AFRICA INVESTMENT-Live-or-die dilemma for S.Africa gold mines, workers

Fri Aug 23, 2013 10:05am EDT

Related Topics

* Unions want pay hikes of 15 to 150 percent

* Companies have cash but strikes will still hurt

* Gold industry in sharp decline, from world's top producer to sixth

* Soaring costs, falling prices push industry to edge

By Ed Stoddard

JOHANNESBURG, Aug 23 (Reuters) - If South Africa's gold miners strike over wages next week, the loss of output will drag down companies already being crushed between rising costs and falling prices for the metal.

The strikers, seeking better pay and conditions for one of the toughest jobs in the world, may also be putting their own livelihoods on the line if a protracted stoppage or the scale of their wage demands force some mines to close.

This live-or-die dilemma hangs equally over boardrooms, mining shafts and communities in an industry which could lose over $35 million a day in output due to stoppages, and also slow already sluggish growth in Africa's biggest economy.

The National Union of Mineworkers (NUM) has threatened to downs tools next week over wages, a move that would effectively shut a gold sector already in a state of steep decline.

Johannesburg's index of gold producing companies has lost 62 percent since a life high reached in September 2002, and 42 percent so far this year.

South Africa's overwhelmingly black mining work force is in a restive mood as it fights for a greater share of the spoils from an industry built on low wages and migrant labour.

But it has reached a point where soaring costs and falling prices have made big pay rises unsustainable. As production has fallen the industry has shed 340,000 jobs since 1990, over two thirds, and more will need to be slashed if wages, which have outpaced inflation the past decade, spiral higher.

The numbers just don't add up at a time when gold's spot price has lost close to 30 percent from the record peak of over $1,920 an ounce it scaled almost two years ago.

NUM, which represents two-thirds of South Africa's gold miners, is seeking a 60 percent wage hike for entry-level workers and 15 percent for all other categories.

Its more hardline rival the Association of Mineworkers and Construction Union (AMCU) wants increases of up to 150 percent at the entry-level but is still in talks with the companies.

The country's chamber of mines says about half of the lower-skilled gold mining workforce of 95,000 would fall into the entry-level category.

Currently, such workers are making 5,000 rand ($490) a month as a basic wage and NUM wants 8,000. So that demand alone would add 142.5 million rand to the industry's monthly wage bill.

In addition to the basic wage, the chamber of mines says that in the gold sector there are other benefits which can translate into a total of 8,800 rand a month in costs to a company. These include meals, housing, and other allowances.

NUM also wants various increases for non-wage benefits as well a 15 percent hike on basic pay for all worker categories.

SURVIVAL OF THE LEAST EXPOSED

Some producers are better placed than others to withstand protracted strike action, which could start next week if NUM's members vote to walk off the job.

Gold Fields spun off the bulk of its South African assets earlier this year and its home base now only accounts for about 12 percent of the company's global production.

So it can easily ride out a strike at its only operation in the country, South Deep, even though at close to $1,900 an ounce for all-in cash costs, it is the most expensive gold mine in the country to run, according to David Davis, mining investment analyst at SBG Securities.

Sibanye, the company created from the spin-off, is more vulnerable with all of its mines in South Africa.

An estimated 14,000 of its workers are entry-level miners, and so NUM's 60 percent demand would add 42 million rand a month to its wage bill, or 500 million rand a year.

In the first half of this financial year, Sibanye generated an operating profit of 3.3 billion rand, so an additional 250 million rand every six months might at first glance seem doable.

But the main profit measure in South Africa - the bottom line to shareholders - is headline earnings, which strip out certain one-off items, and Sibanye's number for the same period was 880 million rand.

Other costs such as power are also rising and Sibanye's all-in cash costs for the period were $1,275 an ounce against gold's current price around $1,375 - giving it little room, especially if spot bullion falls further.

BLINK, BLINK

The producers' latest offer to NUM is 6 percent, just below the current inflation rate.

"I think the mining companies will remain steadfast because they can't afford the increases," said SBG's Davis.

He also said the companies could hold out longer than the unions as they have cash and debt facilities to lean on. Sibanye for example in its first-half results said it had over $200 million in available cash.

AngloGold Ashanti this week secured a relaxation in a financial ratio covenant on its revolving credit facilities.

Miners on the other hand may struggle to hold out without pay for several weeks. The typical South African mine worker has eight dependants, many of whom are peasants in rural areas far from the shafts. This stokes their demands but also means they cannot survive for long without an income.

Even with deep pockets, the mining houses will also battle.

It is instructive to look at the impact of last year's wave of illegal strikes, which spread from platinum to gold and were rooted in a turf war between NUM and AMCU.

Africa's top producer AngloGold said its fourth-quarter adjusted headline earnings last year were 2 U.S. cents compared to 61 U.S cents the previous quarter, largely because of the 250,000 ounces in output it lost to the strikes.

Harmony Gold, which gets almost all of its production from South Africa, fell into a loss in the March quarter because of the temporary closure of its Kusasalethu mine, which shut because of the union rivalry and violence.

The once towering industry has been sinking for decades.

South Africa accounted for 79 percent of world production in 1970 but Thomson Reuters GFMS ranked South Africa sixth in global output in 2012, when it produced 177.8 tonnes of gold, just 6 percent of the world total.

($1 = 10.2789 South African rand) (Additional reporting by Sherilee Lakmidas; editing by David Evans)

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