Some Gold Mines in Deep Trouble
Nation's top industry hurt by drop in gold price, high production costs, inflation. SOUTH AFRICA
JOHANNESBURG — THE words beneath the Transvaal town of Boksburg's coat of arms sound an ominous warning - respice finem - ``heed the end.'' They are likely to have special meaning at this moment for the 10,500 workers at the town's aged and financially troubled gold mine. Nearing its centenary, Boksburg's East Rand Proprietary Mines (ERPM) represents the most precarious case of 18 marginal gold mines in South Africa. While the republic remains the largest gold producer in the world and is expected to retain that ranking for some time to come, many of South Africa's mines are aging and their average profitability declining.
The industry is struggling this year with high production costs, inflation, and, most importantly, the low price of gold. The price has been around $370 an ounce from mid-March after reaching $420 an ounce earlier in the year. ERPM cannot survive at the current price without aid.
If the price of gold falls further, other mines like Gencor's Stilfontein may close down before year-end. Also in the Transvaal, it employs 4,684 people. ``If the gold price remains at its present levels and inflation continues at 15 percent, Stilfontein will have to seriously consider closure,'' says Gary Maude, Gencor's managing director.
Half of South Africa's 40 big gold mines were very profitable last year. However, the less profitable half was in effect subsidizing gold by continuing to produce at the present low price, Mr. Maude says.
``It is time that the South African gold industry stopped crying wolf and allowed the free market to work,'' says Maude, meaning that unprofitable mines should rationalize or close.
Possible social unrest
However, the social as well as the economic repercussions of such closures could intensify pressures within the nation as it begins delicate negotiations over a new political constitution in which blacks will be represented for the first time.
Emotions have already been running high in Boksburg between the town's white extreme right-wingers, some of whom are members of the Afrikaner Resistance Movement, and the black population. Recently two black men were allegedly assaulted by a group of right-wingers at a Boksburg lake. The two were allegedly kicked, punched, and thrown in to a lake by two white men wearing the movement's swastika-like emblem.
Any mass retrenchments of ERPM's work force, only 10 percent of whom are white, could see an upsurge in racial tensions. The government realizes this and has pumped 136 million rand (South African: US$50 million) of aid into the mine between 1978 and 1987 and is currently completing discussions of a new financial rescue package.
ERPM last paid tax in 1980 and a dividend in 1981. At the present price of gold, it is expected to post a loss of at least 15 million rand this quarter. Its biggest loss so far was 200 million rand posted in 1987.
While only ERPM and Stilfontein are in immediate danger of closure, the president of the South African Chamber of Mines, Kennedy Maxwell, recently told a meeting of the Association of Mine Managers that 18 mines would be operating at a loss by July this year if the gold price did not rise above its predicted price for the year of $400 per ounce.
During the '80s South African gold mines moved from being the lowest cost producer in the world to the highest. Since 1980, real annual profits have depreciated every year. Mr. Maxwell says double-digit inflation was a key factor, having ``a destructive effect on our operating costs and consequently our profits.''
He says that 30 to 40 percent of the industry faces substantial losses this year and that there is every chance the ERPM operation, which had not made a profit since 1980, would be declared bankrupt in the near future.
But Jerry Majatladi, spokesman for the National Union of Mineworkers (NUM), says this is traditionally the time of year when the chamber of mines goes public about the poor financial health of its members ahead of the start of industry wage negotiations. Union calls for wage hike
NUM is calling for a new minimum wage of 543 rand (US$238) per month for surface workers and 600 rand (US$231) for underground workers.
Although the union's bid for average pay increases of 35 percent for its members will add to the cost pressures which have cut profit margins, most mining houses in South Africa will do whatever is possible to keep failing mines open. The reason is simple - an increase in the price of gold can turn losing concerns into profit making operations and any cutbacks can make it difficult to increase production.
Exactly when the price of gold will rise is the multimillion dollar question. In the meantime, South Africa waits in hope for declines in production in other parts of the western world, in particular the United States, Canada, and Australia. Production from the western world is expected to peak at 1,800 tons this year, then fall to 1,600 tons in the next few years.
About 34 to 36 percent of this amount is expected to come from South Africa, an impressive figure, but one that nonetheless also shows how far the republic declined in the 1980's due to mines with lower production costs in other parts of the world.
Compare this to 1980, when South Africa produced 70 percent of noncommunist world gold production, and to before the launch of low cost mines in competitor countries, like the US gold mine of Ridgeway in South Carolina. In 1988 it was reported that it took $90 million to develop the mine, about one-sixth of the cost for a (usually bigger) South African mine.
The cost pressures in South Africa flow at least partly from the lower yields from each ton of rock as the richer parts of older mines are mined out. Profit margins for the gold mines peaked at 70 percent in 1979. Work force cutbacks
Faced with tough choices, some mines - particularly those managed by Gencor - have been mining more selectively and cutting production and labor forces to curb costs. They mine fewer tons of rock but with higher yields of gold.
While this strategy helps keeps the mines alive, it also has heavy social costs. Between September 1988 and the end of last year, Gencor shed about 17,000 jobs. Rand Mines's labor force dropped by more than 17,500 over that period.
Workers at Stilfontein and in particular ERPM should know soon whether they will suffer the same fate. But the fact that ERPM's board of directors has only just put a freeze on an application for provisional judicial management, a step preceding bankruptcy, suggests that the motto beneath Boksburg's coat of arms holds special relevance for the mine's work force.