Why South African Mining Is On Life Support


The balance of probability suggests that if you walk into any given jewelry store to buy a gold ring with a diamond, both the gem and the metal came to the store from the soil of South Africa. Up until 2006, no nation in the world dug more gold out of the ground than South Africa, while tacking on $1.25 billion worth of diamond exports to boot. South Africa enjoys mineral wealth that makes them the envy of most other nations on the globe, holding around $2.5 trillion in reserves. Energy shortage, labor strife, and economic woes, however, have made South Africans realize all that glitters is not gold. In an increasingly familiar story, traditional mining hot-spots have been giving diminishing returns, making surveyors search out unorthodox untapped metals. The South African mining sector has been guilty of limiting its efficiency and output to the point today that foreign investment has began to look elsewhere while corporate interests cut output in order to control prices.

Of Geography and Geology

In order to understand the foundation for South Africa's metal and gem wealth, it's necessary to travel back in time -- well back in time, around three billion years ago. Long before single-cellular life ever appeared on our blue planet, the tectonic shifts we experience as earthquakes and tsunamis occurred on a fairly regular basis. Spikes of the Earth's crust driving up and out of the mantle resulted in rock formations known as kimberlite. As the kimberlite experienced enormous pressure, the carbon within the mantle cooled and compacted to form diamonds, while the force driving the rock upwards and outwards drew heavier elements like gold from within the Earth up to the surface. As the southern part of the African continent has a fairly large geologic and geographic "buffer zone", protected from both tectonic shifts as well as oceanic erosion, the kimberlite formations developed billions of years ago remain better intact than on any other continent. That makes regions like Zimbabwe, Nambia, and especially South Africa rich in kimberlite and thus rich in minerals. Indeed, the name kimberlite derives from a South African town where an 83-carat stone spawned one of the largest diamond rushes in history. Today, South Africa relies on mining for a major component of their economy, with gold alone accounting for over $10 billion in annual exports, followed closely by platinum, diamonds, and coal.

Turning Out The Lights

The requirement for more power in terms of both energy and labor has kept South African mining from continuing on a robust pace throughout much of the 21st century. Only in the past year, however, has the energy shortage as well as the labor relations soured to the point that the industry appears to be well and truly in crisis. Eskom Holdings, the nation's state-sponsored power company, has taken the lion share of blame for a series of blackouts and burnouts that has left personal and professional interests alike quite literally in the dark as energy output exceeds demand by a scarce 1.5%. The Cape Town nuclear power plant, the famous home of South Africa's brief flirtation with a nuclear weapons program, failed to stay online throughout the entirety of the winter after a shortage of uranium imports from neighboring Mozambique left Eskom Holdings struggling to find more fuel. The blackouts hit the mining industry particularly hard, leaving Anglo American (currently trading at a robust £1090 on the London stock exchange under AAL) without operational power for a full work week as electrical failure meant a 5% drop in stock prices for companies like Harmony Gold (HMY) and Kumba Iron Ore (KIROY). Power failure kept the South African rand from gaining value as the currency fell to its lowest point since 2011. What's bad in terms of electricity and money is worse in terms of labor relationships with miners themselves. The nation's labor union representing platinum miners launched a five-month strike in 2014 that not only devastated mineral output but made a host of investors wary of committing new capital to a potentially disruptive region. The platinum miners held out for a pay raise of about $100 per month which ended up costing the South African economy about two billion dollars in platinum exports and shrunk the yearly GDP by almost a full percentage point.

Numbers Don't Lie

The end result of power failure and strike can be summed up in one of the economic lifelines of South Africa, gold production. 2015 marked a downright dreadful year for the glimmering yellow metal, with a mining index (production set against price) of less than fifty compared to an index of nearly 300 only twenty years ago. The past decade has seen gold production drop by ten percent per year on average; South Africa now produces only 13% of the total gold that their mines accounted for in 1980, the first year of the gold index reporting. What's bad for gold has also been bad for diamonds: the same Anglo American that lost both money and power in blackouts has also had to cut gem production by 5% in order to retain profitability on their current stock. As in many cases of the commodities game, however, negative news for mining companies usually results in positive news for investors. The lowered supply of gold put into circulation thanks to poor South African output has partially buoyed the price of the precious metal in 2015 after a particularly poor 2014. As gold creeps steadily out of the bear market and holds its own above the all-important $1200 per-ounce threshold, the failure of the South African mining industry to provide ample supply will constrict prices ad make gold's value rise. It's crucial to hurry, however: surveyors have pulled up their stakes in South Africa, but the rush to exploit new goldfields continues. The precious metal will accumulate value only until a new supply comes onto the market.

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