As we enter another round gold sector industry wide wage negotiations – I am once again struck by the sense of helplessness at peoples’ knowledge about mining economics. We hear the mine bosses saying the mines cannot afford to pay more than CPI this year (Mr Graham Briggs – Harmony CEO on E News) and the worker representatives saying the mines are making millions and must pay a huge increase (mine worker on the same E News bulletin).
So who is lying – and what would a reasonable increase be?
Well, I think we can all agree the first thing that should be considered is CPI and what is this CPI they are talking about (Currently 5.9%). The Consumer Price Inflation is the rate the government says consumers will pay more for goods and services and is based on a basket of goods that they compare month on month. The government has some subtle changes to the basket but the whole process is published on the www.statssa.gov.za website. Is this the inflation rate you are experiencing in your own life? Well are you a typical South African citizen – just the fact you have access to the internet and a computer to read this means you are probably a member of the middle-to-upper class when compared to the average South African.
Unskilled miners are also moving up-market as their pay has increased compared too many other unskilled workers in this country – and so I would agree they also don’t experience inflation in the same way as the government has calculated it. The effect of this is that people feel we are getting poorer – what you could by with R100 last year should by you the same as R106 this year – and yet we notice its costing us more. So is the government lying about CPI? No – it’s just my basket of goods is not the same as the one they have selected for their calculations. Am I a typical South African? No- I have a job and tend to buy different items at the supermarket than most South Africans.
So we can understand how the miners say they are getting poorer and need a large increase. Now we come to the issue of whether the mines can afford to pay more. Mark Cutifani (CEO Anglo American) said: "Promoting expectations above the capacity of the industry to pay is a dangerous road that may have tragic consequences for employees who do not understand how close we are to economic devastation in certain sectors” (News 24). We need to understand that mining economics starts with the ore body. To quote another Harmony ex-CEO (Bernard Swanepoel) “The orebody dictates”. Every mine has a different orebody with regard to depth, thickness and grade distribution. The infrastructure in place also differs on each mine. Thus the amount of ore that can be mined profitably also differs. The formula to determine which material is ore and which is waste rock uses the mining unit cost (Rand/ton), gold price (Rand/gram) and recovery factor (%) to determine the break-even grade (g/ton). Rock with a gold content above this grade is economic. Rock with a gold content lower than this grade is waste and cannot be mined economically.
Due to the economies of scale, the higher the mine’s production, the cheaper the mining unit cost becomes. So mines’ tend to operate close to the maximum volume as long as they have sufficient material above the cut-off grade available to achieve this. If the cut-off grade goes up (due to lowering gold price, rising costs or lower recoveries), more development is needed to access the ore body as less is economical which in turn also pushes up the costs. More of what was previously considered payable becomes waste and thus the higher grade ore gets depleted quicker. This reaches the point that there is insufficient higher grade ore to maintain the most economical volume, and so production decreases further causing the unit cost of the rise even higher. This causes the mine to face premature closure even though there is still gold bearing rock left underground. This rock is below the cut-off grade and is thus now considered waste and cannot be mined economically.
The labour bill currently makes up over half the total costs of a mine. Electricity, steel and fuel are also large contributors. Electricity is going up at 16% per annum (throttled back from 22%) and fuel is also going up at a rate far higher than CPI. Labour wants a 60% increase. The gold price in $/oz has dropped from over $1 800 to $1 400 odd over the last 2 years. Can you see how this is affecting the cut-off grade and causing it to rise?
Collective bargaining and expectations of what is happening elsewhere in the mining industry means that individual mines are forced to accept the negotiated salary increase across the entire commodity. The platinum miners had violent strikes and finally settled for double digit salary increases but well down on the R12 500-R16 000 that was demanded. The gold miners are making the same demands as platinum miners but do not seem to see how many new platinum projects are now on hold and how Anglo Platinum is currently retrenching 4 500 workers. How many gold mines will be forced to close as the remaining material underground gets changed from ore to waste as the cut-off grades increase? How many jobs will be lost?
If each mine could determine their own salary increase based on the economics of the individual orebody, maybe workers will negotiate considering they themselves will be the ones losing their jobs if the mine becomes uneconomical. These negotiations are currently done by union officials who will keep their jobs until the last mine closes and there is no industry left to pay their union salaries. Sanity needs to be regained or we will end up with a string of ghost cities spread out across the Mpumalanga, Gauteng, North West and Free State landscape where the great gold mines of South Africa once were.
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