Gold mine head gear in Johannesburg South Africa

Increased Mining Costs in South Africa Reducing Investor Appetite

Investors are turning their attention away from the nation and looking to more profitable mining operations in other regions as mining costs in South Africa rise at a higher rate than inflation. The industry analyzing group Bernstein Research indicated that costs have risen 18% year-on-year. The most important contributors to cost increases have been wage inflation and increased operating costs.

 

Rising Price of Skilled Labor Drives up Mining Costs in South Africa

In South Africa, the National Union of Mineworkers has driven up the cost of skilled labor. The union is demanding a 13% wage increase for 2012, well above the 6.1% increase in cost of living in the nation. A platinum extraction operation in Rustenburg had 18,000 workers strike on February 1, 2012, cutting into production measurably and giving investors a reason to worry about meeting profit expectations. Operating costs have risen significantly in recent years as well. The state owned Energy Company Eskom was given permission by the government to increase the price of electricity by 25% over three years starting in 2011. Coupled with a 45% increase in the price of Brent crude oil, the rising energy costs have been devastating to the power dependent industry. Mining companies are also seeing their profits eroded by unfavorable changes in currency valuations. Many extraction operations in SA report profits in the weakening American dollar but pay their expenses in the local currency, the rand, which has gained in double digit percentages in recent years. A bright spot for companies operating in SA is that the central bank has kept interest rates artificially low to keep money flowing through the economy. In such an asset heavy industry, the difference between borrowing at above 10% like in 2008 and 2009 versus the relatively low 5.5% of 2012 has a substantial impact on the bottom line.

 

 

The steady rise of gold prices in recent years has caused investors to look to gold-rich nations for higher profits. South Africa placed 5th in a list of top gold producing countries behind China, the United States, Australia and Russia. China and Australia especially have seen large investments in resource extraction projects to match China’s rising demand for minerals.

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