The South African economy cannot absorb such a large price shock as that proposed by State-owned power utility Eskom, and the outlook for mines higher up the cost curve would be bleak, South Africa’s Chamber of Mines (CoM) told the National Energy Regulator of South Africa (Nersa) at its hearings on proposed electricity tariff hikes last month.
Eskom’s proposal of a 35% tariff increase every year over three years to 2013 will be a challenge to be absorbed by the South African economy, which is emerging from its first recession in 17 years and is faced with anaemic global economic growth prospects.
The CoM says that the likely impact on the economy of a 147% increase in the electricity price over a three-year period is material and will undermine the economic growth, beneficiation, employment and poverty reduction aims of government.
In general, the underground mines located at the upper end of the cost curve will either have to restructure or close, with negative employment, production and gross domestic product consequences.
For gold and platinum mines, higher costs translate into a smaller portion of the mineral resource base being economic- ally recoverable. That is to say that the marginal ores become uneconomic to mine and are consequently sterilised and will, therefore, play no role in the economic development of the country.
In large-scale underground mines, electricity is a substantial operating cost and a vital ingredient in providing a sustainable environment for mining activity, especially for health and safety, and for processing operations.
In deep-level gold mines, which are mining at average depths of 2,7 km below surface, the ambient rock temperatures reach 55 ˚C, therefore requiring extensive refrigeration, cooling and ventilation systems to keep underground working areas cool, ventilated and sustained for mining operations.
These electricity-intensive mines will see a doubling of the portion of electricity costs in the cash production cost profile in three years. In the gold sector, electricity costs comprised a significant 11% of cash production costs in 2008 on average. This will double to more than 20% of cost in three years. A shift up the global cost curve by various components of the South African mining sector makes the companies more vulnerable to potential closure or restructuring during times of falling commodity prices, and high-cost, uneconomic shafts will be closed.
At the same time, the current shortage of electricity supply is already placing a binding constraint on economic growth, with projects that have an electricity demand of greater than 20 MVA effectively placed on hold. So the two extremes being excessively cheap prices with no extra electricity supply avail- able or electricity prices being too high, with much lower demand and a surplus of electricity supply capacity.
The critical issue is how to balance the financial resources required to sustain and grow the electricity supply industry but in a manner that promotes growth and investment in the economy.