South African power crisis shuts down mines (February 04, 2008)

Vancouver — A nationwide energy crunch in South Africa has hit the country’s powerful mining sector hard, with major gold, platinum and diamond producers suspending operations as a precautionary measure.

The move came after a Jan. 24 request from state-owned electrical utility Eskom to its key industrial consumers — which includes most of the country’s major mining companies — to reduce energy consumption to a minimum. Eskom stated it could not guarantee a stable supply of power to the mines and that there could be blackouts — a situation it said could last from two to four weeks.

South African gold miners Gold Fields (GFI-N, GFI-J), AngloGold Ashanti (AU-N, ANG-J) and Harmony Gold Mining (HMY-N, HAR-J) immediately suspended all mining activity in the country on Jan. 25.

The risk is simply too high to send hundreds of thousands of miners underground without assurances there will be electricity to power the hoists that bring them back to surface. “This will have a serious effect on the South African operations and will negatively affect our gold production,” said Gold Fields CEO Ian Cockerill in a release.

The company produces about 7,000 oz. gold daily from its operations in the country.

Gold Fields subsequently reported on Jan. 28 that its power supply had been restored to just over 70% of total average consumption — enough electricity for essential maintenance, but not production. As is typical in many of the deep mines in South Africa, half of its electrical draw is used to pump water from the mines and for ventilation and cooling.

AngloGold Ashanti reported a similar scenario, with enough electricity for safety maintenance work underground. The company was optimistic that a ramp-up of additional power over the following week could allow a phased resumption of mining.

With the shutdown expected to cost mining companies several tens of millions of dollars daily, the interruption will be a major blow to the South African economy.

“I think that we are starting to emerge from a crisis that had the potential to undermine the viability of the South African gold industry,” said AngloGold Ashanti CEO Mark Cutifani in a company update on the situation.

The power shortage also hit major platinum producers Anglo Platinum (ANP-L, AMS-J) and Impala Platinum Holdings (IPLA-L, IMP-J) along with global diamond giant De Beers — all announcing a halt of operations at essentially all of their South African mines.

With the shutdown expected to cost mining companies several tens of millions of dollars daily, the interruption will be a major blow to the South African economy, which depends heavily on the mining industry.

Eskom, which generates 95% of the electricity used in South Africa, issued the request to reduce energy use to its 138 largest industrial clients (which account for 20-30% of the draw load). The company is reducing power loads to “survival levels” and there could be rotating blackouts to balance the situation, where demand exceeds available supply.

The utility confirmed that electrical demand surpassed supply by 4,000 megawatts on Jan. 24 — a record for Eskom — due to the exhaustion of supply contingencies, depleted coal stocks, load losses and wet coal.

Strong recent growth in the South African economy has strained the power grid. Eskom, which produces about 90% of its electricity from coal-fired generating plants, along with the government, has faced strong criticism for failing to recognize the increasing power needs and is now playing catch-up to meet demand. The utility has reportedly earmarked as much as 300 billion rand (more than US$42 billion) to build new power plants and infrastructure.

With a long lead-time required to build major power plants, it could easily be five years or more before any significant new generating capacity is added to the grid.

The South African government is examining possible energy rationing and is looking to cut use by about 10-15%.

In a Catch-22 scenario, the country’s coal mining industry was also affected by the energy issue. Some mine closures have been reported, leading the government to consider “emergency measures” that would curtail coal exports in light of supply concerns.

Metals markets reacted to the news by sending gold and platinum to record intra-day spot price highs of over US$928 per oz. and US$1,720 per oz., respectively. South Africa supplies more than 70% of the world’s platinum.