Picture: Boxer Ngwenya.

No one has more to lose from gold’s bear market than local producers as workers digging in the world’s deepest, costliest mines threaten to bring them to a standstill unless pay is doubled.

Yesterday the metal slipped to as low as $1 223.54 (R12 352) an ounce, a record quarterly drop and below production and capital spending expenses at Sibanye Gold, Harmony Gold and Gold Fields, Bloomberg data show. Harmony’s South African production costs are the highest of the world’s 12-biggest producers by volume.

“Anything below $1 400 an ounce is sort of a red line” for South African gold producers, said David Davis, an analyst at SBG Securities. “There’s a vast difference between what labour unions are demanding and what South African mines can afford. It points towards… drawn-out negotiations that could end in dispute.”

Surging militancy among workers threatens to erupt into violence in the run-up to wage talks in mid-July as labour unions dig in for increases that could overwhelm companies’ profit. Strikes and related violence at mines last year that left at least 44 dead knocked 0.5 percentage points off economic growth, according to the National Treasury, and led to pay gains for some of double the pace of inflation.

Violence extended into this year with three workers killed in the past six weeks including members of the rival National Union of Mineworkers and Association of Mineworkers and Construction Union.

The Africa gold mining index has dropped 50 percent in the past year, compared with a 19 percent decline in the MSCI world metals and mining index.

South African costs are steeper than peers abroad because of the higher levels of labour needed to dig its ageing mines. Gold companies employ 142 000 people in the country.

AngloGold Ashanti’s Mponeng mine is the world’s deepest gold operation with seams 2.4km to 3.9km underground.

Toronto-based Barrick Gold, the biggest producer, operates mines at or near the surface and last posted output and capex costs of $919 an ounce, 26 percent below yesterday afternoon’s London fix of $1 236.25.

“The cost of production for South African [producers] has been propelled much faster than for other producers, due to labour-intensive mining practices combined with sharply rising wages,” analysts led by Peter Archbold at Fitch Rating wrote in a report. The result was that the country’s mining houses “are the most exposed to the risk of falling gold prices”.

AngloGold said in November it was cutting costs and reviewing operations’ efficiency in and outside the country.

“That work is well under way and we are moving with all appropriate speed to achieve meaningful and sustainable results,” spokesman Chris Nthite said on Monday.

Harmony would in August detail plans to reduce service and corporate costs in South Africa by R400 million and lower capex across all projects by R1.4 billion, spokeswoman Henrika Basterfield said this week. Gold Fields spokesman Sven Lunsche and Sibanye spokesman James Wellsted declined to comment.

Sibanye, South Africa’s second-largest gold producer by output, reported total costs including production and capex of $1 334 an ounce for the three months to March. At Gold Fields, South African costs totalled $2 195 an ounce as the company spent money on building its South Deep plant.

Similar costs at Harmony, the country’s third-largest producer, were $1 487 an ounce, including operating costs of $1 220 an ounce and $61.07m of capital spending on the 228 528 ounces it mined during the period.

AngloGold, the country’s largest gold producer, was the only South African bullion producer whose costs, at $1 204 an ounce in South Africa, were below the current spot gold price. It posted cash costs of $896 an ounce and $101m of capital spending on the 327 000 ounces it mined for the quarter to March.

Globally, gold mining companies are moving to include capital expenditure in their per-ounce cost figures. Barrick Gold and Goldcorp, the biggest producer by market value, have begun reporting “all-in sustaining costs”, a measure that for Barrick includes cash costs, general and administrative costs, rehabilitation, exploration, mine development expenditures and sustaining capital expenditures.

While the prospect of increased wages might add to local gold producers’ already high costs, a dip in the rand from last year helped them, said Richard Hart, an analyst at Macquarie First South Securities in Johannesburg.

Still, any benefits from the unit may be swamped by union demands for higher wages.

Gold companies “cannot afford any increase in wages and benefits”, given fourth-quarter production, the SA Chamber of Mines said last week. “This is of course rather an unlikely outcome.”

Net income at all four of South Africa’s biggest gold mining firms is estimated to drop this year from last year, with Harmony’s earnings forecast to fall 50 percent to R1.35bn. – Bloomberg