Impending wage increases put more pressure on South African gold

Wage increases for South Africa’s black miners, due to take effect on the first of July, will result in even higher production costs for gold mines already among the world’s most expensive. The National Union of Mineworkers (NUM) is calling for wage hikes of up to 32% for the country’s gold miners. Meanwhile, analysts predict an increase of just 15% would raise operating costs at South African gold mines by as much as 8%.

“Labor costs account for about 45% of total working costs and consequently the industry’s costs are very sensitive to wage rises,” says Gold Fields Mineral Services annual review, Gold 1990.

In addition to the wage increases, the all-black union is demanding a shorter work week and increased benefits. White miners settled for a 13.5% wage increase, lower than the country’s 14.9% inflation rate, at the beginning of June.

In South Africa, the average cost of producing an ounce of gold already approaches US$300, compared to an average of about US$250 for Canada. At many South African gold mines, costs of US$330-360 are becoming increasingly common.

Given the falling gold price, can South Africa’s marginal gold mines (which produce 53% of the country’s gold) remain profitable? Statistics are gloomy. Based on a gold price of US$391, South Africa’s Chamber of Mines predicts that nearly half of its 31 member gold mines will be operating at a loss by July. At presstime, the gold price was hovering well below this level at about US$350. Genmin, one of the country’s large gold producers, predicts that at least four of its gold mines will close this year without an increase in the gold price.

Traditionally, South Africa has been the world’s lowest-cost gold producer. Over the past few years, however, miners have had to dig deeper and deeper for ore. Coupled with skyrocketing inflation, (about 15%), this costly underground mining has made South Africa today one of the highest-cost producers.

“The prospects for the South African gold mining industry do not look promising,” says Shearson Lehman Hutton’s Annual Review of the World Gold Industry 1990. “It is faced with declining grades, rising costs, adverse demographics, a less pliant government, major political change and, most importantly, it must accept that it has become a marginal producer.”

The major mining companies and NUM recently declared themselves in dispute over the wage negotiations. They will seek arbitration before further action is considered, which could include a strike.

Last year, the union had even higher demands, and settled for wage increases of 13.5-21.3%. “In the context of this year’s gold price, even a settlement at the lower end of this range would be very negative,” says Peter Cavelti, manager of several gold funds in Canada and the U.S.

Recently, wage negotiations were given a new twist as two gold mines announced that more than 1,000 miners will be laid off. It remains to be seen whether the threat of mine closures and layoffs strengthens or softens NUM’s demands.