ANALYSIS-SAfrica gold firms vow tough line on costs
11:15 a.m. Jul 29, 1998 Eastern
By Darren Schuettler
JOHANNESBURG, July 29 (Reuters) - South African gold companies, enjoying
fat profits again after several lean quarters and a painful
restructuring, have vowed to resist the temptation to return to their
old free-spending ways.
South Africa's slumping currency has powered the rand gold price to new
heights in recent weeks, but a sharp depreciation also brings inflation,
higher costs and the urge to mine marginal areas.
As the industry rolled out strong quarterly results this week,
executives pledged to keep a tight grip on costs.
''Greater effort will have to be made to minimise the effect of
inflation on our margins. It will require a further commitment from
management and labour,'' senior JCI Gold (JCGJ.J) executive Gordon
Miller warned on Tuesday as JCI units reported double-digit profit gains
in the June quarter.
Anglogold Ltd (ANGJ.J) and Gold Fields Ltd (GFLJ.J), respectively the
world's two biggest gold producers, also reiterated their commitments to
keep inflation-driven costs down as they savoured a stronger rand gold
price.
Despite union calls to halt retrenchments in view of the gold rebound,
companies say they will not base the industry's long-term future on
short-term market gyrations.
Most mines have slashed jobs, discarded unprofitable shafts, and
incurred heavy restructuring charges in a bid to trim costs that were
among the highest in the world.
''They have been through one of the most difficult periods in their
history. There has been major pain and major restructurings and I don't
think they will easily go back to their old ways,'' said Nick Goodwin,
an analyst with Fedsure Asset Management in Johannesburg.
The rand has lost 20 percent of its value against the U.S. dollar since
late May, sparking a rally in the price of gold denominated in rand.
While the rest of country despairs over a battered currency, South
African gold miners -- who sell bullion for dollars, but pay costs in
rand -- are smiling.
The rand gold price has soared to over 1,800 rand per ounce in the wake
of the currency crisis, compared to 1,500 rand on June 1.
The downside to this good news is inflation -- a concern highlighted by
South Africa's central banker last week.
''Our problem is that depreciation normally leads to an increase in
inflation and therefore a rise in the cost of production,'' Reserve Bank
Governor Chris Stals told Reuters.
''So whatever advantages the gold mining industry or other export
industries may get out of the depreciation, there is always a danger
that it can be very short-lived and absorbed again very soon by rising
costs of production,'' Stals said.
If the rand remains weak, as most economists expect, and profit margins
continue to bulge, inflation pressures will creep up on the gold
companies, analysts said.
''I would say it will be 12 to 18 months before we notice an increase in
costs due to those reasons,'' Goodwin said.
But he noted mine executives are more committed today to containing
costs, particularly in dollar terms, as they vie to compete with leaner
international gold companies in Canada, the United States and Australia.
South African companies averaged cash costs of just over $300 per ounce
in 1997, compared to $216 per ounce for U.S. firms, $221 per ounce for
Canadian companies and $261 per ounce for Australian miners.
Tony Cadle, gold analyst at Rice Rinaldi Turner and Co, said labour
negotiations next year will be a key component of the industry's future
costs.
South African mines are very labour intensive with employee costs
accounting for about half of an average mine's production costs.
Last year the gold industry struck a watershed two-year wage agreement
which entered its second year this month with an average nine percent
wage gain.
''They have a minimum one-year window until the next wage talks,'' Cadle
said, adding that union negotiators will likely demand a wage increase
matching the rate of inflation.
Economists have forecast that South Africa's inflation rate will be
around eight percent by December, year on year.
((Johannesburg newsroom, 27 11 482 1003 newsroom+reuters.co.za))
Copyright 1998 Reuters Limited. |
