Gold mine feeling the pinch

Gold Fields and Harmony Gold, the two major gold producers that reported this past week, have confirmed what everyone more or less knew: The rand's strength has been playing havoc with South African miners' rand revenues.

Both companies reported higher dollar gold price receipts quarter on quarter, but as the rand strengthened against the dollar, any benefits were essentially eradicated.

It's not all near-term gloom and despair, however. If gold holds its current price level somewhere just below $1400/oz it could offset the rand's strengthening, from the September quarter's average.

On Friday, based on spot gold and rand:dollar exchange rates, bullion was about R304000/kg against the R289329/kg average Gold Fields received in the September quarter.

Whether that will translate into higher overall revenues is another matter as production in the December quarter is normally affected by the year-end holiday season. But again on the positive side, the mines will only be clobbered by Eskom's galloping electricity tariff increases and not by the winter tariff surcharges.

The fact is that old, lower-grade South African mines have been struggling, to the extent that Harmony CEO Graham Briggs has said that some of the operations are not even taken into account by analysts.

As it is, profitability (or the lack thereof) has compelled Harmony to close another marginal Free State shaft (Merriespruit 1) where a conditional agreement to keep operating had been struck with the National Union of Mineworkers as recently as September. Briggs takes a positive view on Harmony's other local operations - the focus is on profitable production while less-promising assets in the Free State and Evander are being sold or closed.

It's not only the marginal mines that are feeling the pinch or, at least, that are taking a tough line on unnecessary costs. Gold Fields, which adopts a highly conservative approach to calculating costs, hopes to curb costs and ensure a 20% profit margin with the merger of its flagship Kloof and Driefontein operations under single management.

CEO Nick Holland says that this has already led to managerial job losses, while further savings are envisaged, reducing the total employee head count by 6000. Kloof and Dries are the country's two highest-grade mines.

Gold Fields is busy ramping up production at South Deep, its deep-level mechanised mine near to Kloof. South Deep will be South Africa's last major gold development and, with a life expectancy of some 50 years, it could well be the country's last surviving deep-level gold mine.

For the rest, growth prospects for Gold Fields and Harmony lie outside South Africa. Harmony has brought the Hidden Valley mine in Papua New Guinea to commercial production and is busy lifting output to full capacity.

And Briggs is bullish on the Wafi/Golpu project which, he says, could produce some 400000 to 700000 ounces of gold a year along with as much as 200000 tons of copper over a life of 20 years.

Gold Fields's global ventures are more widespread. Production slipped in Ghana during the September quarter as a result of lower head grades at Tarkwa, while production increased in Australia and Peru.

The company is adding to other prospects or projects, the latest being a 60% interest in a gold-copper deposit in the Philippines to add to others in that country as well as in Mali, Finland, Peru, Australia, Canada and Kyrgyzstan.

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