The effects of a changing gold price on the South African gold mining industry

Abstract

The importance of gold in the development of South Africa as an industrialised economy cannot be over - emphasised. Towards the end of the 19th century the economy depended almost entirely on the production of gold and diamonds which laid the foundation for a highly - developed national economy. With gold still continuing to play an important role coupled with the recent price increases, a need was felt to investigate the potential effect of higher prices on gold production in South Africa. For reasons set out in the study, it was decided to compare potential out put for five different gold prices. A gold price received by the mines of 050 per ounce was used as abase. Further calculations were made at 060, 070, 0100 and 0150 per ounce. The calculations for all the cases were done duri ng the period when the Rand was floating with the Pound Sterling and a Rand : Dollar parity of 1:1, 2 4 was used. Since then two parity changes occured : the Rand was pegged to the Dollar on the 25th October, 1972 to give a Rand : Dollar parity of 1:1,27732, and the Dollar was devalued on the 13th February, 1973 by 1 1,1 % to give the present Rand : Dollar parity of 1:1, 4192. The e ffect of the above two parity changes is that revenue in Dollar terms is overstated by 14,45 5%. It is suggested that for purposes of this study the Rand figures be accepted and wherever Dollars are used in future estimates these be increased by the afore-mentioned 14, 455%. In Dollar terms the five Cases analised will change as follows: Case A : 5350 becomes 057, 23 per ounce Case B : 260 becomes 068, 67 per ounce Case C : 270 becomes 080,12 per ounce Case D : 0100 becomes 0114 ,46 per ounce Case E : 0150 becomes 0171, 68 per ounce To do an in-depth investigation into the effects of higher gold prices on each individual mine, it was necessary to analyse the various parameters required in the determination of gold p r oduction, revenue, lease and tax payments , and dividends. For each mine the pay limits at the various gold prices and at estimated working cost levels, were determined . Graphs of the estimated tonnages at various pay limits as well as the average grade of ore mineable at these limits were determined. From these graphs it is possible to obtain the total tonnage mi neable at various pay limits. Once the foregoing parameters were obtained for each mine, it was possible to determine annual gold production, revenue, lease and tax payments and amounts available to share holders which are then summarised in tables and illustrated in graphs. For ease of reference the mines were divided up into geographica l areas. Gold production revenue, lease and tax payments to the State and the amounts available to shareholders are summarised and compared for the various gold prices. The summaries show bold production remaining fairly constant at or just below the present level of about 900 000 kilograms per year until 1978 for Case A, 1979 for Cases B and C, 1983 for Case D, and 1984 for Case E. before declining progressively thereafter. Revenue following the same pattern as gold production for Case A , as is to be expected, but increasing to a peak of R1 466 million in 1977 for Case B before progressively declining, increasing to a peak of R2 434 million in 1982 for Case D before progressively declining, increasing to a peak of R3 478 million in 1983 for Case E but remaining above the 1973 level of R1 254 million until the year 2005. Lease and tax payments and amounts available to share-holders following the same pattern as that indicated by revenue reaching peaks of respectively R390 million and R268 million for Case B R485 million and R339 million for Case C R756 million and R536 million for Case D R1 000 million and R779 million for Case E. Following the recent monetary unrest, gold prices assumed for 1973 are too conservative. Should the present gold price of about $80 and the 1972 level of production of 909 000 kilograms continue for the remainder of 1973, then gold production, revenue, lease and tax payments and dividends as shown for Case C for the year 1975 will be applicable for 1973. This shams gold production of 919 520 kilograms, gold revenue of R 1690 million, lease and tax payments of R465 million, and dividends of R339 million. The effect of the higher gold price can be clearly seen when the fore-going figures are compared with the 1971 totals of gold production of 97 6,600 kilogr ams , revenue of R396 million from gold, lease and tax payments of approximately R139 million, and dividends of R142 million . Despite a decline in gold production, revenue is expected to be up by 8 9 % whilst lease and tax payments increase by 2 35% compared with a dividend increase of 139%. Finally certain tax concessions to increase productivity and the rebuy alleviate the labour shortage, prolong the li ves of the mines by mining lower grade ore, and encourage exploration was investigated and suggestions made.