Global Trade Winds Bring Mixed Fortunes for South Africa

While a downturn in prices has hurt some sectors, South Africa’s mining sector will manage through the trough better than other regions.

By Antonio Ruffini, E&MJ’s South African

South Africa’s mining sector is better off than most in the face of the cold winds of the global slowdown. The country’s gold sector is recovering from a dreadful 2008 and, aided by a large local infrastructure build program now in full swing, the domestic coal market has expanded. Diamond producers in South Africa, however, took extended breaks at the turn of the year. The country’s ferrochrome smelters have shut up to 80% of their capacity and many of the touted platinum projects have withered on the vine.

Project promoters in the platinum industry were aware that the platinum price was never going to hold above US$2,000/oz, and based their plans on prices as low as US$1,300/oz to US$1,500/oz. But, they certainly did not foresee US$1,000/oz and less for platinum. Subsequently the world’s second largest platinum producer, Impala Platinum, abandoned its plans to take over Mvelephanda Resources’ Northam mine. The world’s largest platinum producer Anglo Platinum announced that it will hold production in 2009 at the 2008 level of 2.4 million oz of refined platinum and cut 10,000 jobs. The company has slowed or delayed projects including the Amandelbult No 4 shaft, Twickenham, and its Styldrift project.

“We see the lower platinum price being around for at least a couple of years,” said Mahomed Seedat, COO, Lonmin, South Africa’s third largest platinum producer. Lonmin stopped most of its opencast operations at its core Marikana asset the end of 2008. The group is also shutting down underground operations at Marikana and the company plans to put its Limpopo operations on care and maintenance.

“Limpopo will only come back as part of an expansion that would reduce the cost of production. It’s going to take at least three years before that would come back on line again,” Seedat said. The group has also significantly reduced capital expenditure. It has disbanded many of the teams that were undertaking feasibility work on its Akanani project.

“Our costs need to come down significantly to at least let us be in a cash-neutral position for the next couple of years,” said Seedat.

During Lonmin’s 2008 financial year it produced 725,000 oz of platinum, and is looking at about 700,000 oz for the current financial year. “Obviously our earlier plan of reaching 1.4 million oz by 2012 is being reviewed,” Seedat said.

Infrastructure Improvements

But, South Africa is better off than most mining based economies. For one thing, it is doing what countries, like the U.S., are still looking to launch, major useful infrastructural development programs. South Africa, through luck of good timing is already in the midst of such a build program involving power stations, road renovations, and railway and harbor upgrades, which are expected to just about stave off recession in the country.

The global slowdown has also helped ensure that South Africa’s biggest coal consumer, power supply utility Eskom, has not had to load-shed since April 2008. This represents a vast improvement from just over a year ago, when South Africa’s electricity grid was on the verge of collapse and the mining industry was temporarily forced to cease operations.

Similar to all major mining groups in South Africa, major gold producer Gold Fields was required to reduce its power consumption. In Gold Fields case it had to cut power consumption from the pre-January 2008 level of 600 MW. It not only was able to achieve the minimum 5% cut called for by national power company Eskom, but has cut a sustained 10% off its power consumption.

That was achieved mainly as a result of production cuts, as South Africa’s gold sector experienced a torrid 2008. The company which used to produce some 21 metric tons (mt) of gold a quarter in South Africa saw this fall to 15.5 mt during the third quarter of 2008 before increasing to almost 18 mt in the final quarter of the year. It is now looking to raise and stabilize production and Gold Fields is expecting to achieve production of some 19 to 20 mt a quarter in the future.

It will facilitate this while sustaining the power usage reductions by undertaking energy efficiency projects such as a pump efficiency program that will focus on maintenance on an efficiency basis rather on fixed times, ventilation system vane modifications and a three chamber pipe feed system.

As with South Africa’s gold sector in general, the company spent much of 2008 focused on major problems that have threatened the long time viability of gold mining in the country, in particular its poor safety record.

Gold Fields brought in Du Pont to undertake a safety review and is implementing training and cultural interventions. The results are there to be seen. During the company’s 2008 financial year ended mid-2008, it suffered 47 fatalities on its mines while during the first half of its 2009 financial year this was down to eight. While an improvement Gold Fields management said this is not good enough and AngloGold Ashanti raised the benchmark by achieving a fatality free quarter in South Africa last year.

“Investing in safety is not a cost. We cannot mine on a stop start basis,” said Nick Holland, CEO, Gold Fields. Increasingly shafts have been forced to shut when a fatality occurs and it typically takes several days to get a shaft back to full operation after a shut down. Of the company’s eight fatalities in the last half of 2008, seismicity and equipment movement were the two main causes.

Also related to safety, Gold Fields replaced the steelwork on the main shaft at its Kloof mine where the bantons had become corroded. This project saw some 225 mt of steel replaced on this deep level shaft.

Gold Fields’ South Deep project, which will see some US$100 million spent on it this year, however, is the example given when people argue that the sunset of South Africa’s gold mining industry remains a long way off. “South Deep is the mine of the future and will be fully mechanised,” said Vishnu Pillay, head of Gold Fields’ South African operations. South Deep, in construction for 12 years now and having run a gamut of owners from JCI to Placer Dome, is now looking to ramp up from 200,000 oz/yr to 320,000 oz/yr.

As part of its dealing with both safety and to ensure that Eskom’s power reliability does not threaten safety or critical functions at its deep level shafts, Gold Fields has spent US$14 million on standby power generating facilities at its South Deep, Kloof and Driefontein mines. South Deep currently uses 58 MW and it has secured Eskom’s commitment for another 40 MW for the project which, once it reaches full operation, will use some 90 MW.

