No golden future here
Labour costs make SA gold more expensive to mine
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.