By Alan Seccombe
Business Day, Johannesburg
Monday, July 15, 2013
http://www.bdlive.co.za/business/mining/2013/07/15/data-paint-dire-pictu...
As they gold sector
prepares to deliver its counteroffer on wage increases to the unions on
Monday, a report from a leading analyst shows just how dire the financial
situation is for producers.
Seven gold companies represented
by the Chamber of Mines at centralised wage talks
with four unions, including newcomer the Association of Mineworkers and
Construction Union (AMCU), will unveil their counteroffer on Monday.
Amcu and the National Union of
Mineworkers have tabled wage increase demands for entry-level workers of
between 100% and 60% of prevailing salaries.
The companies are
expected to table a counter offer that is below inflation, which was 5.6% in
the May measure of consumer price inflation. Some analysts are expecting the
gold companies to stick close to this measure, perhaps rising by two or three
percentage points.
Chamber chief gold wage negotiator Elize Strydom said a couple of weeks ago the key challenge
would be to manage what companies could afford to pay in a difficult
financial environment and accounting for workers' expectations, given the
scale of increases demanded by unions.
"At the prevailing
gold price, gold miners are already under pressure to sustain operations and
will struggle to grant double-digit wage increases sought by the
unions," Investec's Kamilla Kaplan said last
week.
The chamber told the
unions in a meeting last week that 40% of the South African gold sector was
loss-making or marginal in cash cost terms in the fourth quarter of last
year, when the average price was a record R509,783/kg.
The gold price is now
R412,200/kg and closer to 60% of mines are in a
loss-making or marginal position.
But the problems for the
sector run far deeper than that, said SBG Securities gold analyst David
Davis. Using the new cost reporting metrics proposed by the World Gold
Council last month, the average all-in cost for the world's top five global
gold mining companies was $1,467/oz in the first
quarter of this year against the current spot price of $1,287/oz, Mr Davis said in a note on
Friday.
By next year, about half
of global production will need a break-even gold price of $2,400/oz, using a 10% year-on-year mining inflation assumption,
he said.
Gold companies could
start using the new cost metrics from January next year. Companies such as
AngloGold Ashanti, Gold Fields and Harmony are estimated to have had all-in
costs of $1,580, $1,426 and $1,762 per ounce, respectively, in the first
quarter of this year.
These costs are high
relative to the average of their peer group because they are involved in
capital projects, with AngloGold commissioning three big projects between now
and 2016.
Gold Fields is ramping up
its South Deep mine.
Harmony's capital
expenditure will taper off in coming years as it nears the completion of big
growth projects in South Africa and revises the size of the Wafi Golpu project in Papua New
Guinea to bring down costs.
Gold companies are
currently using a far narrower cost measurement, which had "led to
mining companies recording inflation margins in an environment of declining
gold and equity prices", Mr Davis said.
"This disconnect has sent confusing signals to governments, labour unions, the investment community and other
stakeholders."
SBG had "long held
the view that, with a few exceptions, global mining companies have been
misrepresenting their costs by quoting cash costs as a measure of their
efficiency in producing an ounce of gold", he said.
The widely used cash cost
figure did not include capital to sustain production, to build new projects
or to explore for new gold to replace mined ounces.
Chamber senior executive
Roger Baxter has said that between 2007 and 2012 there was a 238% increase in
electricity prices for mining companies and a 12%-a-year rise in the annual
remuneration paid per worker, roughly five percentage points higher than
producer inflation.
More than half of the
costs of South Africa's deep-level, labour-intensive
mines come from paying workers, Mr Baxter said.
Gold output of 167 tons
last year was the lowest since 1905.
If gold production keeps
falling at the 8%-a-year average rate it has recorded in the past decade,
South Africa's production could fall below 100 tons by 2020, Mr Baxter said.
With declining production
there is less gold to pay for fixed costs. Cash costs have increased by 23%
in the past five years for South African gold mining companies, he said.
The gold sector's output
in May fell 14.6% year on year, Statistics SA said last week.
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