Gold and platinum prices may be at their highest levels in two decades, but the strength of the rand against the dollar has led South African mining companies to look for ways to cut dependence on their home country and join the new global gold rush.
South Africa is the world’s biggest producer of gold, with a 40% share of the global market and more expertise in deep level mining than can be found anywhere. The country’s reserves are still plentiful, with one of the newest mines, South Deep sited close to Johannesburg, having more than 70 years worth of untapped reserves.
With the increasing demand for platinum worldwide South Africa should be in a strong position, with an estimated 200 years worth of reserves of the sought after metal. However, South African mines are capital intensive as deposits are at great depths, with one mine having shafts 3.5 km underground. Add to this is the relatively high cost of labour, which accounts for 50% of all outlays at South Deep, and you have an industry which runs on tight margins at the best of times.
The rand has appreciated by 88% against the dollar since 2001. Last week, the currency briefly dipped below the symbolic R6:$1 mark before bouncing back. While the record prices for gold and platinum have led to a tripling of exploration budgets worldwide, with companies prospecting for precious metals in Central Asia, the rest of Africa and the Americas, in South Africa it remains barely economical to maintain current levels of production.
Furthermore, the continuing uncertainty over mineral rights legislation makes it understandable why major players such as Gold Fields are looking to greener pastures abroad.
The company, the world’s fourth-largest gold producer, plans to develop a R1.77bn ($297.48m) mine at the Cerro Corona deposit in Peru. In addition, through a take over of Bolivar Gold worth $360m, the company has also acquired a new mine in Venezuela. Gold Fields’ foreign operations, which also include mines in Australia and Ghana, account for one-third of their total annual output of 4.2m ounces.
Gold Fields received the go-ahead from the Peruvian government for the Cerro Corona project last week, the company’s chief executive Ian Cockerill told Bloomberg last week.
“We now have a foothold in a key area of future growth,” said Cockerill, with construction work scheduled to start in February next year. The project was in line with the company’s aim of boosting annual output from outside South Africa to 1.5m ounces by 2009, he said.
However, the Bolivar Gold deal still has at least one hoop that has to be jumped through, with Scion Capital LLC, a California-based fund that owns 19% of Bolivar, trying to block the buyout through a Canadian court. Scion’s suit, which will be heard in early February, claims the Gold Fields’ offer undervalues the Peruvian operation and is to the detriment of its investors.
Anglo-American, the world’s second-largest mining company, is now looking for a way to reduce its stake in its South African gold interests. The company announced last week that it had hired Goldman Sachs to provide advice on how to cut its 51% shareholding in Anglo Gold Ashanti.
Possible buyers include South African mining giants Harmony and the Canadian mining firm Barrick. The latter is currently in the process of merging with the fellow Canadian miner Placer Dome, in a $10.4bn deal that has just been approved by Barrick shareholders. If the merger clears all hurdles, it will see the formation of the largest mining company in the world. Placer holds a 50% stake in the South Deep deposits, though there are reports that Barrick management favours selling these off if the merger takes place.
John Bradenham, South Deep’s CEO, said he believed that mine would be attractive to investors simply because of the body of ore. However, he put a codicil on this, saying that if the US dollar:rand exchange rate stayed where it presently was the future for the South African mining industry was bleak.
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