An industry and a country that won't defend themselves may deserve to die

Deserve it or not, without fighting back they're about to die anyway.

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Gold Bear Market Hits Hardest in South African Mines

By Kevin Crowley and Andre Janse van Vuuren
Bloomberg News
Tuesday, June 25, 2013

http://www.bloomberg.com/news/2013-06-25/gold...ts-hardest-i...

JOHANNESBURG -- No one has more to lose from gold’s bear market than South African producers as workers digging in the world’s deepest, costliest mines threaten to bring them to a standstill unless pay is more than doubled.

A record quarterly drop in the metal to as low as $1,270 an ounce is already below production and capital spending costs at Sibanye Gold Ltd. Harmony Gold Mining Co., and Gold Fields Ltd., figures compiled by Bloomberg show. Harmony's South African output costs are the highest of the world's 12 biggest producers by volume, according Bloomberg Industries.

"Anything below $1,400 an ounce is sort of a red line" for South African gold producers, said David Davis, a Johannesburg-based analyst at SBG Securities. "There's a vast difference between what labor unions are demanding and what South African mines can afford. It points toward long, drawn-out negotiations that could end in dispute."

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Violence extended into this year with three workers killed in the past six weeks including members of the rival National Union of Mineworkers and Association of Mineworkers and Construction Union.

South African costs are also steeper than peers abroad because of the higher levels of labor needed to dig its aging mines. Gold companies employ 142,000 people in the country.

AngloGold Ashanti Ltd.'s Mponeng mine is the world's deepest gold operation with seams 2,400 meters (1.5 miles) to 3,900 meters underground. Toronto-based Barrick Gold Corp., the biggest producer, operates mines at or near the surface and last posted output and capex costs of $919 an ounce, 28 percent below the spot price for gold yesterday of $1,278.

"The cost of production for South African miners has been propelled much faster than for other producers, due to labor-intensive mining practices combined with sharply rising wages," analysts led by Peter Archbold at Fitch Ratings Ltd. wrote in a report. The result is that the country's mining companies "are the most exposed to the risk of falling gold prices."

AngloGold said in November it was cutting costs and reviewing operations' efficiency in and outside the country.

"That work is well under way and we are moving with all appropriate speed to achieve meaningful and sustainable results," spokesman Chris Nthite said by e-mail June 24.

Harmony will in August detail plans to reduce service and corporate costs in South Africa by 400 million rand ($40 million), and lower capex across all projects by 1.4 billion rand, spokeswoman Henrika Basterfield said by phone yesterday. Gold Fields spokesman Sven Lunsche and Sibanye spokesman James Wellsted declined to comment.

Sibanye, South Africa's second-largest gold producer by output, reported total costs including production and capex of $1,334 an ounce for the three months to March 31. At Gold Fields, South African costs totaled $2,195 an ounce as the company spent money on building its South Deep development.

Similar costs at Harmony, the country's third-largest producer, were $1,487 an ounce, including operating costs of $1,220 an ounce and $61.07 million of capital spending on the 228,528 ounces it mined during the period, according to Bloomberg calculations.

AngloGold, the country's largest gold miner, was the only South African bullion producer whose costs in the nation of $1,204 an ounce were below the current spot gold price, according to the calculations. It posted cash costs of $896 an ounce and $101 million of capital spending on the 327,000 ounces it mined for the quarter ended March 31.

Globally, gold-mining companies are moving to include capital expenditure in their per-ounce cost figures. Barrick Gold and Goldcorp Inc., the biggest producer by market value, have begun reporting "all-in sustaining costs," a measure that for Barrick includes cash costs, general and administrative costs, rehabilitation, exploration, mine development expenditures, and sustaining capital expenditures.

While the prospect of increased wages may add to South African gold producers' already high costs, a decline in the country's currency from last year helps them, said Richard Hart, an analyst at Macquarie First South Securities Ltd. in Johannesburg. "The South Africa-focused companies are in a better position compared to last year," he said.

The rand, used to pay workers, is down 17 percent against the dollar, in which gold is priced, in the past year.

Still, any benefits from the currency may be swamped by labor union demands for higher wages.

AMCU has demanded a more than doubling of underground workers' pay, with a minimum entry-level salary of 12,500 rand a month, according to a copy of a letter to the Chamber of Mines, which negotiates with unions on behalf of mining companies. That compares with the current minimum of 5,000 rand and is more than a call for 8,000 rand sought by the rival NUM union for the same category. About 85 percent of employees work below the surface.

Gold companies "cannot afford any increase in wages and benefits," given fourth-quarter production, the chamber said last week. "This is of course rather an unlikely outcome."

Net income at all four of South Africa's biggest mining gold companies is estimated to drop in 2013 from last year, with Harmony’s earnings forecast to fall almost 50 percent to 1.35 billion rand, according to data compiled by Bloomberg.

The six-member FTSE/JSE Africa Gold Mining Index is down 49 percent in the past year, compared with a 21 percent decline in the MSCI World Metals and Mining Index.

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