While South Africa is still home to over 50% of all gold reserves in the world, the country only accounts for 4% of the global gold production. With gold price currently booming, is SA primed to attract new investment in its gold mining industry? One would think that the high gold price could encourage more investment, but Jill MacRae, associate director at BDO South Africa, tells Munesu Shoko that market price is only one consideration and there are other factors that investors take into account and may, in fact, place more emphasis on – and these are standing in the way of investment in SA.
Traditionally, gold has been a safe haven in times of uncertainty. With economies and stock markets around the world crashing due to the ongoing COVID-19 pandemic, investors have once again flocked to buy gold, with global demand resulting in gold reaching a seven-year high of high of more than $1,700/oz.
Jill MacRae, associate director at BDO South Africa, says that gold’s latest run is spurred by cash injections to mitigate the severe impact of COVID-19 on the global economy. Governments worldwide, she says, are signing off on massive stimulus measures on top of the zero interest rates and quantitative easing in the hopes of jumpstarting businesses.
In an environment where the gold price is soaring, one would imagine that this could buoy more investment into the South African gold mining industry, given that the country currently hosts more than half of all gold reserves in the world. MacRae, however, says there is more to investment decisions than just the commodity price.
Declining production
The history of gold in South Africa dates back to 1873 when the first large-scale production began when alluvial deposits were discovered at Pilgrim’s Rest, followed shortly by gold discovery in Witwatersrand in 1884. The discovery of gold in the late 19th century gave rise to the development of the city of Johannesburg, Egoli, or the City of Gold and for many years, South Africa was the world’s primary gold producer.
This is no longer the case and South Africa’s gold output has continued to decline for several decades. From peak production of around 1 000 t in 1970, the nation’s gold output fell to 130 t in 2018, with South Africa now only accounting for roughly 4% of the world’s gold production.
“The decline, however, is not a result of any significant depletion in reserves and one would be wrong to assume that South Africa is running out of gold. In fact, over 50% of all gold reserves are found in South Africa, with the Witwatersrand Basin remaining the largest gold resource in the world. The decline in production over the decades has been driven by a combination of closure, maturing assets and industrial strife which has created an inhospitable operating environment,” says MacRae.
MacRae says the remaining reserves have become too difficult and costly to access. She reasons that at the start of gold mining back in the 1800’s, it was the easy to access surface ore that was initially mined. Two centuries later, the remaining high-grade reserves are deep below the ground.
“It would take significant investment for mining companies to be able to access these reserves – investment which is only viable in a high gold price environment like now,” she says.
No interest
Investors, and especially foreign investors, are not attracted to South Africa’s mining industry, argues MacRae. She reasons that the industry has its challenges and many have stated that it’s simply too complicated to invest in South Africa’s mining industry for a range of reasons.
MacRae outlines a mixture of reasons she believes are standing in the way of investment, and these include the stringent BEE requirements; constant changes the government can, and does, make to the Mining Charter, resulting in significant uncertainty for investors; as well as the real risk of industrial action by the workforce, ultimately resulting in high wage costs year on year.
“That being said, I think the main stumbling blocks are primarily a mix of the high investment involved to mine the deeper ore bodies (and this investment is only viable in a high gold price environment so the risk is higher) and the uncertain regulations with regards to the Mining Charter and BEE structures in place, as well as the unions being seen as a deterrent,” she says.
Another major deterrent is the unstable grid which has resulted in constant load-shedding in recent years. With the recent announcement of a possible self-generation regime for mines, will this unlock the much-needed investment in the South African gold mining sector?
“While power is an issue throughout Africa for mining companies, so far mines in SA have generally not had any backup plans in place,” says MacRae. When starting a mine, for example, in West Africa, mining companies know from the outset that power is an issue and as such make plans for the use of renewables or generators and incorporate the cost of such needs into their mine plans.”
Mines in SA, says MacRae, generally don’t have backup generators in place, at least to run the mine at full capacity. With Eskom’s increasing capacity issues and load shedding, the reliability of power is becoming a key concern, especially with the move to stage 6 load-shedding in December 2019 which saw the temporary closure of many underground mines.
However, at the recent Mining Indaba in Cape Town in February, Mineral Resources and Energy Minister Gwede Mantashe announced that the government was in the process of gazetting a revised schedule of the Electricity Regulation Act which will allow mining companies to generate their own energy for self-use.
“Self-generation will be a key factor in addressing South Africa’s energy crisis by releasing some pressure from Eskom and also transitioning the country to a cleaner and more sustainable energy mix. However, I don’t think it will significantly attract more investors as access to power is not seen as the main barrier to investment,” reasons MacRae.
Maturing assets
As a result of maturing assets, South African gold mines now have some of the world’s highest production costs, averaging US$1 000 an ounce. MacRae says with new technology many of the old mines in South Africa could potentially be re-opened and it could be viable to mine deeper to access the plentiful reserves that are still deep below the ground.
However, this would require significant capital investment and the key is whether South Africa can attract investment, especially when the rest of Africa is becoming more accessible and less risky to invest in the mining sector.
“That being said, it is not all bad news, with Australian company Theta Gold Mines so far injecting about R1-billion into establishing a mine in the historical gold mining Mpumalanga town of Pilgrim’s Rest. Theta Gold Mines’ venture is a re-awakening of the giant gold field where South Africa’s first gold rush started in 1873, with a plan which could see 6-million oz mined over the next 20+ years,” she says.
MacRae says while the initial investment may be high, technology could help mining companies access high-grade, undiluted ore at lower levels. Using autonomous technology, deep underground mining is not only safer but can increase production and thus lower the cost of mining.
“The key focus on the use of technology is mainly twofold – the first is in more accurately mapping the ore body and getting a better understanding of the resource and more precision on the grade throughout the ore body,” she says.
“The other is on improving efficiencies and increasing production by optimising material and equipment flow to decrease downtime, anticipating breakdowns and monitoring production and performance on a ‘live’ basis. These efficiencies and production increases can lead to a decrease in the mining cost/oz. Technology can also be used in other areas such as in optimising supply chains, enabling mines to free up working capital,” adds MacRae.
Competition is rife
In fact, it’s not just new investment that is being deterred. MacRae says even the leading gold miners headquartered in South Africa are now focusing elsewhere, with Anglo Gold Ashanti recently selling the last of its South African mining assets and exiting the South African market to focus on “looking offshore for less risky investments”.
One of the reasons, according to MacRae, is that mining companies are finding it more cost effective to expand into the rest of Africa and open up new mines at lower investment and mine easier-to-access ore on the surface at a lower operating cost per ounce. There are more countries, she says, now open for mining investment, thus the competition for investment is higher than it has ever been.
West Africa is one such destination that has seen a favourable surge in gold investment in recent years. “We have seen a lot of gold mines opening up in West Africa in the past few years. West African countries are developing and their governments want to attract foreign investment, especially in the mining industry,” she says.
Governments have incentives to attract investment, and in return new mines opening up create jobs, payments into the state coffers in respect of taxes and royalties and an upskilling of the local workforce.
“Mining companies negotiate mining conventions which are generally beneficial, especially in the early years, with regards to tax rates and, crucially such rates are generally fixed for the life of the mine, which ensures stability and certainty. It is these benefits and the likely higher return on investment, coupled with stability that makes West Africa an attractive investment opportunity,” she concludes.
