 40% of the company’s management jobs within 18 months.

The company also cut back heavily on exploration and hopes to realise savings of nearly $500m next year.

African Barrick Gold (ABG), which operates in Tanzania and Kenya, has so far maintained a steady level of production, but its costs are high.

Hunter Hillcoat, a natural resources analyst at Investec, points out that ABG’s total costs for the third quarter of 2013 stood at $1,275/oz, just $35/oz below the gold price.

The company also drew down $30m of its long-term debt to meet its capital expenditure costs.

Cost cutting

“The harsh reality is that for gold producers in Africa such as ABG, they are still under a lot of cost pressure, mainly labour and fuel,” says Hillcoat.

Miners will have to rethink which ounces they are going to mine, he says, and may have to leave aside marginal and lower-grade resources.

In South Africa, the gold mining sector is in what looks like free fall.

Output from January to June 2013 was 14% lower in volume terms than the year before and 42.6% lower in value terms.

In 1970, South Africa was the world’s number one gold producer, mining 80% of total global output.

It has been pushed into sixth place by Peru and today produces only 6% of the world’s total.

China is the world’s top gold producer, followed by Australia, the US and Russia.

The problems for South Africa’s gold mines are structural and seem set to persist whether global demand goes up or down in 2014.

“The industry is in crisis and is contracting,” says Chris Hart, chief strategist at Investment Solutions.

South Africa produced 167tn of gold in 2012, its lowest annual total since 1905.

Hart estimates that if current trends continue, South Africa’s gold industry will produce fewer than 90tn in 2020 and employ fewer than 60,000 people, down from an estimated 140,000 today.

South African gold’s main problems are ageing mines and steep increases in input spending – electricity costs for the sector rose 238% between 2007 and 2012 and worker renumeration rose 12% a year over the same period.

On top of this, there is continued unpredictability in the regulatory environment.

Boost from weak rand

A 16% fall in the value of the South African rand against the US dollar in 2013 has been crucial for local producers to mitigate the impact of the slump in the gold price.

In its 2013 annual results, Harmony Gold said the rand’s weakening meant it was “a huge advantage to be a predominantly South African producer”.

Harmony’s costs are in rand, but sales are in dollars. Harmony’s gold output fell 2% year-on-year to June 2013 to 1.1m oz.

Operating costs rose, reducing its annual operating profit by R800m ($78m) to R4.5bn.

The main reason for the fall in output was a protracted strike at the company’s Kusasalethu mine, where three-quarters of the workforce belong to the radical Association of Mineworkers and Construction Union (AMCU).

The strikes in the gold sector in 2013 did not drag on as long as they did in 2012, with workers from the main gold mining union, the National Union of Mineworkers, accepting an 8% pay hike in early September after a three-week stoppage.

But AMCU said it was not bound by the settlement and pondered more industrial action.

Gold production is typically an uphill battle, according to officials from Nordgold, a Russian firm that also operates gold mines in Burkina Faso and Guinea.

“At every existing operation you go deeper to get the ore. The ore gets harder, so it’s more difficult to process,” says Igor Klimanov, director for Africa at Nordgold.

“There is no new technology that makes recovering gold any easier or cost effective,” he explains.

Nordgold’s production from July to September 2013 grew 26%, but its revenue only rose 1% over the same period because of a 21% drop in the gold price since 2012.

Hillcoat says the pipeline of gold projects has dried up, except the costlier options.

ABG has put a Tanzania project called Golden Ridge on the back burner while Randgold Resources has stopped talking so positively about its Massawa project in Senegal.

Junior miners seeking funding for marginal projects are finding it even tougher and may have to turn to alternative forms of financing such as private equity, Hillcoat says.

Companies are shifting strategies in Ghana.

Chris-Samson Andoh, founder and managing director of mining company Star Africa Commodities and Minerals, says: “Our focus now is the acquisition of concessions during this downturn. Then once the market picks back up, we’ll most likely shift back into production.”

The government-owned Precious Minerals Marketing Company (PMMC) last year commissioned construction of a $6m refinery, to process 70,000oz per year from 2014.

“Once we start adding value these price incidents will not affect us that much,” says managing director Reuben Darko Damptey. ●

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