You are here
Malaysia''s former prime minister urges businesses to get out of dollar
By Jackie Range
Dow Jones Newswires
Monday, March 28, 2005
http://sg.biz.yahoo.com/050329/15/3rjq2.html
LONDON -- Drilling deep underground in dark, hot, and wet conditions,
South Africa's gold miners may have little idea their industry is
facing its biggest challenge yet miles above their heads.
While rival companies with dollar-based costs bask in a high gold
price -- in December it reached a 16-year peak -- South Africa's gold
miners have been hit by the rand's strength against the dollar and
rising costs. Taking into account all their costs, half of South
Africa's gold mines are currently unprofitable.
As a result, gold industry executives are taking some drastic steps
to give their business a future. Consolidation, diversification, cost-
cutting, mining higher grades, and closures are all on the menu.
"We're all playing a sort of game of last man standing," said Mark
Wellesley-Wood, chairman of DRDGold Ltd. (DROOY), a Johannesburg-
based junior gold miner with assets in South Africa, Papua New
Guinea, and Fiji.
The South African gold industry is in terminal decline. In 1970 it
produced 70% of the world's gold, but by 2003 it accounted for just
14.5% of global output. Now, although South Africa is still the
world's largest producer of gold -- the industry contributes 2% of
the country's gross domestic product -- the prevailing economic
environment is leaving its key businesses scrambling to survive.
Over the last three years, the price in rand of a kilogram of gold
has dropped 22% to reach 84,990 rand ($1=ZAR6.228) a kilo March 24.
Rand strength has outpaced the rise in the U.S. dollar gold price,
explains Williams de Broe Mining analyst Alex Wood. So while South
African miners have been paid more for their gold, their costs have
grown proportionately faster -- erasing gains.
Wood says margins have been squeezed by above-inflation wage
increases and higher outlays on energy, among other costs.
"Probably the most pressing question facing South African gold mining
companies is how to adjust to the current low rand/kg gold-price
scenario," Harmony Gold said in its December quarter earnings
statement. Its widely believed, it added, that the rand could
continue to be strong for at least another 12 months, driven by the
weak dollar.
It's for this reason, according to one analyst, that Harmony Gold
Mining Co. (HMY) Chief Executive Bernard Swanepoel "had no choice"
but to table his all-paper bid for South African peer Gold Fields
Ltd. (GFI) on Oct. 18 last year.
"He's in serious, serious trouble at Harmony and he needed better-
quality assets to see him through a period of a lowish rand/kg gold
price," said the analyst, who didn't want to be named.
Cash-flow from Gold Fields' better-quality South African and
international assets could help subsidize Harmony's marginal
operations, the analyst added.
On a cash-operating cost basis -- a metric used by South African gold
companies to compare their costs, which strips out items including
the cost of capital -- Gold Fields is estimated to need a rand/kg
gold price of ZAR72,000 to break even, while Harmony needs a rand/kg
price of ZAR80,000.
But Harmony Executive Director Ferdi Dippenaar dismisses this view,
saying the company made the bid for Gold Fields because its
executives reckon they can create value for both companies'
shareholders, "not because the company has any cash-flow problem."
Gold Fields is bitterly contesting the bid.
Also driving consolidation and corporate change is black economic
empowerment, the South African government's initiative to enable
those disadvantaged by apartheid to fully participate in the
economy. "Empowerment players emerge, take different assets from
players, and take those companies forward," explains Roger Baxter,
chief economist with South Africa's Chamber of Mines, an industry
lobby group.
South African gold miners have also moved to protect profit margins
by diversifying gold businesses geographically.
World number-two gold producer, AngloGold Ashanti (AU), has spread
its business over four continents, with 21 units, only seven of which
are in South Africa.
J.P. Morgan has cited AngloGold as its top investment pick among
South African gold miners. Analyst Steve Shepherd says the reasons
are twofold: "It is geographically diversified, therefore not as
exposed to the rand/gold price, and ... overall its assets are the
lowest cost of the South African gold producers."
DRDGold has also pursued a diversification strategy, spreading the
company's asset base into Asia. "We'd have gone bust last year" if
the company hadn't diversified, according to CEO Wellesley-Wood.
