- Money Morning Australia

What South Africa’s Mining Turmoil Means for Investing in Gold


Written on 15 October 2012 by MoneyMorning

What South Africa’s Mining Turmoil Means for Investing in Gold

Gold prices recently have risen due to global central bank stimulus measures, but the true movement in the market stems from much more than QE3.

Precious metals investors no doubt have seen the recent headlines coming out of South Africa. Violent strikes (resulting in dozens of deaths) and work stoppages have plagued the platinum industry there in the past few months.

The causes of the labor unrest include poor wages and unsafe working conditions. There has also been a tussle for power between two warring labor unions – the Nation Union of Mineworkers and the far more militant Association of Mineworkers and Construction Union.

The result of all this turmoil is quite obvious for the global platinum market.

The majority of the world’s platinum, roughly 80%, comes from South Africa. Not to mention that 90% of that production comes from a limited area, the Western Bushveld region of the country.

But here’s where it gets interesting, especially for those investing in gold.

South Africa’s Gold Market History

The labor unrest in South Africa has spread outside of the platinum industry, affecting most mining activity in the country, including gold.

Despite its tumble from being the world’s largest producer of gold, South Africa was still the world’s No. 5 gold producer in 2011. Its output was 190 metric tons last year.

In addition, the country still has the world’s second largest in-ground gold reserves at 6,000 metric tons of the yellow metal, according to the U.S. Geological Survey.

So the events in South Africa can’t help but have a long-term impact on the gold market.

So far, the so-called illegal or wildcat strikes at South African gold mines have not been excessively violent. But the demands for increased wages, to $1,514 a month, and better working conditions are similar to those that the platinum miners made.

Strikes are occurring at several major South African gold mining companies including Gold Fields Ltd. (NYSE ADR: GFI) and AngloGold Ashanti Ltd. (NYSE ADR: AU). AngloGold is the world’s third-biggest gold producer by volume. So it should have opened some eyes in the gold market when the company announced in late September that it was shutting down operations at its South African gold mines.

The interesting thing here is that the workers are not listening to the leaders in their union, who are cozy with the gold companies, and are taking these actions without the blessing of their leadership.

The miners, among the highest paid workers in South Africa, do have a point. They work in some of the most dangerous conditions in today’s mining industry.

That’s because the region’s gold is found at such deep depths, which is the main reason behind South Africa’s decline as a gold producer. Gold-mining firms there have had to go deeper than before to find gold in the ground, making mines more dangerous. It also makes them more costly to operate, shrinking profit margins.

In addition to rising labor costs, companies have also had to pay much more for critical power (when it’s available) needs. Electricity costs in the country have jumped an average of 25% over the past three years.

South Africa and Gold Prices

So what are the implications for investors?

Obviously, the first one is that what is occurring in South Africa is terrible for the companies trying to conduct mining business there.

South Africa, for example, accounts for about a third of AngloGold Ashanti’s gold output. Speaking to the South African media, its CEO Mark Cutifani said the South African gold mining industry was on a ‘knife edge’.

It seems as if the traditional labor dispute resolution mechanisms are breaking down in the country. Some have even said that conditions facing mining firms in South Africa are the worst since the end of apartheid in 1994.

David Davis, an analyst at SBG Securities, told the Financial Times that the gold mining industry [in South Africa] was ‘fast reaching an impasse.’ He went on to say the rash of illegal strikes ‘will likely engulf the industry’.

The South Africa gold-mining companies are damned if they do and damned if they don’t with regard to workers’ demands. If they don’t give in, mines are shut down due to strike action. If they do give in, many mines will be closed because they will simply no longer be profitable.

Bottom line here for investors is that gold production from South Africa, the fifth-largest producer, will likely be sharply curtailed for many years to come, perhaps permanently. This supply disruption will only add to the already bullish climate for gold thanks to monetary easing around the globe by central banks.

This bodes well for gold long term, in whatever form investors choose.

Tony Daltorio
Contributing Writer, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

The Biggest Graphite Find in Decades Comes With a Catch
12-10-2012 – Dr. Alex Cowie

Don’t be Fooled by Banker’s Remorse
11-10-2012 – Kris Sayce

Why the Australian Stock Market Could Fall 400 Points in ‘Weeks’
10-10-2012 – Murray Dawes

Why the Hunt for Strategic Minerals took me to Holden in Port Melbourne
09-10-2012 – Dr. Alex Cowie

What’s so Important about Gold?
08-10-2012 – John Stepek



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

MoneyMorning
At Money Morning our aim is simple: to give you intelligent and enjoyable commentary on the most important stock market news and financial information of the day - and tell you how to profit from it. We know the best investments are often the hardest to find. So that's why we sift through mountains of reporting, research and data on your behalf, to present you with only the worthwhile opportunities to invest in. Become a more informed, enlightened and profitable investor today - by taking out your free subscription to Money Morning now.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


Comments are closed.



GET THIS NEW REPORT : 5 Things You Can Do To Boost Your Retirement Pot


In this report we’ll give you strategies, tips and advice to help you kick-start, or revive your retirement savings right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

WWD dvd

World War D was billed as ‘the biggest investment summit of the decade’

It didn’t disappoint…


Absolutely mind-blowing beyond my expectations

– D.A.C. Hall


The BEST INFORMATION available,
contrary to mainstream economic reporting.

– L. Sceresini


Exciting, dynamic, passionate, informative, challenging, so professional... Brain-stretching.

– D Finlay


Click here to watch
the brand new Highlights Reel.

Openx pos2

Stock Market Updates

  • ^NDX4082.559+16.286 - +0.40%
  • ^FTSE6819.75+13.95 - +0.20%
  • ^AORD5624.600+3.300 - +0.06%
  • ^AXJO5625.900+1.500 - +0.03%
  • AUDUSD=X0.9338
  • USDJPY=X104.075

Openx pos3

Diggers and Drillers

After three years in the doldrums…

Aussie resource stocks
are now a raging BUY
 
The last time resource stocks traded this low we saw a two and a half year rally that saw them gain 124%...
 
Now they’re getting ready to do it again. Read on to discover why…and three tiny Aussie miners that could explode up many times higher than that in 2014…click here.

Openx pos4

Openx pos5

Openx pos6

Openx pos7

Openx pos8

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Many Australian investors are turning to alternatives. Led by the SMSF crowd, investors are piling i [Read More...]

I wanted to know what Joe Hockey would do about the hundreds of millions of dollars the government. [Read More...]

This morning the Australian dollar trading for 93 US cents. It hasn’t managed to regain parity since [Read More...]

The government plans to force internet and telco providers to keep your digital information (metadat [Read More...]

So much money is fleeing China…that it is distorting the global economy, particularly in the art mar [Read More...]

You’re about to see, you can do a lot better. You can win at the stock market when you use the power [Read More...]

There are many things I don’t know. High on that list is the mystery of Qantas; how does it manage t [Read More...]

The longer we spend in France, the more similarities we see between its economic problems and those [Read More...]

As China continues to slow (possibly sharply), the iron ore price and broader terms of trade will co [Read More...]

Investing in small-caps is the best way that you make money in the stock market. But you should know [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery