The gold sector is the third-largest contributor to the mining industry’s contribution to South Africa’s gross domestic product, notes professional services company KPMG, adding that gold remains the South African mining industry’s second-most exported mineral.

“Therefore, general global supply and demand trends are going to have an impact on South Africa and our gold sector,” says KPMG gold commodity expert for South Africa Daniel Hooijer.

He notes that current global gold demand is driven by jewellery, investment and central banks.

Jewellery demand depends on developing economies, specifically those of China and India, as the rising middle class in those countries can fuel the buying of gold, which is still considered valuable to own.

Investors still regard gold as a safe haven, even though the price of the metal in 2014 dropped from a high of $1 690/oz to a low of $1 188/oz before recovering to $1 386/oz and then returning to a low of $1 140/oz. World events that drive uncertainty in the gold economy include major sporting events, political debates, major conflict or announcement of conflict, and significant agreements in terms of trade and the trade industry “that changes daily”.

“Major world events can drive people to buy . . . or . . . sell gold,” says Hooijer.

Central banks remain net buyers of gold and still hold a lot of gold as value, which positively impacts on global demand.

Cost-reduction strategy
Gold supply has been on a downward trend, owing to the current depressed commodity price environment and a lack of investment in greenfield exploration, Hooijer says.

There is also a lack of funds for project budgets and for the big mining majors to spend on finding new gold reserves and lengthening the lives of current mines.

Mining majors’ adopting progressive cost-reduction strategies and quite a few miners’ favouring sustaining cash-flow policies have had a big impact on where companies spend their money, what they can achieve and their strategy going forward, Hooijer explains.

“The strategy moving forward should focus on the amount of money that can be generated from mining . . . to pay off debts and give back to shareholders,” he avers.

Hooijer further points out that South Africa’s mining differs from that of the rest of the world in that the country has more deep-level mines, with the subsequent market perception of being more costly.

While deep-level mining is more costly, there are miners that keep their mines maintained and developed to overcome higher costs.

“In terms of South African mining, one should consider what the rate of return for investors will be,” he notes.

Aspects that will impact on the rate of return for investors in South Africa and global gold mining include infrastructure, local economics, regulatory stability and political stability.

“This criteria impacts on mining costs and, in South Africa, mining costs are increasing at a higher rate than the consumer price index, which is proving to be a challenge, especially in the low commodity-price environment,” says Hooijer.