Predicting the future of gold mining in South Africa has become easy these days. With a lot of conviction, I can forecast that production will continue to decline. Having peaked in 1970, it fell to a 109-year low of 167 tons in 2012, at which point Peru overtook us in the global ranking.
Forecasting seems particularly easy at this point in time because, for exactly 20 years now, declining output has followed a distinct linear pattern (if we disregard the effect of the 2012 strike). In itself, this is highly remarkable since it has completely disregarded the law of price elasticity: no supply response at all following bullion’s spectacular price increase after 2001.
As financial analysts, we spend most of our time trying to identify trends; doing projections and what/if scenarios on data in order to safely guard our clients’ savings into the future. We therefore feel strongly inclined to interpolate, based on such a long and linear pattern. Unfortunately, the outcome of that exercise is not a happy one: after more than 135 years, many of these as the leading, even dominant, global producer, South Africa is likely to hoist its last skip of gold-bearing ore from the once giant Witwatersrand deposit in 2019.
Even that date is at risk of being sooner given recent developments. These include the falling gold price, which many analysts predict will continue; and, in particular, mining companies’ desperate response to these falling prices, which has been to drastically curtail their capital expenditure.
While this has saved their cash flow problems in the short term, their actions come at the expense of the life of the reserves. And when you haven’t got much of the latter, then the impact of a lack of investment becomes more severe.
Last but not least, if the Association of Mineworkers and Construction Union (Amcu) has its way in the present round of wage talks, it will shave off most of whatever little life is left in the gold industry.
About 130 000 direct jobs will be lost, with many more disappearing on the periphery in goods and services. By 2020, about R25 billion of earnings annually will have stopped flowing to employees. Sadly, the poor will be particularly hard hit in the labour-supplying areas, where mineworkers tend to have dependents.
What are the reasons for the gold mining industry’s protracted deterioration? Obviously declining grades and the general exhaustion of deposits have been visible for many years, even though there is still a lot of gold left. In addition, I am on public record warning company management that their personal greed is the biggest stumbling block to change.
However, it is not the pay that is the issue because, though exorbitant in many cases, executive pay is a small part of the total cost base. So my criticism has had more to do with the fact that management should lead by example. How can the chief executives of gold mining companies justify their annual increases when they have presided over such a decline in the sector?
The disappointing upward trend in executive pay is a global one that is receiving more attention, with the most recent instance the outcry over Anglo American Platinum (Amplats) chief executive Chris Griffith’s pay. Though his package was excessive, it was not high by global, and local, standards, given the complexity of the company. Few of the mining group’s peers worldwide have to contend with as many complex issues as Amplats does.
Unfortunately, the focus on the huge pay differential between executives and mineworkers is often used to detract from the real underlying industry problem: we are in the process of pricing ourselves out of the market. To illustrate my point, I quote the following data from AngloGold Ashanti in terms of gold produced per total employee costed (TEC) during the second quarter of last year:
South Africa: 4.2 oz/TEC
Continental Africa 9.2
Clearly, our gold mines are more labour intensive. Gold mines in general are price takers, which means that we are competing in terms of our labour costs (typically greater than 50 percent of the total) versus the price of diesel and cost of equipment. It would help if we could become better at increasing productivity. But sadly, we produced 39 percent less gold per mineworker in 2012 than we did in 2002.
In addition, the gold industry has been on the receiving end of a successful organisation, the National Union of Mineworkers (NUM). It has managed to deliver consistently to its members, not only increases well above inflation, but also well ahead of many other sectors of the economy. When the NUM was created 31 years ago, mineworkers were worse off than factory workers. Today, they are comparatively well paid, particularly on a total package basis. In view of the NUM’s success, it is difficult to understand why mineworkers are unhappy. Why the longest strike action ever? Why now?
While the call for “a living wage” sounds noble, are the demands by Amcu reasonable or even fair in comparison with the minimum pay of other gold-producing countries? The current industrial relations situation is tricky and, if handled badly, could result in a lot of pain, particularly for gold miners. As a keen observer, my suggestions are:
- More needs to happen regarding how much chief executives are paid. My previous appeal to “come down or get out” has had some success, but more needs to happen.
- I don’t believe our mineworkers are still underpaid. So in return for the chief executives’ sacrifices, I would suggest we need to negotiate a general commitment from labour agreeing that any real increases in pay are extended only in return for real increases in productivity.
- If I was a mineworker, I would ask myself which union has delivered and which one makes more economic sense. I would question the ulterior motives for the strike.
- Much of the strike participation is enforced through threats and violence. I am happy that the new minister has shown some leadership and started to tackle the situation. This is not easy for him because the government is not really perceived as impartial by many: first because of its association with NUM, and second because several influential politicians have, in the past, become mine owners through empowerment deals. I would like to see the regulator democratising the bargaining process in the industry by introducing legislation that requires proper balloting before and during industrial action.
- I have admiration for what the NUM has achieved. But the survival of the gold sector, as well as a large part of the union’s constituency, is under threat and this requires the NUM to take a leadership position, especially when Cosatu is weak.
One of the developments in the mining industry that puzzled me was the collapse of the lower-wage categories 1-3. Though it was well meant in terms of uplifting the poor, over the years it has created some unhealthy distortions. Minimum wages have risen much faster than skilled ones and this has engendered unhappiness among skilled employees, particularly rock drill operators. It has also crowded out the youth and the rural poor.
President Jacob Zuma has voiced his desire to lower unemployment and help the youth, but his idea to give companies money if they employ workers has been blocked by Cosatu until now. Perhaps the NUM could pre-empt the outcome of that battle and help our country and the mining sector by supporting the idea that the gold mining industry reintroduces wage categories 1-3. As in other countries, these should be pitched very low, but should be coupled with increased development and skills training. That could improve the potential earnings of mineworkers and improve South Africa’s fortunes.
* Mike Schroder is a portfolio manager at Old Mutual Equities.