Johannesburg – The jobs carnage in the mining industry is likely to continue as high-cost mines close over the next three years.
Declining commodity prices, subdued economic growth in China and weak demand have seen mining houses dramatically cut costs in the past few months, but this is not enough to save the struggling industry.
Yesterday, credit rating agency Moody’s Investors Service said AngloGold Ashanti and Gold Fields would have to restructure their operations to a lower gold price after the precious metal fell to $1 091 (R13 755) an ounce on Friday, more than $230 below its 52-week high.
The slump was driven by prospects of rising interest rates, a strong dollar and heavy selling in China and India.
The Moody’s research concluded that the gold price decline was credit negative for both companies because it would lower their revenues.
Peter Major, an analyst at Cadiz Corporate Solutions, said many more jobs were on the line due to declining productivity.
“There has to be more job losses on the cards because companies are operating at massive losses. High-cost gold mines will close in three years. Unfortunately, most of gold mines have become high cost,” Major said.
The ANC yesterday called on companies to revise their job shedding plans as they would worsen the local economy. However, market dynamics, including rapidly declining commodity prices were beyond their control.
Major said South Africa’s mining sector had become inflexible.
“There is too much union and government interference in the operations of our mines. They are all competing. The moment there is us and them there is no hope for mines in South Africa,” said Major.
Johan Botes, Cliffe Dekker Hofmeyr’s employment law director, said the parties should have frank discussions about the state of the industry.
“If ever there was a need for a true partnership between trade unions and business this may be it,” Botes said.
The DA called for drastic action, including the withdrawal of the Mineral and Petroleum Resources Development Act pending a rewrite that would recognise the need for the mines to be financially sustainable.
This comes after diversified global mining company Anglo American said it would shed 6 000 jobs by the end of the year as part of a plan to reduce 54 000 jobs by 2018 as it divests in 15 assets.
The world’s third largest platinum producer Lonmin also said it would cut 6 000 jobs due to lower prices.
Moody’s analyst Douglas Rowlings said Gold Fields, which operates South Deep outside of Johannesburg, would suffer more because the company calculated the value of its underground gold reserves at $1 300 an ounce.
The company’s 15 percent free cash flow margin target at this level deduces a cash flow breakeven at its mines of $1 105 an ounce.
“Gold Fields could be required to revise its reserve gold price downward under accounting principles if it determines its current assumption is no longer reasonable,” he said.
“This would lead to an impairment of mine values as a result of lower calculated future cash flows. A low gold price would also compound the negative free cash flow situation at the company’s South Deep mine, which will need additional capital expenditures to complete production ramp-up.
Rowlings said AngloGold Ashanti’s free cash flow would also weaken as a result of lower gold prices, despite the company being on a stronger footing after selling its US mine.
“Even though the company no longer has to meet sizable project capital expenditure commitments for its US mine, lower gold prices will make returning to positive free cash flow generation more challenging. A low gold price will also limit the options that AngloGold Ashanti has in deciding what to do with its Obuasi mine,” he said.