While part of the reason for South Africa’s electricity situation having improved was the imposition of constraints on key customers, such as mines, to use 5% – 10% less electricity, the other reason Eskom sits more comfortably is due to the ferrochrome and steel smelters having shut down some 1,500 MW of capacity.

The country’s electricity reserve margin, though below the desired 15% and not expected to reach this level for many years, stood at 8% in January 2009. The country’s winter electricity demand peak in July 2008 was 35,959 MW, below that of 36,513 MW in July 2007 and Eskom is forecasting a 3% reduction in energy sales this year.

With some US$23 billion being invested on its new power station projects, Eskom’s first new captive colliery coal-fired base load power station in decades, the 4,764 MW Medupi station, will be the fourth largest coal power station in the world. Its construction adds 0.34% GDP growth to South Africa a year and will see its first unit commissioned in 2012, the final one in 2015. The second new base load power station already under construction, the 4,800 MW Kusile, is having a similar effect. And Eskom admits to the possibility that the next big base load station, its third in recent times, may well be coal fired, even though nuclear energy remains on the cards.

In addition, Eskom has ensured its coal stockpiles now have enough for 38.7 days of power generation. That is compared with January 2008, when the utility had 10 days worth of stockpiles at its power stations on average. It has benefited the burgeoning domestic coal producers that rely on short term sales to Eskom, which uses high-ash low-calorific value coal unsuited for the export market.

Transnet Invests in More Capacity

Last year, the short term coal market (i.e., not the coal supplied to Eskom’s power stations from its captive collieries) amounted to some 25% of its total used. This year that percentage is expected to increase to 30% as more of the utility’s 3,645 MW of formerly mothballed power station units come on stream.

Eskom does not see supply of coal as a risk as it believes there is sufficient capacity out there, but does see pricing as a risk. The utility does not foresee its demand for short term coal decreasing; rather the opposite, even as it finds itself with much needed breathing space, due to the global slowdown. The short term coal market represents Eskom’s swing production, and the only major risk to Eskom’s short term coal suppliers is that the global economy deteriorates to such an extent that power generation in South Africa is reduced by a large amount.

State owned rail company, Transnet, does not believe the coal future for South Africa will be so dire and is conducting feasibility studies relating to investment worth up to US$6.5 billion on the country’s long-term coal and iron ore haulage infrastructure. Its Freight Rail division is also spending US$500 million on rolling stock for the short-term expansion of its coal and iron ore lines.

Transnet CEO Siyabonga Gama says this long term investment would break down into US$3 to US$5 billion on Transnet Freight Rail’s 585 km coal line, which links 42 coal-loading sites, primarily in Mpumalanga, with the Indian Ocean port of Richards Bay; and up to US$1.5 billion on its 861 km iron ore line from Sishen to the country’s major iron ore port of Saldanha Bay on the Atlantic seaboard.

“We think that, regardless of the global financial crisis, there are important sectors that we should continue to develop, and coal is one of them,” said Gama. “You will find in our overall portfolio, close to 100 million mt is coal–70 million mt for export and 24 million mt for domestic clients. The demand for domestic coal has risen considerably over the past 12 months. In fact, it has risen more than the demand for export coal. Traditionally we have handled about 19 million mt/yr of domestic coal, but last year we handled 23 million mt.”

This increasing demand has prompted Transnet Freight Rail to expand. “We have had to invest in what we call smalls, 600 wagons for domestic coal. These cost US$75,000 each,” said Gama. “Our assessment is that we can carry between 74 and 76 million mt/yr on the coal line, but coal availability is the key factor. I would estimate that we handled about 63 million mt last financial year, and that we will probably handle 67 to 69 million mt in the current financial year, which ends on 31 March 2009.”

One of the main reasons for the lower annual figures is the increased rate of signaling problems and locomotive failures experienced with the aging locomotive fleet. “This is why we have launched a capital program for our coal line to bring in 110 new electric locomotives over the next three years at a cost of over US$350 million,” said Gama.

From a rolling stock perspective, Transnet Freight Rail will be in a position to handle up to 81 million mt/yr of coal by 2011 without further investment. Moving to 93 to 94 million mt/yr is where the US$3 to US$5 billion comes in.

Responding to whether he was confident there would be sufficient future coal supplies from the mines to require Transnet capacity of 85 million mt/yr, or even over 90 million mt/yr, Gama says: “The Department of Minerals and Energy has recently granted quite a number of coal mining licenses, so we are quite comfortable,” said Gama. “We believe that in the next 24 months we will see an increasing number of new coal producers coming into the picture.”

Transnet Freight Rail has also signed contracts providing for capacity of up to 60 million mt/yr of iron ore from 2015 for 15 years, an increase from the current capacity of 38 million mt/yr.

“Next year our capacity will increase to 43 million mt/yr, then to 47 million mt/yr in 2010, rising to 54 million mt/yr and eventually the 60 million mt/yr by 2015,” said Gama. To handle this increased capacity Transnet Freight Rail will be spending more than US$100 million on additional rolling stock.

This is merely the tip of the iceberg. The company has done detailed feasibility studies which have indicated that extensive channel-wide infrastructure investment will be required at the country’s iron ore port of Saldanha bay. “We need to provide additional loops amounting to 190 km of rail, 99,000 m3 of ballast and 44,000 new railway sleepers; we have to expand the yards at the loading sites and at Saldanha Bay; and we have to create two new quay walls at the port, and install additional ship-loaders, tipplers and so on,” said Gama

In terms of the overall outlook for South Africa, Gama predicted coal to continue to grow. “It will have its peaks and valleys, but will remain fairly high,” said Gama. “As far as iron ore is concerned, the future seems less certain. The iron ore horse could run, but the coal horse definitely will.”