Gold – Caught Between A Rock And A Hard Place

“Do not go gentle into that good night … Rage, rage against the dying of the light,” wrote Welsh poet and writer Dylan Thomas when talking of dying. But it seems as though South Africa’s gold sector, which is in its twilight years, is doing little to stave off the inevitable.

Despite the opportunities presented by the elements of the Fourth Industrial Revolution, the sector continues to stumble amid rising input costs associated with lower grades, deep-level mining, increasing labour costs and soaring electricity prices.

“This is an industry that is mature, and, in the absence of major new discoveries, or innovative means to reach and mine its deep and more marginal reserves, gold production in South Africa will continue to decline in the coming decades,” explains Henk Langenhoven, chief economist at the Minerals Council South Africa (MCSA).

South Africa was for many decades the highest global gold producer, yielding 1 000 tonnes per annum of gold at its peak. Today it is just scraping the bottom of the production barrel at 138t, which it sold for R67.6-billion in 2017.

“For over a decade, production has declined precipitously. By 2016, the country’s market share had reduced to 4.4% of newly mined global supply, only ranking seventh among gold-producing nations. Since 2005, South African gold production has declined by 54% due to a number of reasons including increasing depth of mining, less working time at the face due to greater distances from shaft infrastructure, declining grades, rising costs and stoppages. Between 2013 and 2017, gold production declined by 14% while employment decreased by 15% at the same time.”

As a price-taker, the gold industry does not have any control over the price of its product, which is set by the market and driven by both supply and demand, as well as sentiment. Cost increases, therefore, cannot be passed on to its buyers.

“As a result, around 75% of gold mines operating in South Africa today are unprofitable. In fact, between 2013 and 2017, input costs for the industry increased on average by 10.4% while the selling price of gold only improved by 4.7% on average,” explains Langenhoven.

South Africa’s gold mines are among the deepest in the world, some as deep as 4km underground, which significantly increases operating costs. The key drivers of costs for the gold industry are employee compensation (around 53%); and electricity (around 20%), the price of which has more than trebled over the past decade.

South African mines are considered to be among the most expensive to operate in the world with all-in sustaining costs averaging $1 035/oz compared to the global average of $818/oz.

In 2017, around 75% of gold mines were unsustainable at the average gold price for the year of $1 257/oz or R590 976/kg.

Gold sector continues to shed jobs

The sector has already experienced a litany of job losses in the recent past as operators try to keep their heads above water, amid escalating costs. In fact, the industry has lost more than 57 000 jobs in the past decade, states Langenhoven.

According to the This is Gold fact sheet July 2018, The state of the gold industry, every mining employee supports between five and 10 dependants, and for every direct mining job created, a further two direct jobs are created in downstream and support industries. As such, “the industry, which employs around 112 000 people directly, also creates around 340 000 direct and indirect jobs in and around its operations, and indirectly supports between 1.1 million and 3.4 million dependants”.

However, despite the reduced production rate, the sector in 2016 contributed R42.7bn towards South Africa’s gross domestic product (GDP), says Langenhoven.