Death of an Industry

The bankruptcy of Pamodzi Gold is symptomatic of the dying South African Mining industry. With diamond mining reduced to the level of 19th century prospecting, scratching for a livelihood and the mighty De Beers, once prosperous and in total control of their destiny and market, now technically insolvent. The gold mining industry in South Africa with technical problems and challenges, are unable to find investors to start new mines. The platinum mining industry is struggling to maintain profitability in a realistic market environment. It is littered inefficiency, with BEE deals and unsustainable “mining ventures”.

Using the Pamodzi example and a bit of forward thinking I see Sentula finding a partner who will invest money to buy the “assets” at a rock bottom price. They will inject some working capital come up with a plan promising a pot of gold and raise more cash from the market. Mining will recommence the company will make losses but promises of future profitability will suck in the gamblers and the price of the stock will increase. A few people, mainly  management, investors and the astute dealers will make money, probably lots of it, however many people; greedy people, poor people and stupid people will loose money. Some will loose a little and say nothing to save them the embarrassment; others who lost a lot will kill themselves. When the mines reopen the unions and workers will rejoice. The Minister will laud the businessmen for showing confidence in the South African economy and the BEE partners will toast everyone for their contribution in making the rebirth of the mines possible. Being increase time the workers will embark on a strike for more pay. During the subsequent strike, management, under pressure, to keep the marginal operations going and to protect the revived baby from harm, brings in contractors to minimise disruption to production. This results in anarchy and the killing of a contract labourer by the strikers, causing the mine to grind to a halt. After severe financial losses, operations restart but a comrade dies in an accident and the workers down tools in sympathy. By now, the projected margins are paper thin or non-existent. A week later inspectors of the DME arrive for a “Blitz”. They find a worker not wearing his Rescue Set and issue a section 54 order. As a result, operations are generally suspended for 24 hours or more. The Mine Manager, a caring man, because of the stress and the threatened permanent closure of the mine dies of a heart attack. The mine in this period produced gold. Unfortunately, it was produced at a loss and no value was generated. The people who made this miserable tale possible will walk away. They will blame the markets but nobody will bother to deal with the real issues. During this time, five people died in road accidents and thirty people were murdered in the areas in which the mines operate.

Who would invest in such a venture? It is better to invest your money in a decrepit sewage plant gushing raw sewage into the Vaal River. At least the technology to clean human excrement is readily available and no one will call you a killer of people.

It is almost inconceivable. We are witnessing the demise of the South African gold mining industry. One of the two pillars that supported the South African economy for more than a century are crumbling right before our eyes giving rise to the obvious question; Why now; with the gold price at its highest level in 20 years? How do we allow an industry to die when we still have some of the biggest gold resources known to man? How do we stand by and see thousands of people losing their jobs in a country with the third highest unemployment rate in the world?

The reason for this is simple. Economics and the market. The cost of mining gold and the resulting lack of profitability of the business do not justify its existence. We all know that, or do we? Many do not realise the simple principle that the lack of profitability and resultant lack of competitiveness can, and will kill an industry. Conversely, and here is the dangerous part, many “leaders” who are aware of the ills of the industry, do not speak about it because it is not politically expedient to do so. I read an article in the M&G recently about a mineworker who religiously monitors the platinum price on TV. To him the price determines his continued employment or otherwise. The concept of profitability does not enter in the equation.. The sad reality is that he is only one of 400 000 mineworkers who hold this belief, people who believe that the mine owners set the price of the commodity they produce. Four hundred thousand mine employees do not know that cost has a telling effect on operations and they do not understand the factors impacting on cost. They only understand the “Market of Economic Myths” espoused by their leaders.

