Is This the Swan Song of a South Africa's Mining Industry?

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"South Africa's gold mining sector is undergoing a dramatic change, the question is, what will it end up looking like?"

Mine dumps loomed large over my childhood. Growing up in the east rand of Johannesburg, a stone's throw away from the ERPM mine operations, they were a part of my skyline. When we were kids we went to the drive-in on top of them and, later on, tried to "dune board" down them. But, in the last few years they have gradually begun to disappear.

As the gold price has risen and mines have got deeper, so many of these dumps have been re-drilled and reprocessed but, it is not just the landscape that is changing - the industry that gave birth to Africa's "city of gold" is changing right along with it.

"The cynical among us might describe it as rearranging the deck chairs on the Titanic," says Bernard Swanepoel, Joint CEO of Village Main Reef, one of the new class of junior gold miners coming up in South Africa at the moment.

Speaking to Mineweb from a sparse boardroom at Village's offices in Johannesburg, Swanepoel explains, "If you take the long view, then after 120 years, even if we talk about the next 30 years, it is clearly the last phase of the SA gold mining industry."

Seemingly proving his point, the majors (AngloGold Ashanti, Harmony Gold and Gold Fields) while still active in the country, are increasingly focused on finding ounces in other parts of the world. And, while much of it has to do with diversifying their country risk, as the well-worn adage goes, if you want to hunt elephants, you need to go to elephant country and, for these big game hunters, the savannas of countries like Papua New guinea are looking more and more appealing from a trophy point of view.

That is not to say the Witwatersrand Basin is not an elephant, indeed many would argue it remains the bull elephant in the global gold herd but, it is getting old. In 2011, the South African gold fields only produced around 6m troy ounces of the yellow metal, placing them fourth behind China, Australia and the US in the producer rankings.

This is a far cry from the peak reached in 1971, when, according to the South African Chamber of Mines numbers, they produced 79% of the gold mined globally - a total of roughly 31m troy ounces and, to put it bluntly, there is no longer enough gold coming out of the country to satisfy the ever growling mills and refineries of the majors.

The majors continue to manage their mines in South Africa very well, but their attention is elsewhere and this opens up new opportunities.

Nick Holland, CEO at Gold Fields, told Mineweb earlier this year, there is a lot of potential around the Wits Basin and, there is beginning to a merge a mid-tier of companies able to bring this potential to account.

"First of all they might be able to extract more value out of certain assets that other companies couldn't, take Evander for example that has been sold by Harmony; secondly they might have a very different approach to some of the higher risk exploration projects, unlike the majors who have probably got a lot of South African exposure already, like us for example."

Pan African Resources CEO, Jan Nelson agrees, saying that, at the moment, the landscape is populated very much by majors and juniors. But, he says, a mid-tier is developing.

"Juniors are going to have to consolidate, with the majors considering exiting the country and divesting their SA assets, who do they sell them to if there is only a bunch of juniors, there is a gap that needs to be filled."

Swanepoel adds, that by definition a big mining company has to act like a big mining company, "They need big and fancy head offices and humongous overheads and only a certain type of ore body lends itself to that."

So, he says, they need to have a set of players to whom they can hand down assets which no longer fit into a big mining company."

"It is like dumping an old car into the hands of someone to whom it is a new car. It gets treated differently, washed twice a week etc. And so, I suspect the best thing for these assets is for them to be handed down to people who really want to own them who want to run them differently."

He adds that the current high gold price has a role to play as well because, with the higher prices, has come an understanding that these still-operational assets are, under current prices, worth owning.

"Those of us who were smart enough to buy some of them a year or two ago we look a bit smarter than even we like to think we are, because there is always a dose of very good luck in these sorts of things."

Neal Froneman, CEO of Gold One International, whose Modder East mine is one of the newest on the reef agrees that there are significant changes underway within the industry.

"The resources that are left for mining are really only medium grade, there are no real high grade resources left and you can only really mine these resources at medium and shallow depths. Because of that, the scale of these operations is significantly smaller than what would attract majors."

He explains that depth, in particular, is a major issue; one that comes with costs and, with environmental, safety and, ultimately, political risk.

"For the majors to operate on the scale they need to operate on," he says, "They have to go deeper and that is not commercially smart from an international perspective."

Froneman points out that the political and operational risk attached to deep level mining in South Africa leads to larger discount rates and, because the risk of accidents rises exponentially the deeper one goes, it can also lead to perceptions of management incompetence on the international market. And, while he is quick to point out that such perceptions couldn't be farther from the truth as, he says, the South African majors are incredibly well managed, it can lead to a discount in their shareprices.

A Second Chapter

Swanepoel believes what is happening now is the second chapter of a story that was started by former AngloGold Ashanti CEO, Bobby Godsell.

"I would really credit his visionary leadership at a point in time when, instead of shutting down assets and shafts that he could no longer make money out of or could no longer justify having in his portfolio he handed them down to Harmony and African Rainbow Minerals and when we merged Harmony and ARM to create what is today's Harmony, it was a very mutually beneficial relationship," he says.

Swanepoel was, of course, the CEO of that newly enlarged Harmony Gold and spent a lot of his time at the company, doing what he doing now, making marginal assets work just a little bit harder. And, he points out one of the benefits of a century's worth of mining is that the country is full of infrastructure that often narrows the gap between cash costs and so-called Ďall-in' costs. This he says, is because firstly, a lot of the infrastructure is in place and, secondly, no further expansion or exploration is needed.