Some gold miners have also sought to protect profits through cost-
cutting measures. For instance, in the last nine months, Harmony has
axed 4,000 workers and 4,000 contractors. Numbers employed in the
industry overall fell 10% between 2000 and 2003.
Baxter, of the Chamber of Mines, points out that many of the job
reductions have come through "natural attrition" rather than more-
expensive redundancy programs. Technology and productivity
improvements also play a part in falling employment numbers, Baxter
added.
Still, there's "a lot of fat to cut" at Gold Fields' Driefontein and
Kloof mines in particular, an analyst said. Gold Fields employs only
around 45% of its labor force in revenue-driving, rock-breaking jobs,
compared with Harmony's almost 60%, according to one South African
gold mining analyst. Another analyst reckons Gold Fields' costs could
be cut by 20% to emulate Harmony's leaner cost structure.
Attacking higher-grade areas containing richer seams of gold within
an existing mine, is a method already in action at Gold Fields and is
employed across the industry to combat the weak price environment.
Gold Fields is using this approach now on loss-making shafts at its
Beatrix mine, in the Free State Province.
But while companies move drilling teams to different parts of mines,
closure of either shafts or mines is a last resort. Reopening them is
prohibitively expensive and companies loose the flexibility of being
able to move back into lower-grade areas of the mine if the rand/gold
price strengthens.
To combat the difficult price environment, however, Gold Fields,
Harmony, and DRDGold have already closed shafts.
Most recently DRDGold announced the provisional liquidation of its
Buffelsfontein Gold Mines Ltd. business. Hit by a severe earthquake
on March 9, this mine was already loss making -- contributing 75% of
the company's losses. One Johannesburg-based analyst estimates that a
rand/kg gold price of ZAR120,000 would be needed before this mine
could operate at a profit.
There could be more staff cuts to come at Harmony's Free State
operations, meanwhile, unless the company can persuade South Africa's
National Union of Mineworkers to introduce a new working practice.
Under the practice known as continuous operations, or CONOPS, the
mine is in production every day of the year, rather than the current
industry standard of 273 days a year.
This situation appears to be worsening, with the union at that mine
electing to strike over a number of issues, including the
introduction of CONOPS.
But Harmony's Dippenaar says CONOPS is just one of the methods which
can be used to make those shafts profitable. Harmony also uses other
measures such as cutting expenditure on consumables, mining higher-
grade areas and restructuring labor on the shafts.
"It is about restructuring and downscaling for profitability at those
operations and not about ultimate closure," Dippenaar said.
----------------------------------------------------
To subscribe to GATA's dispatches, send an e-mail to:
gata-subscribe@yahoogroups.com
To unsubscribe, send an e-mail to:
gata-unsubscribe@yahoogroups.com
----------------------------------------------------
RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kereport.com
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
http://www.resourceinvestor.com
Subscription sites:
http://www.lemetropolecafe.com/
http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS
Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com
Centennial Precious Metals
3033 East First Ave., Suite 807
Denver, Colorado 80206
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
cpm@usagold.com
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net
El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net
Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
Dublin 2
Ireland
+353 1 2315260/6
Fax: +353 1 2315202
http://www.goldinvestments.org
info@gold.ie
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com
Lone Star Silver Exchange
1702 S. Highway 121
Suite 607-111
Lewisville, Texas 75067
214-632-8869
http://www.discountsilverclub.com
Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
314-965-9797
1-800-280-9797
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
The Moneychanger
Box 178
Westpoint, Tennessee 38486
http://www.the-moneychanger.com
Franklin Sanders
1-888-218-9226, 931-766-6066
----------------------------------------------------
HOW TO HELP GATA
If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.
By check:
Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541
USA
By credit card (MasterCard, Visa, and
Discover) over the Internet:
http://www.gata.org/creditcard.html
By GoldMoney:
http://www.GoldMoney.com
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L
Donors of $1,000 or more will, upon request,
be sent a print of Alain Despert's colorful
painting symbolizing our cause, titled GATA.
Donors of $200 or more will receive copies
of "The ABCs of Gold Investing" by Michael
Kosares, proprietor of Centennial Precious
Metals in Denver, Colorado, and "The Coming
Collapse of the Dollar" by James Turk and
John Rubino.
GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.