The terminal illness afflicting the gold mining industry stems from the nature and depth of our deposits. As a result, gold mining in South Africa, is technically complex. That should not be a problem. It took us one hundred years to get from reef outcrop to 4000 metres, a magical achievement. In the last 20 years, despite the increasing rate of technological development, we have gone nowhere because there was no money to develop technology Developing technology requires skills, expertise, investment and passion. The South African mining industry was built by hard work; the blood, sweat and tears of true pioneers. It was built by people prepared to take big risks in order to reap a well earned reward. Most of these attributes are now nowhere to be found. Skills fled, because of falling productivity, margins are paper-thin. The prevailing mood around the industry are characterised by a reluctance to face the truth, avoidance of tough decisions and a false sense that somehow a miracle will happen and all will be well. Today the culture in South Africa has changed. We must avoid risk, keep hard work to a minimum and reserve competition  for the sports field. Rewarding risk is politically incorrect, everybody have rights, privileges cannot be earned and should you by chance have skills or knowledge that, in the opinion of some, has been acquired unfairly, all efforts must be focused on avoidance of the effective use of that skills and knowledge. We live in an environment where people demand to eat eggs without breaking the shells. As a result of this madness, we have not seen any major gold mining project since the early nineties. Gold mining companies in South Africa are marginal and struggling whilst global companies operating in competitive market environments contain costs, maintain margins and deliver good profits. Barrick, Newmont and Randgold Resources are doing well whilst past have fallen onto bad times. The former king of gold, Anglo American, sold its gold division, Goldfields are struggling and the South African number three, and Harmony is a marginal miner. For the rest…nothing. South African gold production in 2007 was one third of levels in 1978, but more significant is that the period 1993 to 2007 accounted for two thirds of the wipe, certainly a rapid shutdown. Before we can even think of fixing the industry, we must face and understand the brutal truths facing us:

  • Mining has always been a risky and hazardous, so is motorcar racing and policing in South Africa. I am yet to see the SAPS strike every time a police officer is shot in the line of duty and many racing car drivers pay good money to put their lives at risk for the spectators. I can safely say it is more risky to just live in South Africa than working in a deep gold mine if you consider that the life expectancy of South Africans have dropped from 65 to 51 in the last fourteen years. For gold mining and mining to survive in South Africa, people are going to die.
  • Labour cost globally, and in competitive countries unlike in South Africa, are driven by supply and demand. Here, with abundant labour at our disposal we restrict employment through counter-competitive measures such as legally entrenched labour practices and unrealistic minimum wage levels. Artificially elevated wage levels with high unemployment are preferred to a market related living wage with low unemployment. People are going to have work harder for less.
  • Institutionalised laziness promoted by trade unions and political leaders in the name of ideology. The deliberate destruction of employment opportunities by declaring certain types of work as meaningless and undesirable, resulting in people resorting to crime rather than work. The power of the Unions will have to be broken.
  • A development fund can be created to develop the future and to allow our children to benefit from our resources, a reserve similar to the Norwegian Oil Model.

The Unions use safety to score points with members. They prey on the ignorant by portraying themselves as fighters for the poor and oppressed. In the process they keep their membership high and prevent the entrance of competitive alternatives

The CEO of Goldfields stated recently that Kloof reduced fatalities by withdrawing from remnants. Is he telling us the strategy is to withdraw until nobody is left underground? No work, no workers and no risk. It sound like a pretty good growth strategy and it should make the government and unions happy. Nic Holland, the hero killing all those meaningless jobs. Whilst researching and writing this, Anglo Ashanti results was published and CEO Mark Cutifani, in a very blasé manner of handedly fashion, painted a bleak picture for the future of Anglo Ashanti’s South African operations.

To return the gold mining industry to a growing industry we need commitment to profitability. Profitability will encourage investment in green fields projects and R&D. However, no amount of money will prevent the loss of life in the quest to conquer depth and nature. Maybe we need to be reminded of the number of people who died during the construction of the Panama Canal, the Hoover Dam and the conquest of space through space travel. Today we want to forfeit less whilst earning more than our predecessors who died to get us to 4000 metres underground.

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4 Responses to Death of an Industry

  1. […] the “good news” story turns out to be a common occurrence. South Africa, having the best Chrome Ore resources in the world by far, developed and grew from a small base in 1980 to the worlds primary […]

  2. Thapelo Mpai says:

    i agree labour instituitions are the ones killing jobs with their unrealistic ideologies, we need realistic solutions to revive our industries…

  3. Chris Mabuya-Gexe says:

    what a great article! the author seem to have little understanding of SA mining history though. chickens have come home to roost unfortunately.

    what the author refers to as his predecessors instiled racial hatred that was pervasice in all of SA’s fabric including the mining industry. one cannot talk of the failing industry without understanding the prevailing material conditions in had to survice within. in this regard the author is being highly naive.

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