No golden fu­ture here

Labour costs make SA gold more ex­pen­sive to mine

Finweek English Edition - - Economic trends & analysis - GARTH THE­UNIS­SEN

DE­SPITE SOUTH AFRICA’S de­vel­op­ing-coun­try sta­tus and an un­em­ploy­ment rate es­ti­mated to be as high as 40%, it still costs more to mine an ounce of gold in this coun­try than in any other ma­jor gold pro­duc­ing na­tion (see ta­ble).

That’s largely why SA gold pro­duc­tion con­tin­ues to fall from its cur­rent level of 297t/year. The all-time high of 1 000t reached way back in 1970 is now a dis­tant me­mory. JPMor­gan blames union­i­sa­tion and the in­creas­ing depth of SA mines as our ma­jor cost-push fac­tors.

It’s ironic then that since 2004 the in­crease in gold min­ing costs in SA (up 10%) are the low­est of the ma­jor gold pro­duc­ers. Only Aus­tralia comes close, with an 11% in­crease since 2004. By con­trast, the US has suf­fered a mas­sive 44% in­crease in gold min­ing costs since 2004. That’s due to the typ­i­cal cost fac­tors of US mines be­ing oil re­lated. This is due to the high level of mech­a­ni­sa­tion cou­pled with the fact that many US mines pro­duce their own elec­tric­ity from diesel pow­ered gen­er­a­tors.

US min­ers have thus suf­fered dis­pro­por­tion­ately from record high oil prices, rel­a­tive to their SA coun­ter­parts, who en­joy some of the cheap­est elec­tric­ity world­wide.

Even so, it’s still cheaper to mine an ounce of gold in the US (US$359/oz) than in SA ($389/oz). Sur­pris­ingly, that seems to be due to the fact that the bulk of SA gold min­ing costs are cen­tred on labour. “Around 50% to 60% of the cash costs of SA’s deep level mines are labour re­lated,” says Steve Shep­herd, an an­a­lyst at JPMor­gan.

In other words, of the $389 it costs to mine an ounce of gold in SA, up to $233,40 goes to labour. That’s 35% of the cur­rent gold price of $665/oz at the time of writ­ing. Put an­other way, the labour costs of SA’s gold min­ers amount to more than 97% of the en­tire cost of min­ing an ounce of gold in Canada.

Cou­pled with the in­creas­ing depth at which gold must be mined in SA, the prospects for fu­ture gold pro­duc­tion look grim. “SA has very lim­ited, if any, ge­o­log­i­cal po­ten­tial for fur­ther in­creased pro­duc­tion,” says JPMor­gan. “Our anal­y­sis of the ma­jor SA gold pro­duc­ers in­di­cates that an­nual gold pro­duc­tion will strug­gle to re­cover to 300 t/ year over the next three years.”

And while the cur­rent gold price of around $665/oz might seem at­trac­tive given where it was just five years ago, JPMor­gan reck­ons it would have to surge to be­tween $1 500/oz and $2 000/oz for gold min­ing to be­come as at­trac­tive as it was in the mid-Eight­ies.

GOLD COSTS PER OUNCE

Source: Gold Field Min­eral Ser­vices

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