MOTIVATION, BACKGROUND AND OPINIONS ON THE 1998-2002 “PRICE BUST” AND THE FUTURE OF SOUTH AFRICAN GOLD MINING

The table below shows the average number of employees on gold mines belonging to South African Chamber of Mines members for the years 1981-2007 (www.bullion.org.za). It presents a very sad tale...over 300,000 well-paying jobs gone. Even sadder when you consider that every South African gold miner usually is the major “bread winner” for an additional 8-10 other family members not to mention the skill levels and knowledge lost. And, again, it didn't have to happen.

YEAR

EMPLOYEES IN SERVICE

YEAR

EMPLOYEES IN SERVICE

1981

478938

1995

377144

1982

475769

1996

342439

1983

487761

1997

322025

1984

498421

1998

255164

1985

513832

1999

222389

1986

534255

2000

197537

1987

530622

2001

176612

1988

515741

2002

176090

1989

505271

2003

168108

1990

474851

2004

148829

1991

429649

2005

137569

1992

407185

2006

135208

1993

390415

2007

140783

1994

392021





Graphic for above table

This table, along with the earlier tables of South African production and Central Bank gold sales explain my motivation in establishing the website and presenting the data in it. There is/was no excuse for the Central Bank gold sales at the levels of the 1990's and 2000's. That gold doesn't even belong to the Central Banks..it belongs to the citizens of the respective countries. How appointed officials such as Gordon Brown of the UK can sell “well over half” of a country's gold reserves at “fire sale” prices without the consent of the citizens is beyond me.

I began my career with the U.S. Bureau of Mines in 1975, shortly after graduation from Penn State with a BS degree in Geological Sciences. In 1981, I was assigned the task of analyzing and reporting on the world-wide availability of gold. Shortly before resigning in 1994, I had tangled with the “Clinton crew” on the subject of imposing high-percentage gross royalties on mining from public lands. That administration had been anti-mining, anti-logging, anti-land development of any kind from it's start and I just could not work for them anymore. The anti-gold sentiment emanating out of DC was just too strong. I still would check on gold prices and any gold-related items in the Wall Street Journal on a daily basis but that was the sole extent of my gold studies from late 1994 to June or July of 1996. At that time, with gold in the $380-$390/tr oz range, an op-ed piece in the Journal by either Larry Kudlow or Wayne Angell (I forget whom) shocked me. In it, the author claimed that the industry could handle a gold price below $300/tr oz since production costs were below that. Knowing that this wasn't true for much of the industry, knowing that this misrepresentation would be believed by most people reading it, and knowing that the author had no clue about true gold mining costs sent a shiver down my spine. Something was brewing. (I haven't read the Wall Street Journal since that time..they were just as culpable).

About this same time (1996) Robert Rubin (Clinton's Treasury Secretary) started his “strong dollar” policy and Wayne Angell (and other self-proclaimed “inflation hawks”) pushed their “zero inflation” policy. Rubin, and others constantly “talked-up” the dollar and Angell, and others, constantly “talked down” gold and interest rates. This, combined with the large Central Bank gold sales of 1992 and 1993 and the increased gold sales of 1996 and 1997 killed (or heavily maimed..at the least) investment demand for gold. As they had desired, the stock market became the only game in town and gold prices declined to outrageously low levels (which I considered to be anything below $325/tr oz) for 1998-2002.

There was an unnatural feel to all of this. That high-profile “talking heads” in the Wall Street/DC circle could, in little more than a year's time, push the gold price below a base price level that had existed for more than 11 years amazed (and sickened) me. Did these guys really have that much power? Also strange was that there wasn't a “peep” of complaint from the North American gold miners. Although I wasn't paying a lot of attention at the time, it seemed to me that the South Africans were the only producers to protest. Why were the North American gold miners so quiescent? Didn't they care? Were they in on the scam?

It probably appears as if I'm “beating a dead horse” on this subject but I don't think so. There are lessons to be learned from this episode. It is interesting that Rubin was making $10 million a year at Citigroup from 1999-2008 and, even though retired since 2002, Wayne Angell was a major executive at Bear Stearns. And we know how both of those companies ended up being busted by the “toxic asset” mess. Coincidence? Hardly! How these people can “game the system” time and time again should outrage people. They have obviously been wrong about a lot of economic issues, yet no one has “called them” on any of it. The people deserve better “leadership” than this.

The Future of South African Gold Mining (an opinion only)

In the 2004 study, I presented my belief that the South African gold mining industry would eventually bounce back from the “present low levels of production” (2003 = 376 mt), given the following four conditions:

(1) The world gold market will have to give these reserves an adequate market price for extraction.

(2) The SA gold mining industry will have to control, as much as they can, their internal inflation costs.

(3) The world's Central Banks will have to radically decrease sales and leasing activities involving their gold reserves.

(4) Exchange rate fluctuations should be more moderate.

So far I've been very wrong about the production direction. I certainly did not foresee that annual production would decline by a further 156 mtpy by 2008, even though three of those four conditions were met during 2004-2008. The average annual U.S. $ gold price increased 140 pct, exchange rates were steady at 6.36-8.25 rands/dollar and the industry appears to have done the best they could at controlling costs. However, the Central Bank sales hardly declined at all (averaging 527 mtpy for 1999-2003 and 484 mtpy for 2004-2008). As the marginal, highest cost producer, the South African industry is in direct competition with the essentially cost-free gold of the Central Banks.

Besides the “handcuffs” of Central Bank sales, the year 2008 was unusually full of operational difficulties. At the very start of the year ESCOM (the sole electricity supplier in the country) ceased providing power to the mines for five days. There were a number of outages in ensuing months and the mines were limited to 90-95 pct of their normal useage for the rest of the year. The industry has also instituted much more vigorous safety programs. This means more frequent and longer shutdowns of mining areas in cases of bad ground or seismic activity. For example, in 2008, at least 6 mines had lengthy shutdowns of mining areas due to seismic activity, one for a fire, another for a shaft accident and another for bad ground, flooding and low availability of equipment. South African gold mining is not an easy business to be in.

I do see two “glimmers of hope” for the future of the industry. Both have already been presented in this update. First is the fact that the 2008 average gold price of $872/tr oz translates to a constant 1983 $ price of $403/tr oz using a U.S. CPI deflator. This is a comfortable starting price for the industry to build upon. Second is the fact that the employment level appears to have stabilized in the last few years (even if at a very low level). If they occur, significant increases from the present production level (220 mtpy) won't occur before 2012/2013. Those are the years when ESCOM claims they will have the present “electricity reserve inadequacy” problem solved.

Five years on, I am not as confident about predicting increases to South African gold production. It is a shame, and a waste, that they have been beaten down to a point where nearly 50 pct of their ore treated in a year is surface mineable ore that only produces 12 mt of gold a year. For example, if only 50% of that ore capacity was switched back to treating regular underground ore it would produce nearly 80 mt of gold, an increase of over 70 mtpy in additional gold output. Unfortunately, that probably won't happen until the Central Banks quit selling completely. For now, I believe that the short-term and intermediate-term levels of production won't be much larger than the present level of production.

Longer term (beyond the 2010's) South Africa will once again be the “top dog”. As shown previously, their 2008 reserve plus resource position (19,971 mt gold) is 1.8 times larger than the reserve plus resource position of the two largest company producers combined (11,082 mt gold). As in the 2004 “revisit” I do feel confident that all of the South African reserve (and probably most of the resource) will eventually be produced. It is only a question of when and at what price.

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