Chapter 1

INTRODUCTION

THE ROLE OF THE GOLD AND PLATINUM GROUP METAL MINING INDUSTRY IN SOUTH AFRICA

The economic and strategic importance of South Africa’s mining industry is beyond dispute. While there has been a recent decline in mining volumes mined and the sale of some minerals such as gold, the significant mineral reserves of the country suggest that South Africa’s mining industry will continue to be an important global roleplayer for many decades to come. The country has about 40% of the world’s gold reserves and 90% of platinum group metal (PGM) reserves.1 South Africa is therefore ranked first in the world in respect of both gold and platinum reserves.

Although the contribution of gold and platinum mining towards South Africa’s economy is constantly changing, it has been significant over many decades. This does not mean that the industry will not face significant challenges in future. Of the gold and platinum mining industry, gold mining has had to pass through the most turbulent times during the past few years.

GOLD MINING

The profound changes that the gold-mining industry has experienced, have been caused by both local and international conditions. Cost increases in the industry have been significant, while both the tonnage and the grade of the ore have declined. Recent statistics indicate that this trend is continuing.2 South Africa’s gold production fell from 494 tons in 1997, 464 in 1998 to 428 tons (at an annualised rate) in the first half of 1999.3

At the same time, the price of gold has dropped, making many mines marginal. During 1999 spot gold prices dropped to US $256 per ounce, the lowest in two decades, following the announcement by the Bank of England that the United Kingdom treasury intended to dispose of more than half of its gold reserves over a period of two years. It is further estimated that only if the gold price remains in the region of US $300 or above would there be a dramatic reduction in price-related retrenchments of mineworkers.4

Despite declining production and export figures, the gold-mining industry directly contributes just under 4% to gross domestic product. It is more likely to contribute a total of closer to 10% if the indirect contribution of the industry’s multiplier effects is taken into account. The estimated total direct taxation paid towards the national fiscus for the fiscal year 1996/1997 was R2 billion.5

The value of gold exports as a percentage of South Africa’s foreign exchange earnings has declined from more than 50% in 1983 to just over 20% in 1996. More recent estimates show that gold exports in relation to total exports have declined to a record low of 11.5% in 1999 from 25% in 1990.6 If the fact is taken into account that, in contrast to the manufacturing sector, the gold-mining industry is a relatively low net user of foreign exchange, then even its contribution of about 11.5% to South Africa’s foreign exchange earnings remains significant.

As a result of increasing costs, a decline in tonnage and the grade of the ore mined, and a drop in the gold price, employment levels in the gold mining industry have seen significant decreases over the past ten years. From a total of approximately 520 000 people employed in the gold mining sector in 1987,7 there has been a decline to an employment level of 258 815 in 1998, a decline of approximately 50%.8 The negative impact of such job losses becomes even more serious when considering that every worker in the gold-mining industry is estimated to have between seven and ten dependants.

The above factors explain why the gold-mining industry, despite playing a prominent role in South Africa’s economy, is presently experiencing significant threats to its economic survival. Productivity and profitability are therefore key to its survival.

PLATINUM GROUP METALS MINING

South African mines are the world’s primary producers of the platinum group metals (PGMs): platinum, palladium, rhodium, ruthenium, iridium and osmium. The impact of platinum-mining on the South African economy is growing, both in terms of export earnings and as a significant employer of labour. PGMs are presently the country’s second largest export after gold and the gap between gold’s export earnings and those of PGMs is narrowing. In 1998, gold exports earned R24 billion, while those of PGMs earned R14 billion.9 Almost 100 000 South Africans are employed in this sector.

Uncertainties about the production levels and marketing strategies of the world’s second largest producer of PGMs, Russia, continue to complicate forecasts of international price, demand and production levels. During November 1999, for example, prices for PGMs reached new highs based on fears that Russia could halt exports of palladium during 2000. The platinum price followed suit. When Russia’s acting president signed legislation providing for the resumption of Russian platinum exports in January 2000, the London platinum price immediately dropped.

Despite these uncertainties, however, international demand for PGMs is expected to rise. Analysts expect metal markets to absorb resumed Russian exports because of the rising global demand.10 The platinum-mining industry is therefore planning for ongoing expansion, but in an international environment of uncertainty as far as global supply and price are concerned.

In summary:

Despite its ongoing prominent role in South Africa’s economy, the gold-mining sector is currently experiencing significant challenges to its economic survival related primarily to issues of productivity and profitability.



The PGM mining industry is expecting increased international demand, but in an environment of uncertainty as far as global supply and prices are concerned.

This brief background indicates that the issues of productivity and profitability have increasingly come under the spotlight. It therefore stands to reason that the theft of precious metals from mines and refineries have been accorded a higher priority by the mining industry than in the past. In its 1998/1999 Annual Report, the South African Chamber of Mines (Chamber) reported that: