Picture: REUTERS
Picture: REUTERS

AS THE gold sector prepares to deliver its counter offer on wage increases to the unions on Monday, a report from a leading analyst shows just how dire the financial situation is for producers.

Seven gold companies represented by the Chamber of Mines at centralised wage talks with four unions, including newcomer the Association of Mineworkers and Construction Union (Amcu), will unveil their counter offer on Monday.

Amcu and the National Union of Mineworkers have tabled wage increase demands for entry-level workers of between 100% and 60% of prevailing salaries.

The companies are expected to table a counter offer that is below inflation, which was 5.6% in the May measure of consumer price inflation. Some analysts are expecting the gold companies to stick close to this measure, perhaps rising by two or three percentage points.

Chamber chief gold wage negotiator Elize Strydom said a couple of weeks ago the key challenge would be to manage what companies could afford to pay in a difficult financial environment and accounting for workers’ expectations, given the scale of increases demanded by unions.

"At the prevailing gold price, gold miners are already under pressure to sustain operations and will struggle to grant double-digit wage increases sought by the unions," Investec’s Kamilla Kaplan said last week.

The chamber told the unions in a meeting last week that 40% of the South African gold sector was loss-making or marginal in cash cost terms in the fourth quarter of last year, when the average price was a record R509,783/kg.

The gold price is now R412,200/kg and closer to 60% of mines are in a loss-making or marginal position.

But the problems for the sector run far deeper than that, said SBG Securities gold analyst David Davis. Using the new cost reporting metrics proposed by the World Gold Council last month, the average all-in cost for the world’s top five global gold mining companies was $1,467/oz in the first quarter of this year against the current spot price of $1,287/oz, Mr Davis said in a note on Friday.

By next year, about half of global production will need a break-even gold price of $2,400/oz, using a 10% year-on-year mining inflation assumption, he said.

Gold companies could start using the new cost metrics from January next year. Companies such as AngloGold Ashanti, Gold Fields and Harmony are estimated to have had all-in costs of $1,580, $1,426 and $1,762 per ounce, respectively, in the first quarter of this year.

These costs are high relative to the average of their peer group because they are involved in capital projects, with AngloGold commissioning three big projects between now and 2016.

Gold Fields is ramping up its South Deep mine.

Harmony’s capital expenditure will taper off in coming years as it nears the completion of big growth projects in South Africa and revises the size of the Wafi Golpu project in Papua New Guinea to bring down costs.

Gold companies are currently using a far narrower cost measurement, which had "led to mining companies recording inflation margins in an environment of declining gold and equity prices", Mr Davis said. "This disconnect has sent confusing signals to governments, labour unions, the investment community and other stakeholders."

SBG had "long held the view that, with a few exceptions, global mining companies have been misrepresenting their costs by quoting cash costs as a measure of their efficiency in producing an ounce of gold", he said.

The widely used cash cost figure did not include capital to sustain production, to build new projects or to explore for new gold to replace mined ounces.

Chamber senior executive Roger Baxter has said that between 2007 and 2012 there was a 238% increase in electricity prices for mining companies and a 12%-a-year rise in the annual remuneration paid per worker, roughly five percentage points higher than producer inflation.

More than half of the costs of South Africa’s deep-level, labour-intensive mines come from paying workers, Mr Baxter said.

Gold output of 167 tons last year was the lowest since 1905.

If gold production keeps falling at the 8%-a-year average rate it has recorded in the past decade, South Africa’s production could fall below 100 tons by 2020, Mr Baxter said.

With declining production there is less gold to pay for fixed costs. Cash costs have increased by 23% in the past five years for South African gold mining companies, he said.

The gold sector’s output in May fell 14.6% year on year, Statistics SA said last week.