JOHANNESBURG (miningweekly.com) – South Africa needed to apply its mind to solving the electricity price issue to avoid widespread knock-on effects that would seriously stunt economic growth and spark a new round of wage demands, Harmony Gold CEO Graham Briggs said on Friday.

The head of South Africa's third-largest gold-mining company said that increasing the electricity tariffs by 45% a year over three years would cause prices of other commodities to spiral across a broad front and stretch household budgets, which would, in turn, have further repercussions.

"It will be a sad situation if it is allowed to eventuate. There must be many ways of dealing with the issue," Briggs told Mining Weekly Online.

He said that Harmony, Gold Fields and AngloGold Ashanti had voiced the need to continue to engage with Eskom and the government through the Chamber of Mines in order to reach a better solution.

If the proposal were adopted in its present form, it would stunt economic growth in South Africa as a whole to an extent that there would no longer be an electricity shortage.

"It will stop smelters, it will stop mines, it will stop business and somewhere in the system there has got to be some give and, somewhere in the system, there has got to be some new ideas on how to take electricity forward and how to recover those costs to be able to grow," he said.

The electricity hike would increase inflation by 2% and stretch household budgets to a point where there would be renewed wage demands.

It would increase Harmony's own cash costs by some 15% a year and electricity costs would come to represent 25% of total costs instead of the current 13%.

"We are in a fairly unique position because we do have increasing productivity and more ounces per person in future, we will continue to look at power savings and we have an increasing grade that will offset our rand per kilogram costs," he said.

But it could impact on the company at a time when it is about to enter into a prolonged period of production growth

This is because Harmony is in the fortunate position of having capital expenditure on the decline and gold production from new growth projects on the up.

Briggs said, after reporting a net loss of R29-million for the September quarter, that Harmony was poised to benefit progressively from the return on its many years of investment in growth projects.

"We've spent the money, we've built the infrastructure, we're developing the orebodies and we're starting to stope at these new projects, which is giving us new gold ounces," he told Mining Weekly Online.

The return on capital was already evident from the Doornkop, Elandsrand, Phakisa and Hidden Valley gold projects, where production was ramping up and capital expenditure (capex) was scaling down.

In the quarter, capex declined 17% and production rose 6%, 2% above of guidance. Capex is set to decline further, by R100-million a quarter in the December, March and June quarters, interim CFO Frank Abbott reported in his last presentation. Hannes Meyer, who is replacing Abbott, attended Friday's quarterly.

Harmony, which has R726-million cash in hand, is also benefiting from improved gold grades, which will make the company less sensitive to the steep  power costs that are bieng proposed. There was also a 10% improvement in the average recovered grade in the September quarter.

Prior to the higher electricity tariffs, Harmony was actually predicting a scenario of lower costs in kilogram terms.

"We have some great assets in our portfolio that will produce more ounces and we will therefore be more productive," Briggs told Mining Weekly Online.

The proposed tailings project at St Helena in the Free State, which has the potential to have a throughput of a million tons a month, was an example of a Harmony asset that would be less sensitive to the higher electricity tariffs. Also planned was the Phoenix surface project expansion.

"Payback on these projects would be quick and both have low sensitivity to the electricity issues," Briggs said.

The company had a better handle on grades at Phoenix, which could hasten go-ahead for that expansion.

Both these projects would go to Harmony's February board meeting.

"There are a mixture of assets and things that are happening in Harmony that put us in a very strong position for the future," he said.

While the company had been on the back foot for the last two years, it was able to beat its production guidance in lifting production by 6% in the September quarter.

The two laggards in the Harmony stable are Evander and Virginia and some of the shafts in these areas are reaching the end of their lives. The Brand, Harmony 2, Evander 7 shaft are under threat.

"There will be shaft closures, but fortunately we are able to move people to operations that are building up," he said.

While the Brand shaft was a candidate for closure, it had great miners who were accustomed to extracting extra value out of depleting assets and ever effort would be made to transfer these personnel to growth shafts.

Work is being done on restructuring at the under-performance at Evander 2 and 5 shafts.

Briggs told Mining Weekly Online that the Department of Mineral Resources had done excellently in conferring all Pamodzi Gold Free State mineral rights on Harmony: "They really pulled out all the stops to get the process going," Briggs said.

Left to obtain was the sanction from the National Nuclear Regulator and the competitions approval.

"In the meantime, we are doing the planning, we've got a team on site and hopefully in three months we will be able to report go-ahead," he said.

Harmony, which produced 1,5-million ounces of gold last year, was still intent, Briggs reiterated, on achieving its target of being able to produce 2,2-million ounces of gold a year from 2012.