Froneman too, acknowledges the merit of using existing infrastructure saying that it does indeed lower one's capital cost. But, he adds there are also valid reasons to build a new mine.

"The problem with using some of the old infrastructure is that you duplicate the inefficiencies of the past mining systems, whereas a new mine can be purpose built for a new approach to the reefs. It can avoid historical water issues and use more modern mining methods."

A third model, he says, is when you have extensive infrastructure, multiple shafts and plants but you can then identify secondary reefs which, at lower gold prices, are not viable but which, at current gold prices, are very attractive."

"I think we will see an industry that migrates from its current depth to more of a medium depth industry, a bringing to account of a lot of these secondary reefs that have perhaps not been viable under previous gold prices," Froneman adds.

Nelson, however, is a little more pessimistic about the sector as a whole. "From our perspective there aren't too many high-grade, shallow gold assets left in the country."

"You might have the infrastructure but, if your ore body is running at 2 or 3 grams/tonne the moment you have even the slightest dip in the gold price you are underwater. So, primarily it has to be a good orebody. Just look at the platinum industry, just how much platinum is being produced at a cost higher than the price they are getting for it; it is the same with the gold sector. That is why we don't like marginal mines."

"It depends on the asset and the ore body, first and foremost you have to find a good orebody, infrastructure helps but it doesn't wipe out the sins of a bad orebody."

It's Not Inside, It's on Top

While the majors may be looking elsewhere for big underground deposits, a century's worth of mining has left the surface of the Wits basin a fertile exploration landscape - something currently being proven by, among others, DRDGold.

The oldest, still-listed stock on the Johannesburg Stock Exchange started life as Durban Roodepoort Deep and created many of the mine dumps that are now its life blood and, with the sale of the Blyvoorzicht mine to Village Main reef, the group disposed of its last remaining underground operation, to focus all of its attention on surface retreatment operations.

As Niel Pretorius, DRDGold CEO, explained to Mineweb, there are still many decades of dumps left to process in the country and the technology is getting every better to ensure that the group can extract as much gold as possible.

Currently Pretorius says, the group can mine a resource as small as 0.22 grams per ton but, the one it is currently processing is between 0.28 and 0.36 grams per ton.

He says, "We're mining an ore body that at this stage can be extracted at a cost of between $ 1 000 and 1 100 per ounce. So those are the resources that we're targeting. And at this stage, at the current gold price, those are the ones that come in at about one-third of a gram of gold per ton."

But, he says, "what makes it viable, what makes it attractive and slightly less risky and volatile maybe, provided that the gold price stays above those levels is that your capital is spent up front and beyond that point your ongoing capital is relatively modest, so you can tolerate a higher cash cost."

Part of the reason, DRDGold is able to re-mine the dumps is that milling and crushing technology has progressed such that they can expose more and more gold to the leeching process. And, Pretorius believes that technology's long march is likely to continue to sustain life on South Africa's reefs both above and below ground, especially if they are planning to go any deeper.

"I think the unions are probably faced with the same sort of precarious balancing act that the Department of Mineral Resources has to follow and make no mistake, the unions and the leadership of the unions understand exactly what the commercial dynamics are of this industry."

"For the mines to remain open they have to mechanise. I think we'll find that on the public stage they will oppose it vigorously but they know when the writing is on the wall, when people power, muscle power is simply no longer adequate, at a sustainable rate, to get ore out of the ground. They say that more than half of the gold, the original gold resource in South Africa, is still in the ground. People can't go underground four-and-a-half or five kilometres to go and dig it out, it's no longer feasible, it's not doable."

But, he says, as long as there remains demand for gold, people will find a way.

"Look at places where they pump oil from. Eventually they'll find a way, there's no doubt about that."

Nelson, once again is slightly more pessimistic, "Except for one or two of AngloGold's mines and Gold Fields' South Deep operation, if you look at all the other mines they all have a life of mine of between 10 and 15 years and, the last five years probably won't happen so, that tells you most of the sector only has 10 years left unless something happens so that is quite concerning because we are going deeper, costs are going up and mining inflation is going up at 14% every year."

In ten years, Nelson says, most of the juniors will have gone and there will be one or two mid tier groups and perhaps one or two of the majors still active.

Doubtful of Going Deeper

Asked how much gold is left in the basin for this new tier of miners, Swanepoel sits somewhere inbetween Pretorius and Nelson. He is fairly positive for the next 30 years or so but pours water on hopes of new very deep level gold mines in the country.

He says while it is great to talk about millions of ounces lying at 4 and 5kms deep, he struggles to believe that we will ever rediscover the financial model with which to fund such a venture.

"There is just no one left with the mindset to fund a project for 15 years, to see revenue in year 16 and get financial break even in year 25 except, maybe, in China. No one else, no fund manager, backs a project that doesn't show results next quarter so there is a mismatch between the funding model of the world and building new deep level gold mines in SA."

Instead, he says, "I think we can take the existing infrastructure, the depth of infrastructure as a sort of a cut off. It is hard to foresee new tertiary shaft systems actually being put in place... If you take any mine's current deepest point as its cut off, then I think most of these ore bodies are about 75% mined out."

That said, he is quick to point out that that should take about 30 years which is more than long enough to see him nicely to retirement, "you youngsters have your own problems."

Geoff Candy
Mineweb

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