interesting comments on Energy Costs for SA Mines:
JP Morgan analyst Steve Shepherd is looking for improved earnings from the gold companies because of the higher average rand gold price received. JP Morgan’s latest "Golden Goose" research report released yesterday highlights again the advantage held by the major South African gold producers over their international competitors in terms of the impact of high energy costs. Worries over energy costs are once more to the fore with the oil price back at record levels above $70/barrel.
The South African mines have lower exposure to the impact of rising oil prices because they are predominantly deep-level, labour-intensive operations with low levels of mechanisation. Labour typically accounts for between 40% and 50% of the working costs on an SA gold mine.
By contrast, most major gold mines in the rest of the world are open cast operations using fleets of diesel-powered haul trucks and other earth-moving equipment.
Last September, JP Morgan estimated that energy costs could amount to between 20% and 30% of operating costs on open pit mines at oil prices around US$50/bbl and highlighted Gold Fields with its relatively low energy exposure.
The firm now points out that the Gold Fields share price is up 94% since early September compared with a 40% rise in the XAU index which tracks 12 precious metals companies listed on the Philadelphia stock exchange. Shepherd expects the cost pressures facing the SA gold companies to be "considerably less" than their offshore peers and picks out Harmony and Gold Fields as the least affected. Harmony gets 90% of its production from SA and Gold Fields around 65%.
But there is a drawback because of the power of SA’s labour unions which in recent years have consistently negotiated pay increases above the country’s ruling rates of inflation. Operating costs will drop on an open cast mine when energy prices fall but higher wage levels on SA underground mines will not be reduced.
"This represents a danger for SA mines’ cost structure relative to offshore mines. While less labour intensive/more oil/commodity dependent mines would likely benefit from any reduction in oil prices, South African mines cannot claw back wage increases that have been institutionalised."
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