Mar 7, 2007

South African Gold production plummets

Johannesburg - South African gold production fell by 7.5 percent in 2006 to 275 119.4 kilograms, its lowest level in 84 years, as lower grades were mined because of higher gold prices, according to the Chamber of Mines.

"This is the lowest level of gold production since the strike in 1922 reduced production to 218 031 kilograms," said the Chamber adding that members of the industry body, representing about 85 percent of production, reported a 1.5 percent increase in tons but a 9.3 percent decrease in the average grade mined.

In 2005, 297 311.6 kilograms of gold were produced out of South Africa's mines.

Costs were up by substantially more than inflation according to a statement. Total production costs before capital expenditure were up 11.9 percent year-on-year at R99 725 per kilogram, while the figure including capital rose by an even higher 20.8 percent to R125 030 per kilogram.

In the final quarter alone, the country's gold production fell by 3.1 percent quarter-on-quarter to 68 117.9 kilograms, while on a year on year basis this figure was 9.3 percent lower than in 2005. Again lower grades were attributed to the decrease.

"The 0.1 percent increase in the tonnage of ore milled to 12.9 million tons was not sufficient to offset the 2.7 percent decline in the average grade achieved hence the decrease in production," said the Chamber.

"On a year-on-year basis gold production declined by 10 percent in the last quarter of 2006 as the 4.9 percent increase in tons of ore milled was not sufficient to compensate for the 14.2 percent percent decline in the average grade mined."

South Africa’s gold output at 84-year low

By Chris Flood (The Financial Times)

South Africa’s annual gold production has sunk to its lowest level since 1922, extending the decline from the world’s biggest source of the yellow metal that has also helped drive an almost continuous rise in prices this decade.

Production levels have fallen steadily since 1973 as higher grade ore has been gradually depleted. However, with higher gold prices encouraging more costly extraction techniques from deeper mines and lower ore grades, falling production volumes could begin to slow or stabilise.

Gold output from South Africa fell 7.5 per cent in 2006 to 275.1 tonnes. This means the country’s annual output has now halved over the past 10 years.

Roger Baxter, chief economist at South Africa’s Chamber of Mines, said that if certain key projects were successful, the rate of decline in the country’s gold production was likely to slow or possibly stabilise.

The mining of lower grade deposits that would have been uneconomic to pursue previously has seen the average grade of ore mined in South Africa fall by 9.3 per cent last year.

However, to extract gold from these sources, companies are facing increasingly challenging conditions with workers having to operate in extremely high temperatures at ever greater depths below the earth’s surface.

This is putting significant upward pressure on costs. Total production costs (including capital expenditure) rose 20.8 per cent last year in rand terms.

“[Companies] have the flexibility to mine lower grades to break-even with costs as a result of the higher gold price,” Mr Baxter said. But he was unsure how soon higher capital spending would feed into increased production because developing a mine from a new discovery to full production takes about eight years.

The industry is still suffering from cut-backs in exploration budgets and a dearth of new discoveries between 1997 and 2001.

John Reade, head of metals strategy at UBS, said South Africa would remain an important gold producer, but higher capital expenditure was likely only to slow its long-term decline.

South Africa remains the world’s largest producer, but its share of global mine production has now shrunk to about 11 per cent from 50 per cent in the early 1980’s.

Falling output from South Africa has contributed to a steady decline in global production and an almost continuous rise in the gold price since 2001. Gold averaged just over $271 a troy ounce in 2001 and Goldman Sachs expects the price to reach $750 by the end of this year from just under $650 currently, helped by further weakness in the dollar.

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