South Africa’s Platinum and Gold Mines Are in "Downward Spiral" – Andy Jackson

Posted By Henry Bonner ([email protected])

IPM Group: With the collapse in USA gold mining production of approximately 14% year on year and below with South Africa, the precious metal investment story is approaching a confluence of metrics, supply / demand deficits, falling production, monetary system crisis  - truly a perfect storm ?

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South Africa is a tough place to do business as a miner. Labor uprisings and tense relations between unions and mining companies are threatening mines’ long-term survival.

Mines may close or become mechanized in the years ahead, and production could drop substantially during this rough transition.

The “old way” of mining in South Africa will probably disappear, says Andy Jackson, an exploration geologist at Sprott Global Resource Investments Ltd.

He believes that many mines will shut down if they can’t replace workers with machines.

Around 8% of South Africa’s economy depends on mining.1 South Africa is the 6th largest gold-mining country in the world, producing around 165 tons in 2014.2 It is also the world’s largest platinum producer, accounting for 78% of the world’s platinum production in 2013.3

Andy, originally from Zimbabwe, foresees for South Africa “an irregular and bitter downward spiral of both the mining industry and the country’s economy.”

Andy explains why he sees this decline in gold and platinum mining, and who may benefit:

The precious metals mining industry in South Africa is going from bad to worse. Political changes, low metals prices, and mines that are getting deeper and tougher to mine are slowly killing the gold sector.

The South African labor unions, in particular the dominant National Union of Mineworkers (NUM), have always demanded outrageous wage increases (30-120%, in a 5-6% inflation environment) during annual negotiations. Employers, acting through the Chamber of Mines, would counter with an increase of around the inflation rate.

After a bunch of posturing from both sides, they would agree to increase wages to be even with inflation, plus a few percentage points.

But this annual pantomime has been totally disrupted by the arrival of the Association of Mineworkers and Construction Union (AMCU).

AMCU says that its established rival NUM has been getting too cozy with the government and with mining companies. This smaller union is saying that the average mineworker in South Africa has seen no significant improvement to his lot in life since the end of apartheid. Of course, they’re largely correct on that front.

And the AMCU is preaching a much more radical approach, which has been rapidly luring workers away from the more established NUM. Julius Malema, the leader of radical populist party the Economic Freedom Fighters, has thrown his support behind AMCU.

Last year, we saw the conflict between AMCU and NUM come to a head in the platinum sector.

The Rustenburg platinum mines suffered a 5-month strike over wages.

AMCU had demanded even more outrageous increases than NUM in order to outdo its rival. It then refused to play the usual charade of reaching a compromise. The result was many months of minimal production, and violence between AMCU and NUM. NUM lost a bunch more members to AMCU.

Those who wanted to keep working bore the brunt of the violence and the mining companies eventually crumbled (probably hoping to use the situation to allow them to close some loss-making shafts).

Anglo American Platinum, which owned the mines, reported that it had lost a third of annual production because of the strike. It even announced plans to sell mines after the strike ended,4 a decision that it has now followed through with. Around a week ago, it sold several South African mines to Sibanye Goldfor $330 million in cash and stock. 5

But the damage won’t end there.

Now AMCU is turning its attention to the gold sector. NUM can’t afford another face-losing confrontation, so it has upped its ante, demanding larger increases and negotiating more strenuously. Neither union has much regard for how low commodity prices reduce the overall profitability of these mines.

There was a great quote in an interview with a NUM official last month. He said something along the lines of: “We know the mining companies can’t afford a big increase, but I am mandated by my members to get a big increase. So we must strike.”

The main mining companies have increased their offers and NUM has accepted the improved terms.  The Solidarity Union (mainly made up of skilled and semi-skilled workers) has also accepted, but the Chamber of Mines says it has to be accepted by all the unions before it can be implemented. AMCU has rejected the offer and so is again controlling the game.

AMCU is also appealing a Labor Court decision last year that any strike at AngloGold Ashanti, Harmony, and Sibanye’s gold operations would be considered ‘unprotected.’ They were bound by an earlier collective bargaining agreement that they were party to. That appeal is still in court.

Gold mining companies are warning that the wage increases, coupled with a low gold price, will result in layoffs. AMCU views possible layoffs as a threat targeted towards its members. It has recently vowed to oppose downsizing in both gold and platinum industries. They have threatened to take action if layoffs occur.

The South African government is trying to please both sides. Mines produce revenue but the votes come from labor.

So we’re seeing a 4-way struggle between the mining companies, NUM, AMCU and the South African government.

It appears that in the long term there’s no escaping the problems that ail these mines. Work conditions are increasingly harsh as the mines become deeper and hotter, but they are too unprofitable to pay workers high salaries.

Unless some new technological innovation occurs that allows mechanized mining in economically-stretched gold and narrow-reef platinum mines, they will go the way of 19th-century whalers.

And if mechanization and automation do save the mining industry, it will be a rocky changeover, with unions lashing out against escalating layoffs.

Over the next few years, expect more discontent and unrest as mines continue to pay low wages, shut down, or move towards automation.

Is there an upside?

New mines that are developed using automation, employing a low number of skilled and highly-paid workers from the outset, might avoid the turmoil that will affect older gold and platinum mines in South Africa. New mechanized platinum mines, which employ fewer people and offer better pay and superior working conditions, might stand to benefit.

The world is dependent on new platinum supply for industrial uses, and the price of platinum could rise as production at older mines decreases.






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