The improvement of the South African gold market will depend on the rate of global economic growth and the level of trust between governments, while activity in the local gold industry continues to decline, says investment manager Stanlib gold analyst Kobus Nell.

He expects the country’s export volume to further decrease.

“South Africa makes up around 10% of the global gold supply and our volumes of the commodity have decreased over the years. I think this trend will continue owing to the lack of expansion of local gold mines as most miners’ attention is directed to operations outside the country.”

Nell says project development in the South African gold sector is almost non- existent; however, the developments that are active are expanding output and trying to increase the country’s product threshold. However, the general negative trend in South African reserves over the last ten years or so does not support future pro- duction growth prospects.

“South Africa is doing the best it can with regard to using its gold resources but it has lost competitiveness compared with other countries. The instability in the electricity and labour areas is a great disadvantage to the country’s mining sector. Mines are getting deeper and miners are working further away from the shaft face. Structural challenges are also hampering the industry and causing a decline in production,” states Nell.

Precious metals research consultancy Thomson Reuters GFMS precious metals head Paul Walker emphasises that, although South Africa has not successfully used its gold resources, it still sits on one of the largest gold reserves in the world.

“South African gold mining has fallen precipitously over the past decade in spite of prices having risen sharply; for a variety of reasons, South African producers have not been able to take advantage of this in spite of massive reserves of the metal. Low grades, rising labour and other input costs and deep-level mining have all contributed to this decline – what the miners could have done to mitigate these is not clear.”

Walker believes that the eurozone debt crisis has been positive for the overall gold price and Nell states that the weaker rand has aided the gold price increase for local producers, benefiting South African operations.

Nell suggests that, if the growth environment presents itself as being more challenging, it will be positive for the gold market as it creates more stimuli.

Walker believes that although gold prices will rise in the near term, there is a material risk of lower prices in the not-too-distant future and, given their high operating costs, South African mines will suffer more than others.

“Without financial engineering to protect them, a lot of mining companies will struggle tremendously over the next few years and mine production will decline sharply in the face of lower dollar gold prices. South Africa’s share of gold production has declined sharply in the last decade and if significantly lower prices are witnessed in the future, output will collapse. “This will not only have an impact on shareholders and employees, but will also greatly affect support businesses and South Africa’s export revenues. Globally, South African gold mining is now a shadow of its former self and it could become insignificant if steps are not taken now to protect it against these risks,” he states.

“However, the current state of the gold market is strong but it is all about growth. Last year, we experienced a price, as well as a consensus, increase. The relationship between the dollar and the euro has been noted as the driver of the gold price, but that relationship has weakened over time. This has resulted in the gold price strengthening as the dollar weakens, as a result of the US debt crisis,” says Nell.

He states that the gold price is past the record high of $1 920/oz experienced during the latter part of late last year, while the gold industry has been elevated from an inflation perspective.

Regarding the challenges faced by the South African gold market, Nell believes that a decrease in demand from India and China will negatively affect the country’s gold market.

“The growth in gold demand from India and China has been significant but is slowing down. We will now need new buyers to counter this decrease in demand, such as Reserve Banks globally, which have increased their demand for gold and are active in the industry. I think this commitment will remain fairly strong,” he says.

Further, safety remains a great concern in the gold mining industry, which is able to deal with this challenge by introducing mechanised instruments that will improve the efficiency of operations and, thereby, capitalise on the technological opportunities that are available.

Nell states that the gold mining industry is a structurally declining environment owing to continually deepening mining operations.

Walker agrees that there are long-term challenges that relate to rising produc- tion costs, legislative issues and safety problems.

“The South African gold industry is not just about mining, but also about refining and value adding. There are local organisations like Rand Refinery that run world-class operations that are globally competitive and have potential in terms of value adding. While other value-adding undertakings, like jewellery, have not taken hold, there are other parts of the gold value chain in South Africa that can hold their own in the world,” he emphasises.

Meanwhile, improving the productivity of the gold mining industry in South Africa depends on reserve availability and flexibility, how safety-related issues are being handled, labour and the cost of electricity, says Nell.

“These factors are important and make up the biggest portion of costs in South Africa. They need to be improved upon; however, this will also depend on how long the country’s electricity supply can be stabilised. Relationships between employees of the Department of Mineral Resources and operational staff on mines also need to be improved to manage safety-related stoppages better, which, at the moment, are a major drain on produc- tivity,” he stresses.

He notes that the industry also has to employ more energy efficient processes, as the rapidly rising cost of power is a key issue in the country.

“Previously, energy accounted for a small percentage of production costs on some mines but is now an increasingly material percentage of costs. Renewable energy, such as solar power, should be used to save energy. If the energy challenge is tackled, this cost pressure will be miti- gated,” says Walker.

He explains that, if cost pressures are decreased, job development will improve, more gold will be mined and export revenues will increase.

Walker points out that the relationship between workers and management also requires attention, along with issues of inadequate safety and safety stoppages that result in financial losses.

Workers and management need to get together to understand that there should be a common goal to ensure the survival of mining operations.

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