WHILE Eskom loadshedding hurts all mining activity in South Africa, it’s the marginal businesses such as gold mining where the damage is the greater.
That’s the view of analysts writing on the country’s unfolding energy crisis who say that gold miners with depleting resources are most affected.
South Africa’s gold mines are deeper, labour intensive, and therefore more expensive to run. James Wellsted, spokesman for Sibanye-Stillwater which mines gold and platinum group metals (PGMs), says curtailments have the effect of lowering volumes which is “a kicker to unit costs” and speeds up closures.
According to analysts at RMB Morgan Stanley in a report this month, electricity costs will comprise 20% of Harmony Gold’s total operating costs. For Sibanye-Stillwater, electricity will represent 15% of operating costs. The recent improvement in the dollar gold price, coupled with rand weakness, has sent the rand gold price to a two-and-a-half high. While margin supportive it nonetheless makes for a fragile investment case.
“Prolonged stage 4 loadshedding isn’t something we ordinarily expected,” said Jared Coetzer, spokesman for Harmony Gold. “We can management intermittent (cuts) but it will be tricky to manage a permanent cut in demand.” Harmony’s response to potentially prolonged power curtailments is due on March 1 at its interim results announcement.
The negative impact of loadshedding for PGMs might be “over-emphasised” as there’s “no evidence of declining grid consumption” in the PGM sector, said UBS analyst Steven Friedman. “We can only assume that they either have sufficient flexibility with their baseload capacity to offset the negative impact of loadshedding or the curtailments have not been severe”.
Still, PGM production will be further compromised by loadshedding if it continues at its current clip. According to Henk Langenhoven, chief economist at the Minerals Council, intermediary costs – which are inputs bought from other sectors of the economy – move from 13% to 19% in the PGM sector.
Of the PGM miners, Royal Bafokeng Platinum, Sibanye-Stillwater and Northam Platinum are the most vulnerable as they have about 90% reliance for their energy on the national grid. Anglo American Platinum and Impala Platinum have 70% exposure to Eskom.
Helpfully, less PGM production is price supportive. At some 12.8 million ounces last year, global PGM primary supply was at its lowest level in decades, surpassed only by the Covid hit 2020 and mass strikes in 2014.
But it comes with big risks for the South African economy. “We believe the market could be materially underestimating the country risk-premia which will likely weigh on the South African PGM equities,” said Friedman.