Finweek English Edition - - FRONT PAGE - BY DAVID MCKAY ed­i­to­rial@finweek.co.za

While t he i mpact of Eskom’s load-shed­ding i s s ure t o dam­age S o ut h Af r ic a’s eco­nomic growth, the feed­back from the coun­try’s min­ing com­mu­nity over the last fort­night is that it’s deal­ing with the cri­sis like any of the labour or reg­u­la­tory head­winds it rou­tinely faces.

This is not to un­der­play the im­pact of above-inf la­tion tar­iff in­creases, or un­re­li­able sup­ply. In fact, so moved is Neal Frone­man, CEO of Sibanye Gold, by the power cri­sis that he wants his com­pany to be­come self-suf­fi­cient in sourc­ing its power sup­ply, and even gen­er­ate rev­enue off its self-suf­fi­ciency by wheel­ing ex­cess sup­ply to the SA grid.

Last week, Sibanye Gold an­nounced t hat it would build a R3bn so­lar­pow­ered fa­cil­ity near its Drie­fontein mine on t he West Rand to sup­ply 150MW with the help of devel­op­ment fund­ing in­sti­tu­tions, as yet un­spec­i­fied.

The prob­lems with the ini­tia­tive, how­ever, are twofold. Firstly, 150MW is only 30% of its to­tal 500MW power needs, and se­condly, there doesn’t seem to be a uni­fied re­sponse by the in­dus­try whether it is work­ing to­gether to deal with the threat of sil­i­co­sis claims, and whether it co­op­er­ates when l abour dis­putes arise of a cer­tain or­der. Said Frone­man in an in­ter­view with

Finweek : “I be­lieve this could be a gold in­dus­try-wide ini­tia­tive ow­ing to the im­por­tance of hav­ing scale.” Asked at the com­pany’s year-end f ig­ures for his view on broad co­op­er­a­tion, he was less forth­com­ing.

Srini­vasan Venkatakr­ish­nan, CEO of An­gloGold Ashanti, was sim­i­larly vague: “It is an in­dus­try is­sue to f ind a res­o­lu­tion i n con­sul­ta­tion with Gov­ern­ment.” He added, how­ever, that build­ing power gen­er­a­tion sets be­yond what’s needed to trans­port em­ploy­ees in the even of a power emer­gency was not a pri­or­ity.”

“It didn’t make sense to build a power sta­tion. Grid power is more ef­fi­cient and while we con­tinue to look at green en­ergy, such as so­lar power, this would only pro­vide standby power

for us,” he said.

Power costs ar e be­com­ing a n in­creas­ingly mean­ing­ful f i xed cost to gold min­ing, dou­bling from 10% sev­eral years ago to 20% to­day for both Sibanye Gold and An­gloGold Ashanti.

Im­pala Plat­inum CEO Terence Good­lace sa i d t he com­pany was con­sid­er­ing pro­vid­ing it­self with power through fuel-cell tech­nol­ogy, but in the end Eskom-re­lated power prob­lems will have a bear­ing on the com­pany. “We’ve got a de­tailed plan on how to re­duce power and what we turn off.

“But once we get to 20% [stage 3 load-shed­ding] we are go­ing to have to start closing shafts down,” he said. “We’d start by look­ing at the low­est con­tribut­ing shaft – since we know what does what – if the sit­u­a­tion gets worse,” he said.

The news­flow from fi­nance min­is­ter Nh­lanhla Nene’s Bud­get wouldn’t have ex­actly been heart-warm­ing to min­ing com­pa­nies ei­ther.

Nene an­nounced an in­crease in the elec­tricit y lev y to 5.5c per kilo­watt hour (c/ kWh) from 3.5c/ kWh with 2c/ kWh to be re­moved a f ter t he car­bon ta x, which was de­layed t wo years in the pre­vi­ous bud­get, has been im­ple­mented.

Ac­cord­ing to Eu­gene King, an an­a­lyst for Gold­man Sachs, the higher levy as well as the in­crease in the an­nual tar­iff in­crease, some 4% over the level pre­vi­ously an­nounced by the Na­tional En­ergy Reg­u­la­tor of South Africa (Nersa) to 12.69% from 2016, could lead to a 50% plus in­crease in elec­tric­ity costs for SA min­ers where power is about 15% to 20% of to­tal bills.

“Over­all, neg­a­tive newsf low for South Africa-based min­ers,” said King. “Elec­tric­ity sup­ply has been ir­reg­u­lar which has led to lost pro­duc­tion. The new 50% pro­posed hike in elec­tric­ity bills would neg­a­tively im­pact earn­ings and re­duce their com­pet­i­tive­ness visà-vis global min­ers i n t he cur­rent en­vi­ron­ment where we are wit­ness­ing f lat­ten­ing of the cost curve,” he said.

The bear­ing of power cost in­creases de­pends on what min­ing stocks one is think­ing about, how­ever. About 25% of An­gloGold Ashanti’s as­set base is ex­posed to SA, but only 1% for Gold Fields, while Har­mony Gold and Sibanye Gold have 90% and 100% ex­po­sure re­spec­tively.

From a plat­inum per­spec­tive, Im­plats i s t he l east ex­posed (50%), while Lon­min is 100% ex­posed and An­glo Amer­i­can Plat­inum (Am­plats) has some 88% ex­po­sure, ac­cord­ing to King.

Else­where, how­ever, gold min­ers sim­ply roll with the punches.

Niel Pre­to­rius, CEO of DRDGold, a gold re­treat­ment com­pany, said it had agreed with Eskom to lower us­age at its Ergo op­er­a­tion on the East Rand by 10% in the event of phase 1 and phase 2 load-shed­ding, in which elec­tric­ity sup­ply is cut 1 000MW and 2 000MW na­tion­ally, on con­di­tion that it re­ceives t wo hours’ no­tice, which gives it enough time to thrift power be­tween op­er­at­ing units.

Am­plats has sim­i­lar f lex­i­bil­ity in its set-up to tackle Eskom’s load-shed­ding sched­ule. Ow­ing to the fact that its pro­cess­ing fa­cil­i­ties are not op­er­at­ing at full tilt, it is able to cut back on power sup­ply to th­ese units al­low­ing its min­ing op­er­a­tions to con­tinue.

For the time be­ing, Sibanye Gold is on its own as it seeks to build its own power source. As such, it is highly risky, es­pe­cially as Frone­man hinted in his in­ter­view with Finweek that Sibanye may one day even seek to own the coal that would sup­ply a power sta­tion.

A re­port by Deloitte, how­ever, sug­gests that min­ing com­pa­nies seek­ing to en­ter the en­ergy mar­ket on their own run con­sid­er­able risks since build­ing power sta­tions is a com­plex task well out­side the core com­pe­tence of a miner.

“Where min­ing com­pa­nies choose to par­tic­i­pate ac­tively in in­de­pen­dent power pro­duc­ers [ IPPs], t hey may choose to part­ner with other coal pro­duc­ers,” said Chris de Vries, an as­so­ciate direc­tor of Ven­myn Deloitte, a min­ing ad­vi­sory firm.

In this model, min­ing com­pa­nies can share the risk of op­er­at­ing an IPP or choose to build a small mod­u­lar gen­er­a­tion unit to re­duce the risk of a larger power plant, said De Vries.



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