COMPILATION OF ACTUAL PRODUCTION DATA AND “WORKING COSTS” FROM 2003, 2007 AND 2008 ANNUAL REPORTS

The following table provides compiled underground and surface ore tonnages milled, yield (recovered) gold grades and “working costs” (essentially mining and milling operating costs) for the years 2003, 2007 and 2008. They were compiled from annual report data from the four major gold producers with operations in South Africa. Their internet addresses are : www.drd.co.za (Durban Roodepoort Deep), www.anglogold.com (Anglogold Ashanti Ltd.), www.goldfields.co.za (Gold Fields Corp.) and www.harmony.co.za (Harmony Gold). The 2003 data for the South Deep Project was from the Western Areas annual report (www.westernareas.co.za) but this project is now included in Gold Fields Corp.'s annual report.

The mines included in the 2003 compilation were responsible for about 308 mt (287 mt underground, 21 mt surface) of gold production in 2003; about 82 percent of total 2003 South African production.

The mines included in the 2007 compilation were responsible for about 209 mt (197.8 mt underground, 11.2 mt surface) of gold production in 2007; about 82 percent of total 2007 South African production.

The mines included in the 2008 compilation were responsible for about 194 mt (182 mt underground, 12 mt surface) of gold production in 2008; about 88 percent of total 2008 South African production.

YEAR

TYPE OF ORE

# OF MINES

TONNAGE MILLED (MILLION MT)

YIELD GRADE (GRAMS GOLD/MT)

WORKING COST RANGE (RANDS/MT)

WORKING COST WEIGHTED AVERAGE (RANDS/MT)

2003

Underground

18

41.93

6.84

286 - 628

462


Surface

10

27.53

0.76

29 - 139

39


Total

19

69.46

4.43

29 - 628

293








2007

Underground

21

31.4

6.31

330 – 1,019

597


Surface

8

21.13

0.53

21 - 123

46


Total

24

52.53

3.98

21 – 1,019

375








2008

Underground

23

28.6

6.37

498 – 1,323

750


Surface

8

24.7

0.48

17 - 182

52


Total

26

53.3

3.64

17 – 1,323

429



During this 2003-2008 period, South Africa's total production has declined 41.5 pct from 376 mt to 220 mt. Of this 156 mtpy decline, 114 mtpy (73 pct) is from the operations included in the above compilations. For these operations, the 9 mtpy decline in surface production from 2003-2008 is mostly due to lower yield grades (- 37%) with the tonnage treated only lower by 10%. Conversely, the 105 mtpy decline in production from underground ore is mostly due to lower tonnages of underground ore being milled (- 31%) and much less due to lower underground yield grades (only 7% lower).

In the early 1980's, when doing my first study, less than 5% of the total ore being treated was from surface mineable ore. By 1991/1992, when doing my second study, the breakdown was 84% underground ore and 16% surface ore. By 2003, as shown above, only 60% was underground ore and 40% was surface ore and by 2008 the underground ore percentage slipped further to only 53.7 pct.

There was no way I could have foreseen a time when nearly 50% of the gold ore milled in a particular year in South Africa would yield less than ½ gram of gold. As will be shown later in this presentation, surface ore contains only 7 pct of the gold in the 2008 reserves of these companies. As noted in the 2004 “revisit”, this is a sign of an industry in major distress. The surface ore does not provide any kind of future for the industry. A robust South African gold industry requires market prices that make the higher cost underground ore material profitable to mine!!

The compiled weighted average underground working cost of R750/mt ore for 2008 appears unusually high. Updating the 2003 value of R462/mt ore by a factor of 1.383 (54% labor, 46% CPI index from previous section) would give a rough, expected 2008 value of R639/mt ore. Updating the 2007 value of R597/mt ore by 1.095 (again, 54% labor, 46% CPI index) gives an expected 2008 value of R654/mt ore. Both of these “expected” values are 13-15% less than the actual weighted average 2008 working cost. Most of the difference is probably due to the “power problem” of early 2008 where ESCOM had to restrict the mines' power usage by 5 to 10 pct for the entire year (and probably through 2011). However, the annual reports reveal that many mines also had “bad ground” and tectonic activity problems as well as a host of other operational problems. Gold mining in South Africa is not an easy business.

Out of curiousity I decided to update my old cost estimates from the first study. In average 1983 SA rand terms, the weighted average underground mining operating cost was R45/mt ore (46% labor) and the weighted average milling operating cost was R6.72/mt ore (32% labor); a total “working cost” of about R52/mt ore. Updating the labor portion of these costs by a factor of 16.7 times and the non-labor portion by a factor of 9.9 times results in a total estimated 2008 operating cost of R679/mt ore; only 9.5 pct less than the actual 2008 working cost value, which, as noted above, was unusually high.

Updating the cost estimates from the second study did not come out as close. The weighted average operating costs (avg. 1991 R) were R130/mt ore (52% labor) for underground mining and R18/mt ore (33% labor) for milling; a total of R148/mt ore. Updating the labor portion by a factor of 4.2 times and the non-labor portion by a factor of 3.2 times results in an estimated 2008 mining plus milling cost of R543/mt ore, 27.6 pct less than the actual 2008 working cost value. It seems that my mining cost estimates of the second study were a bit on the low side.

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