Gold Decline in S. Africa to Accelerate Under New Contract
By Antony Sguazzin
Johannesburg, Aug. 12 (Bloomberg) -- Gold producers in South Africa, who mine one of every five
ounces worldwide, said a labor accord reached this month will accelerate a decline in output from the
current 47-year low.
By threatening to strike, the National Union of Mineworkers won raises of 7 percent to 9 percent -- above
the nation's 6.4 percent inflation rate -- with more time off and other benefits for 150,000 workers.
Because labor represents half of costs and bullion prices hover at a 20-year low, producers may cut back.
``Believe me, if we compound 5 to 6 percent cost increases every year, we will turn gold reserves into
(unprofitable) resources'' not worth digging, said Chris Thompson, chairman of Gold Fields Ltd., the
world's third-largest gold company. ``It's absolutely infuriating, and I will not take full responsibility.''
Cheap black labor was used during apartheid to tunnel miles underground, shafts that now lead to cash
costs that are the highest in the world -- around $221 an ounce. South African miners are struggling to
compete with those in Australia and North America, where costs are as low as $180 an ounce, according to
Gold Fields Mineral Services Ltd.
Poverty
Gold Fields Ltd., Harmony Gold Mining Co. and Durban Roodepoort Deep Ltd., who together produce a
10th of the world's gold, on Aug. 1 agreed to a two-year contract for more than 50,000 miners. AngloGold
Ltd., the world's biggest producer, and Placer Dome Inc. settled with the union earlier.
In addition to the raises, the union won guarantees that miners at all companies except Durban Deep will
receive minimum salaries of 2,000 rand ($243) a month within two years, the industry's first base wage.
They also won three to four extra vacation days a year and greater benefits for workers who leave
employment due to illnesses such as AIDS. Gold Fields estimates that almost 27 percent of its 48,000
workers carry the HIV virus that causes AIDS.
Workers across South Africa are stepping up demands for higher pay and better working conditions seven
years after the end of apartheid, arguing that living standards for most black South Africans have improved
little.
Unions estimate that each worker helps support 10 other people, and 61 percent of blacks earn less than
$43 a month. According to a United Nations report, South Africa is the world's third most-unequal society.
To Their Knees
Management responds that better pay may translate into fewer workers, worsening an unemployment rate
already at 22.5 percent. Gold is South Africa's second-biggest export industry, after platinum.
At earnings presentations after the agreement, AngloGold said the settlement would add more than 6
percent to total costs. Thompson said it would raise Gold Fields' costs by 8 percent.
Should the gold price stay around current levels -- only about $20 an ounce higher than a 21-year low of
$251.95 -- the first to close may be mines such as Gold Fields' Oryx and St. Helena operations; Harmony's
Free State shafts are also vulnerable, said Johan Odendaal, an analyst at Merrill Lynch & Co.
``An 8 percent cost increase could bring them to their knees,'' Odendaal said of the Harmony operations.
``If the price stays around $260 an ounce, it will put enormous pressure on them.''
The increase could hurt even more should government actions lower inflation as planned. South Africa's
central bank expects prices to rise by a little more 3 percent by end of next year, half the current level.
Durban Deep, which just posted its first profit in nine quarters, could suffer even more. The company's
chairman, Mark Wellesley-Wood, told South African newspapers that a strike would have bankrupted his
company because its cash reserves are limited.
The NUM said it has extracted no guarantees from employers that the higher wages won't trigger job
losses.
``It's un-South African to cut jobs,'' said Crosby Moni, deputy president of the NUM. If job losses ``ensue
we would regard the employers as not taking us seriously.''
Even before the settlement Thompson forecast that South Africa's gold production will likely slump at
least 5.6 percent this year to below 400 metric tons. Last year, the country produced 423.6 tons, its
lowest output since 1954.
Bernard Swanepoel, chief executive of Harmony, said the industry will have to change its ways to stay in
business.
``There is no way we can let this industry go down this road,'' he said. ``We can't let 50 percent of our costs
get out of hand again.'' |
