What Do We Do When the Mines Stop?

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"The problem is that we have mined out most of the country's safely and cheaply accessible gold."

Much of South Africa's history rests on our gold mining industry. For decades, South Africa was the world's largest gold producer, our biggest city—Johannesburg—is the product of our gold mines, and many of our biggest companies were born in the gold fields.

Thus it's hard for us to accept the fading of our gold industry, even though the evidence of its demise is incontrovertible. The problem is that we have mined out most of the country's safely and cheaply accessible gold. There's plenty of gold left in the ground, but it's buried too deeply to be mined safely and economically within the context of South Africa's laws, cost structures and regulations.

There are a number of factors influencing the decline in our gold industry, including issues of mine safety, rising costs, and the nature of South Africa's gold deposits.

In South Africa, mine safety is a major flashpoint among mineworkers, government and mining companies. Many areas of the country have been continuously mined for decades. South African mines are the deepest in the world, and the risk of accidents increases with the depth of the mines.

When evaluating mining projects, local mining companies must decide whether or not a shaft can be mined safely and cost-effectively. Safety and cost concerns have led to many mine shafts being shuttered, leaving the millions of ounces of gold in them untouched.

Due to various pressures, costs on local mines have been edging upwards for years. Wage costs have been rising fast for several years, and continue to do so.

Other costs have also increased, particularly electricity. Rising electricity costs are a burden on local mines, and constrain their capacity to grow and increase production.

Another challenge facing local mines has to do with the way that mine costs and income are structured. Basically, the gold price is set internationally and is denominated in dollars.

On the flip side, local mines costs are denominated in rands. Therefore, they are exposed to currency risk. If the rand is weak against the dollar they do well, when the rand strengthens they struggle.

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