Monday, November 16, 2009

South African gold on final deathwatch

The Union Building in Pretoria, South Africa.Image via Wikipedia

Got gold?

Top grade scientist finds residual gold is more than 90% less than claimed.


JOHANNESBURG - The apparent bottom line in a paper published in the South African Journal of Science is that South Africa's gold industry is on final deathwatch, despite claims of massive existing below-ground reserves. Chris Hartnady, research and technical director of Cape Town earth sciences consultancy Umvoto Africa, has found that South Africa's Witwatersrand goldfields are around 95% exhausted, and anticipates that production rates should fall permanently below 100 tonnes a year within the coming decade.

Gold production from the Witwatersrand, the biggest known gold field in the world, peaked at around 1 000 tonnes in 1970 and has declined ever since. Hartnady says that while initially (1970-1975) the decline was "quite precipitous", it has been interrupted by only short periods of slight trend reversal (1982-1984 and 1992-1993).

Leon Esterhuizen, a London-based specialist analyst at RBC Capital Markets, has reacted to the research by saying that "South African gold is dying -- this is not new news", but adds "that it may be dying faster than we currently believe is novel". On the levels of reserves, Hartnady finds that the South African "residual gold reserve" after production through 2007 is only 2 948 tonnes, a little less than three times the 1970 production figure, and much less than 10% of the officially cited reserve.

The country's gold reserves are less than half of the current United States Geological Survey (USGS) estimate of 6 000 tonnes, and the country is not first, but fourth in world rankings, after Australia (5 000 tonnes), Peru (3 500 tonnes) and Russia (3 000 tonnes), Hartnady's research shows. The USGS currently cites South Africa's gold reserves at around 6 000 tonnes, while SA claims a 36 000 tonnes reserve base figure (or about 40% of the global total). Hartnady's findings are based on Chamber of Mines figures and mathematical modelling pioneered by the distinguished American geologist M King Hubbert.

Esterhuizen comments that "most recent indications from Harmony (even with gold bullion at new dollar records over $1 100/oz) is that its old shafts - effectively the Free State gold field - are dying. DRDGold has got Blyvooruitzicht on life support and is trying to get permission to keep the plug in for a little bit longer (with everything around Blyvooruitzicht now having been shut down), while Pamodzi Gold's demise and Simmer & Jack's failure at Buffelsfontein just proves the point -- all of this, at record gold prices in rand terms".

Analysts have also expressed surprise, if not amazement, about recent comments from AngloGold Ashanti CEO Mark Cutifani to the effect that its South African operations will be restructured. How is it, analysts ask, that "the highest margin operating gold assets in South Africa are . . . being re-structured ?"

A growing number of sceptics are also asking whether Gold Fields's developing South Deep operation - which it bought in 2007 for $3bn - will truly ever be able to make money. It is already evident that it will probably never deliver a real return on the capital that it took to bring it to life, says Esterhuizen. He also notes particular current promises by both Gold Fields and Harmony of growth from the South African base over the next three years.

Hartnady's prognosis is pretty grim: "Given the energy and environmental problems associated with ongoing groundwater control, water-resource contamination by acid mine drainage, and the possibility of widespread mercury and other factors of pollution caused by illicit underground ore-processing by the zama-zamas (illegal miners), the glory days of South African gold mining appear to have arrived finally at an ignominious end.

"There can be no further illusions, maintained by unrealistic expectation of a future fortune, about the seriousness of the present situation. In their various possible forms, the slow-onset disasters of environmental degradation associated with the death-throes of a formerly illustrious industry now pose a serious threat, and may ultimately cost far more than the net present value of some 3 000 tonnes of gold".

Esterhuizen mentions a number of other challenges faced by South African gold diggers: royalties (a new thing), zooming electricity charges, BEE (black economic empowerment) burdens, safety shutdowns, "massive security costs", and ever-present currency exchange control. In these areas, Esterhuizen argues that "government may achieve a ‘small' miracle or, more likely, simply hasten the end".

Esterhuizen says that "a small opportunity may be the possible stronger future uranium market- effectively reducing gold costs by obtaining revenue from by-products". This is already happening at a number of gold mines where uranium is also produced. Certain closed shafts known to hold good quantities of uranium are also being investigated for possible recommissioning.

Source: market & company data, compiled by Barry Sergeant

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