South Africa’s gold industry, long seen as a stalwart in global production of the precious metal, can look forward to a year of stabilisation after a string of unfortunate events that marked 2008.

Until 2006, South Africa was the top producer of gold in the world. Although local production has seen a sharp decline since 2002, the 295,7 t produced in 2006 was enough to stay ahead of China, which produced 247,2 t that year.

However, according to the Gold Fields Mineral Services 2008 gold survey, China has replaced South Africa at the top of the pile, with 280,5 t produced in 2007, compared with South Africa’s 247,2 t. South Africa has been further relegated as the US’s 2008 gold production made the country the second-biggest gold producer.

The decline in South African production has been felt by a number of companies in the country, none more so than Rand Refinery.

The refinery’s current capacity is 1 000 t, and MD Geoff Millet says that 36% of this capacity is being sourced outside South Africa.

Challenging Year
South African Chamber of Mines chief economist Roger Baxter reports that the significant production loss of nearly 34 t in 2008 was a result of a challenging year experienced in South Africa.

“All indications pointed to a year in which South Africa was going to experience a bit of an increase on 2007 production levels. However, the structural decline caused by the electricity crisis forced production to decline because of a downscale of about 10%,” says Baxter.

He adds that the actual impact of a 10% electricity supply curtailment was not just a 10% decline in production. Considering that half of the electricity used in the average gold mine is for cooling, ventilation and pumping, which cannot be switched off, it was the remaining 50% of electricity used in the production process which ended up taking the biggest hit. In addi- tion, closures of shafts and mines for safety-related reasons also had a significant impact on the industry. Overall, good progress was made in improving safety, and the social partners and industry leadership continue to see this as a vital issue.

In 2008, the total decline in gold pro- duction for 2008 was 16,2% in terms of the mining numbers released by StatsSA on February 12.

Baxter believes that South Africa’s gold output will not decline far below the 200-t/y level as there are sufficient reserves in the country that can be economically mined. “However, South Africa needs to concentrate on tackling a few issues in order to stabilise production levels above the 200-t/y mark.”

One is the major issue of containing cost pressures in the industry. According to Baxter, much of the benefit of higher gold prices over the past three years has been reinvested by the industry in projects to sustain or grow gold production. However, the rapid rate of increase in costs, compounded by slowing production, which exacerbates increases in unit production costs, has eroded the gains of higher prices.

Global Turmoil
As South Africa was recovering from the far-reaching effects of the domestic electricity crisis, the global financial crisis started to have an impact on mineral production in a number of countries. Fortunately, the gold sector’s production has not been influenced by the global econo- mic crisis as investment demand has continued strongly as people seek the safe-haven status of gold in a world filled with uncertainty.

Baxter says that, for gold to be mined economically in South Africa, the critical drivers are price and cost.

“Gold is fortunate in that it has the benefit of higher prices because the gold price is seen as a safe-haven-type asset. In order to take advantage of this, South African companies need to mine the greatest possible quantity of reserves at the lowest possible cost,” says Baxter.

Added to the challenges presented by the electricity crisis, the price of steel increased significantly throughout 2008, with some reports indicating that the price increased by nearly 90% over the year.

“The increase in the cost of electricity alone added an extra R1-billion a year onto the costs of the gold-mining sector in 2008,” says Baxter.

These types of price increases do pose a substantial challenge for the mining industry, as steel and electricity are vital inputs for mining.

Baxter reports that one positive aspect of the global financial crisis is that mines can expect a measure of respite in the price of steel. “The global financial crisis has seen a decrease in the demand for steel, which means that steel prices will have to drop accordingly.”

South Africa really needs to focus on stabilising its production before increasing it. Baxter reports that he doesn’t feel that South Africa is aspiring to take the top spot away from China in the immediate future. Rather, South African gold-mining companies are focused on improving safety, constraining cost pressures and producing sustainable ounces in a safe and profitable fashion.

The Road Ahead
Baxter says that South Africa will remain a significant gold-mining player for many years into the future. However, there needs to a be a collaborative push from the tripartite stakeholders within the industry to achieve this.

“The director-general of the Department of Minerals and Energy, Advocate Sandile Nogxina, established the tripartite Mining Industry Growth Development and Employment Task Team (Migdett) in December 2008,” says Baxter.

The main focus of Migdett will be to champion the South African mining industry and to establish how the mining sector can best respond to the global financial crisis. However, the long-term focus of the group will be to establish how South Africa can reposition itself to grow and prosper when the next commodity up-cycle starts.

Taking the Bull by the Horns
Over the past three years, gold-mining companies have invested significantly in capital expenditure (about R19 billion), in order to sustain production, Baxter reports, and in brownfield expansion projects.

One of these is Gold Fields, which is planning to invest over R1-billion a year over the next six years at its South Deep mine, in Carletonville.

South Deep mine vice-president Stuart Allen says that the first part of this capital expenditure programme entails investing in an uninterruptible power supply (UPS) system, to ensure the mine has power at times when State-owned power utility Eskom cannot guarantee sufficient supply.

In addition to the UPS, other capex projects at South Deep during 2009 will include completing the resupport of the main access ramps in the trackless projects, completing all remedial measures for the below-95-level development to ramp up to the planned 12 000-m development and reef metres and 5 542 kg of gold for the year.

Gold Fields is also installing UPS systems at its Kloof and Driefontein mines.

Gold Fields CEO Nick Holland says that the company is pleased with the improved production and good cost control it has achieved as well as the progress it is making in terms of delivering the various projects, which will make a significant difference to the future profile of Gold Fields.

“The company is well placed to restore Gold Fields’ production closer to historical levels and, in particular, to achieving a run rate of one-million ounces per quarter in the near term. The rehabilitation of the steel infrastructure at the Kloof main shaft and the expansion of the Tarkwa carbon-in-leach plant, in Ghana, have been substantially completed, and are in full production build-up stages,” says Holland.

The group’s attributable production for the second quarter of 2009 is expected to come in at 840 000 oz and Holland told the Mining Indaba in Cape Town that Gold Fields aims to be producing at a rate of four-million ounces of gold a year from April this year.

AngloGold Ashanti is already at five-million ounces a year, and its CEO, Mark Cutifani, wants to lift that to six-million ounces a year, while Harmony Gold CEO Graham Briggs is targeting 2,2-million ounces a year.

AngoGold Ashanti has raised $1,1-billion by selling its 33,33% stake in the Boddington gold mine in Western Australia to Newmont Mining to fund its future growth aspirations. The sale brings some welcome relief to the company’s balance sheet.

AngloGold Ashanti is also proving that ‘deep’ can also be ‘cheap’ at Mponeng gold mine, now the world’s deepest by going beyond 3 777 m. Mponeng’s cash costs are an astoundingly low $222/oz, against a current gold price of $900/oz that some say will move to $1 000/oz this year.

No Production Increase
Baxter cautions, however, that South Africa should not look forward to a gold production increase this year.

“The short-term focus of the South African gold-mining industry should be stabilising production and managing costs so that the pressures of 2008 do not have a profound effect during 2009,” says Baxter.

He adds that the South African gold industry is still a “champion industry” that has the potential to turn around the recent declines that it has faced.

“It is the duty of every South African, be it in the private sector or the public sector, to champion the industry,” concludes Baxter.

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