Tech Analysis of Precious Metals Miners

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Rand key to gold output stability:

By Eric Onstad
January 19, 2005

Production decline 33% over decade

Johannesburg: Gold output in South Africa is expected to fall slightly this year, but a bigger slide is threatened if the rand extends its bull run, a government expert said yesterday.

SA gold production could nearly stabilise this year with a buoyant dollar gold price and a stable rand, Alex Conradie, chief mineral economist with the Department of Minerals and Energy, told Reuters.

The country has seen production tumble by over a third in the past decade as high-grade mines run out of ore and firms have to dig deeper to find new deposits.

This year output is forecast to slip only three tonnes to 363 tonnes, a decline of 0.8% after an estimated fall of six tonnes, or 1.6%, in 2004. Final figures for last year are not yet available. "But I think that there is definitely a danger that it could fall further (in 2005) with a stronger rand," Conradie added.

The main factor in knocking output over the past few years has been the rampaging rand, one of the world's best performing currencies, which has strengthened 127% against the dollar since late 2001.

A strong rand, which rallied by 18% versus the greenback in 2004, slashes local income from dollar sales of gold, making some mines unprofitable and vulnerable to closure.

Downscaling

Last year the largest domestic gold producer, Harmony Gold, announced downscaling at six unprofitable shafts that had been producing a total of 220 000 ounces (6.84 tonnes) of output per year.

But this year Conradie expects the rand to stabilise at an average of R6.00 against the dollar, not far from its midday level yesterday of R6.08.

He also projects the dollar gold price will average $447 per ounce in 2005, up from current levels just above $420 and near a peak achieved late last year.

"That is because of contin-uing instability, geopolitical reasons, especially the situ-ation in Iraq, and also the US economy with the dollar weakening," he said.

That would result in a domestic gold price of around R86 000 per kg, compared with just over R82 000 currently and a range of around R100 000-R75 000 last year. Gold production, however, could fall further if the rand extended its three-year march higher, but Conradie said no estimates were available under those scenarios.

Conradie sees the long-term downward trend continuing, with production down by 4.4% to 350 tonnes by 2008, when he projects the local gold price slipping to R80 000.

It would take a gold price of over R100 000 to significantly stem the decline, he added.

South Africa's share of global gold production has shrunk to under 15% from 27% in 1993, but the country still dominates the world in terms of reserves - underground deposits yet to be tapped - with 40%.

The bulk of those deposits, however, would only be economical if local gold prices doubled to R150 000 and above. - Reuters

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