Aberrant production practice rearing its head in mining, says security executive

19th August 2011 By: Jonathan Faurie

A new aberrant production practice is rearing its head in mining, says the executive of a security company.

The new mining malaise allegedly comes in the form of the irregular creation of undisclosed production streams that benefit insiders.

“There is a new ‘nonofficial’ production stream that has been created, which allows producers to generate product that sits outside of the official production reporting line,” G4S mining development director Fritz Kruger tells Mining Weekly.

“This allows the generation of sales and income that is not taxed and does not have to feed into profits and, therefore, payments of dividends to shareholders. Further, one can use poor production figures to not pay excessive wage increases,” Kruger adds.
G4S offers security services to mines in South Africa and across the African con- tinent as a whole.

Kruger’s comments put a dark new hue on the illegal mining scourge that has been intensifying in mining since the commodities resumed their strong run following the economic crisis of 2008 and 2009.

Although G4S sees traditional rough-and-ready illegal mining as a most unwelcome part of the African and South African mining scene, it is growing increasingly concerned about further-reaching under-the-counter aberrations within the industry.

Kruger says that, since the 2009 global financial crisis, and with fears of a double- dip recession increasing, companies have had to become creative in generating steady income streams to lessen any potential blow to income.

Significant Industry Challenges

Kruger positions corruption as a pivotal component of the illegal mining affliction.

He sees this new corruption as being something that is multisourced.

Once perpetrators become accustomed to the ‘benefits’, they find it hard to do without them.

The irregular behaviour can have small beginnings.

He cites the instance of a shift manager getting a cut for allowing an illegal in at the gate.

He may then go a step further and allow the illegal into the skip to go underground.

The employee in charge of sampling may also then need to be paid off, as well as the person who supplies explosives to the mine.

In this way, a tangled web of far-reaching corruption is created.

“Couple this with prominent South Africans and senior State members or politicians, then the flow of illegal mining just leads to another new multimillionaire in South Africa,” Kruger postulates.

The more traditional view of illegal mining, particularly in gold, is centred on running battles between mining company security staff and illegal miners.

There was a time when illegal mining was regarded as relatively tameable, and even in the heat of the commodities boom, some have taken it head-on and beaten the pants off it, but there are also credible reports of the problem being exacerbated as the activity becomes syndicated and part of a wider crime-driven network, which results in illegal miners becoming well funded, better equipped and even armed to the hilt.

Piercing the Veil

But does the veil need to be pierced to allow the new malaise to be exposed?

In its heyday, the South African mining industry was the world’s premier producer of gold.

However, over the past five years, the industry has been on a steady production decline which has seen South Africa drop to the world’s fourth-biggest gold-producing country behind the US, Australia and China.

Many economists and industry analysts pinned this decline down to increasing mining costs, the deep nature of South Africa’s gold-bearing reefs, the steep wage demands from industry and the increases in electricity imposed on the industry from power utility Eskom.

However, Kruger questions these as the only reasons.

“With South Africa’s open borders, where no visas are needed, over four-million illegal, refugee-type nonresidents reside in the country. These include some of the most notorious crime syndicates in the world,” says Kruger.

Kruger also questions the willingness of the industry to take steps to combat the illegal mining that stems from this, citing a decline in the number of illegal mining arrests as testament.

However, security company Fidelity Security Services reports there are mining companies that want to clear the industry of this scourge and that significant arrests are being made.

CEO Wahl Bartmann says one need just look at the amount of arrests that are currently taking place and syndicates that have been exposed within the mining areas.

“Illegal mining is far more prevalent than the industry cares to admit. Fidelity Security Services has made in excess of 2 000 arrests of illegal miners over the past 18 months. The syndicates running these illegal operations are businesses that are being funded though the supply of equipment, intelligence and gold from the illegal mining industry,” says Bartmann.

Eradication Headache

South African President Jacob Zuma and Mineral Resources Minister Susan Shabangu, as well as her previous counterparts, have all said the eradication of illegal mining must be seen as a priority.

However, this is easier said than done, as syndicates are harder to get rid of than the individual ‘mercenary-type’ illegal miners. Also, illegal miners have become better funded and better armed, which complicates this problem.

Kruger agrees with these views and says South Africa might never be free of illegal mining.

He points out that one can combat illegal mining in a specific area, but then the problem is transferred to neighbouring operations.

“Too many people have tasted the ‘forbidden fruit’ and there is too much corruption going on in the industry to effectively combat this,” he says, adding that the Chambers of Mines do not wield the power they once did.

“Once an illegal route has been created, it becomes virtually impossible to break,” says Kruger, who adds the syndicates go further than only mining and include a vast network of buyers.

“The biggest consumer of gold in the world is India. The country consumes more than 500 t/y of gold just on wedding jewellery, so any illegal gold can just be sucked up and consumed like that. The majority of the worlds diamond cutters are found in India, which is another clear destination for diamond product – legal and illegal. A number of illegal South African-produced or -resourced products are destined for China, such as abalone and rhino horn, so I suspect gold, diamonds and platinum are not much different. Chinese companies are flooding Africa and South Africa, so it has become so easy to suck up illegal product and make it disappear.

“In the old days, one could not sell gold on the street at the ruling gold price; it was typically sold at 50% of real value. However, now that illegal trading has flourished, one could sell gold based on Internet-verified gold prices, showing that the illegal trade is now the same as the legal trade,” says Kruger.

Bartmann goes even further, pointing to the illegal trade of commodities funding community projects.

“These illegal activates are managed on a daily basis and, in some cases, the local communities benefit directly from this through by supplying equipment,” says Bartmann.

Reported Success Stories

This, however, does not mean that the South African mining industry does not have success stories.

In the past, Pan African Resources’ Barber-ton mining operations, Rand Uranium’s Cooke operation and Harmony Gold’s Tshepong operation, have seen the highest incidence of illegal mining.

After spending considerable time, resources and capital, Pan African Resources managed to clear its Barberton operation of illegal mining in 2010.

Rand Uranium CEO John Munro has told Mining Weekly that the company too has recently cleared its Cooke operation of illegal operations.

At the height of illegal operation, Munro had to contend with between 300 and 400 illegal miners at Rand Uranium’s Cooke operation. This figure had been reduced to 40 illegal miners by the end of 2010.

“Towards the end of 2010, the company saw that passive methods of trying to control access points were becoming ineffective, as illegal miners were getting underground as and when they wanted to. The company then favoured a stance that has been effective on other operations and a more aggressive approach was employed. The illegal miners have been apprehended and handed over to the police and charges will be pressed against them,” says Munro. He adds that the Cooke operation is 98% illegal-mining free.

The problem was so severe at the operation that Rand Uranium was forced to impose a food ban, which was lifted in April this year.

Illegal miners typically spend a significant time underground, sometimes as long as three to six months. These illegal miners would confront legal miners and steal food off them. Miners, who had medical conditions that necessitated eating at regular intervals during the day, were moved to surface, while other miners were offered a meal, which could be taken before or after a shift.

As with other companies, Munro reports that the company’s current security spend will be a permanent feature.

“One cannot drop one’s guard now. The money spent and the security measures put in place to eradicate illegal mining have to be maintained,” says Munro.

Although not willing to comment on the issue directly, Harmony corporate and investor relations executive Marian van der Walt reports the company prefers to respond through the Department of Mineral Resources, from which it receives significant support.