Chamber of Mines senior executive for strategy and economics Roger Baxter. Picture: FINANCIAL MAIL

THIS year will be difficult for the mining sector, which is under great pressure to cut costs in the face of rising wages and electricity prices, according to Chamber of Mines senior executive for strategy and economics Roger Baxter.

"The industry will have to cut its cloth from the fabric it has," he said.

Wages made up 50% of the costs for gold-mining companies, Mr Baxter said. "This is going to be an important year for wage negotiations, as we will have to also minimise labour disruptions."

He said South Africa had cheap electricity prices until 2008 as they were about $0.08/kWh. I f power utility Eskom got its way, prices would rise to $0.16/kWh, depending on exchange rates.

The Eskom tariff increase application would place South Africa in the top quartile of the most expensive countries for electricity.

"The practical reality is that South Africa is at a tipping point as far as electricity prices are concerned," Mr Baxter said.

He said 65% of Eskom’s tariff increase application was aimed at return on investment and capital depreciation and only 12% on coal and energy. All of this was targeted at making Eskom an investment-grade company.

Last week, Anglo American CEO-designate Mark Cutifani said while the increases might raise Eskom’s rating, this would pose investment challenges for all its clients. The power utility is proposing that large industrial and mining users face a 21% rise in prices for the next five years.

Mr Baxter said mining companies would try to operate within the constraints they were facing. But he warned that if electricity prices and wages rose too quickly and too soon, restructuring would have to take place.

"They (mines) can’t just keep operating shafts if they are absorbing cash and capital at a fast rate," he said.