The gold price may be booming but it’s unlikely to attract any investment into South Africa’s mines.
Gold has historically been a safe haven in times of uncertainty. With economies and stock markets around the world crashing as a result of the ongoing COVID-19 pandemic, investors have once again flocked to buy with demand resulting in the commodity reaching a 7 year high of >$1,700/oz in recent days.
Gold’s latest run is spurred by cash injections to mitigate the severe impact of COVID- 19 on the global economy. Governments worldwide are signing off on massive stimulus measures on top of the near-zero interest rates and quantitative easing in the hopes of jumpstarting businesses.
One would think that the high price would encourage more investment into South African gold mines, however market price is only one consideration and there are other factors that investors take into account and may, in fact, place more emphasis on.
The history of gold in South Africa goes back to 1873 when the first large-scale production began when alluvial deposits were discovered at Pilgrim’s Rest, followed shortly by gold discovery in Witwatersrand in 1884.
The discovery of gold in the late 19th century gave rise to the development of the city of Johannesburg, Egoli, or the City of Gold and for many years, South Africa was the world’s primary gold producer.
This is no longer the case and South Africa’s gold output has continued to decline for several decades. From peak production of around 1,000t in 1970, the nation’s gold output fell to 130t in 2018, with South Africa now only accounting for c.4% of the world’s gold production.
This decline, however, is not a result of a depletion in reserves and one would be wrong to assume that South Africa is running out of gold. In fact, over 50% of all gold reserves are found in South Africa, with the Witwatersrand Basin remaining the largest gold resource in the world.
The decline in production over the decades has been driven by a combination of closure, maturing assets and industrial strife which has created an inhospitable operating environment. Investors, and especially foreign investors, are not attracted to South Africa’s mining industry.
The industry has its challenges and many have stated that it’s simply too complicated to invest in South Africa’s mining industry – from the stringent BEE requirements to the constant changes the Government can, and does, make to the Mining Charter, resulting in significant uncertainty for investors.
And it goes without saying that industrial action by the workforce, ultimately leading in higher wage costs year on year, and load-shedding by Eskom also play part in deterring investors.
And it is not just new investment that is being deterred. Even the leading miners headquartered in South Africa are now focusing elsewhere, with Anglo Gold Ashanti recently selling the last of its South African mining assets and exiting the South African market to focus on “looking offshore for less risky investments”.
It is not all bad news, with Australian company Theta Gold Mines so far injecting c. R1 billion into establishing a mine in the historical mining Mpumalanga town of Pilgrim’s Rest.
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Theta Gold Mines’ venture is a re-awakening of the giant field where South Africa’s first rush started in 1873, with a plan which could see 6 Moz mined over the next 20+ years.
With new technology many of the old mines in South Africa could potentially be re-opened and it could be viable to mine deeper to access the plentiful reserves that are still deep below the ground.
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However, this would require significant capital investment and the key is whether South Africa can attract investment, especially when the rest of Africa is becoming more accessible and less risky to invest in the mining sector.
AUTHOR: Jill MacRae, Associate Director, BDO in South Africa