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Miners make a plan on Eskom
27/03/2008 17:58 - (SA)
Brendan Ryan
Johannesburg - The market may have overreacted negatively to the impact of the Eskom crisis on South Africa's mining groups according to JP Morgan analysts Steve Shepherd and Allan Cooke.
The analysts also accept the official line from Eskom and the South African government that electricity charges must rise significantly.
That's despite their calculation that the currently proposed 53% hike in power tariffs could increase overall mining cash costs by up to 5% annually.
In a recently published research report, Cooke and Shepherd said: "We fully expect the price of Eskom electricity to double in the next two to three years. Eskom must do this since power has been too cheap for too long which may be a significant contributory factor to the problems now being encountered."
The analysts added: "The miners are not sitting on their hands. Apart from striving to make economies, many are making plans to supplement their power supply with either self or co-generation facilities.
Production can get back on track
"In our view, it is possible that production and growth may be fully back on track in two years' time - if Eskom and the government can come to the party. The full co-operation of labour unions will also be vital.
"We believe the market may have factored an overly negative outlook due to the power crisis. We can understand this but as we do more research we are being persuaded that a more positive outlook is possible," the analysts said.
They calculated that power - as a percentage of cash operating costs at current charges around $0.027 per kW hour - ranges from 2% for a shallow platinum mine selling metal in concentrate form to 15% for an ultra-deep gold mine.
Specific examples are Aquarius Platinum at 2%; the three platinum majors - Anglo Platinum, Impala Platinum and Lonmin - at 5% and Gold Fields along with AngloGold Ashanti at 15%.
They estimate that a 50% hike in power charges would add 1% to Aquarius Platinum's costs while the three platinum majors would all suffer a 2.5% increase and AngloGold Ashanti's costs would go up 3.4%.
Gold Fields, which has the greatest exposure to deep-level mining, would suffer a 4.9% rise in operating costs.
Electricity use varies from mine to mine and is determined by a number of factors. The main ones are; the volume of water pumped and from what depth; the refrigeration load which relates to depth and ventilation requirements which relate to the depth and distance of the mining areas from the primary access infrastructure.
The mining method used is also important. A shallow, mechanised bord-and-pillar miner like Aquarius Platinum uses very little power compared to Anglo Gold Ashanti's ultra-deep Mponeng and Tau Tona operations.
Where to save
Shepherd and Cooke said there are two specific areas where the mines could save significant amounts of power. These are to cut back on the use of pneumatic rockdrills which are powered by electrically-generated compressed air and to replace incandescent lighting with fluorescent lighting.
They reckoned up to 10% of power usage could be saved in this way although there would be hefty capital expenditure costs involved in switching mines from pneumatic rockdrills to electric or electric-hydraulic rockdrills.
The analysts said pneumatic rockdrills use up to ten times the power that equivalent electric rockdrills require.
But switching over would cost a large mine hundreds of millions of rands and render their current investment in pneumatic rockdrills obselete.
They said: "We seriously doubt the manufacturers of electric drills could begin to meet a massive surge in demand so this is no short-term solution. But we are confident it can make a difference over the next two years or so."
The analysts pointed out AngloGold Ashanti had already made significant progress in implementing the use of electric drills but most other mining groups had not.
"We wonder if this will be considered when electricity gets allocated by Eskom. It could prove rough justice if pro-active AngloGold has to save, having already cut its consumption 17% over the past three years," they stated.
Summing up, Cooke and Shepherd attacked Eskom for not clearly communicating its power supply policy to the precious metals miners.
They said: "We 'think' it (Eskom) has agreed to supply the deep gold mines with 95% of previous supply while the platinum mines may continue to receive only 90. But we, and our industry contacts, are still not completely sure about this.
"We believe it may be realistic to expect the SA platinum miners to save close to 10% of historical power consumption by changing some basic approaches to mining and from various other economy efforts.
"It will be harder for the deep-level gold miners since they have a higher power overhead but increasing these miners' allocation of power to 95% may have levelled the playing field relative to the majority of the platinum miners."
- Miningmx.com
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Power Crisis Special Report
