Gold Mining: South Africa's Energy Crisis

South Africa's deep gold mines need 50% power supplies just for lighting and cooling...

DESPITE SLIPPING to second place in the world league of Gold mining nations in 2007, South Africa remains a major source of new bullion, as well as the primary source of platinum supply, writes Julian Phillips of The Gold Forecaster...

   And following the much-publicized collapse of South African energy supplies in Jan. – a collapse that crimped metals output and drove both platinum and Gold Prices sharply higher – the Johannesburg government will now give state-owned power utility, Eskom, R80 billion ($10bn) in funding.

   The aim, announced in the annual budget of 20th Feb., is to help boost electricity generation. And since then, it has become clear that Eskom will be able to access the total funding it needs of well over R300 billion ($37.5bn) to expand capacity.

   Eskom has also confirmed that it needs to see South Africans cut power demand by 10% for the next few years. At the moment the main city of South Africa is suffering power outages every second day for between one and three hours at a time.

   It has recommended too that expansion plans for the mines, smelters in the country, housing projects and new ventures be curtailed until Eskom can guarantee the needed electricity to operate them. It expects power cuts to continue until at least 2013. So that one, on the outside, can gain some perspective of the problem and how it will be handled in the future, it would be good to see just how such a SNAFU could have happened.

   More than 10 years ago there was excess power capacity in Eskom's hands, but it foresaw that this would be taken up and growth would be accommodated easily. There would be a requirement for one power station per year thereafter. But the company falls under the Department of Minerals and Energy, and after it requested funding – or so we are told – it was refused the money on the basis that Eskom had too much capacity and too many well paid engineers.

   So the excess power capacity was mothballed, and expansion was halted. Even maintenance was cut to the minimum. And as we know from the man who fell off the 50 storey building as he passed the 12th floor, "So far, so good" – but all was not well!

   The one day late in 2007 power was cut and the story came out much to the embarrassment of all in government and all in Eskom...just as the top echelons were awarding themselves shares and incredible bonuses and salary increases. The government tried to put a good spin on it, and said the crisis could be contained.

   But Eskom recently announced that it would have to change its tune; it was far worse than they thought.

   Then one saw the Minister of Finance pleading that electricity prices had to go up 53% or 100% next year. With the damage scheduled to go on until 2013 – and the country being taken off the good investment list for international capital – some R30 billion worth of government stock has been sold, sucking out the "hot money" that had enjoyed a strengthening Rand and very high interest rates of over 13%.

   The Rand then fell from R6.8 per US Dollar to R8.2 in a matter of weeks, boosting the Gold Price for local South African miners but leaving them unable to capitalize on this windfall as power supplies were capped by the Eskom shortage.

   Given that South Africa continues to have a high trade deficit which is unlikely to slow, the Governor of the Reserve Bank is in a muck sweat. He has warned South Africans to tighten their belts. He has to weigh up the negatives of imposing Exchange Controls on this departing money with the future needs for foreign capital. But still the money flooded out.

   Just below 10,000 jobs were going to be cut in the mining industry and a lot more outside it if Eskom didn't play it right. So Eskom decided that household supply was more important than mining suply – until the government realized that the mining industry, and in particular the gold sector, would definitely have to shed jobs if this was done.

   The deep gold mines – now projected to run 4 kilometers down and more – need half their power simply to light and cool the mines, making work conditions bearable. Otherwise they would have to close shafts for safety reasons if they only got 90% of demand.

   Mining executives have pointed out that cuts in electrical power have a non-linear effect on gold mines. The typical deep level gold mine allocates roughly 50% of its electrical feed to refrigeration, ventilation and pumping. These facilities need to run at 100% before men can be put down the shafts, meaning that a 10% cut in overall electrical feed to a mine would in fact translate into a 20% cut in the balance of the mine's power usage.

   It was not so bad in the coal mining industry and in platinum mining where the mines are relatively shallow. But international investment flows being what they are, it was platinum prices which really shot higher on the Eskom outages of late Jan. and early Feb.

   Eventually after some heavy duty negotiations, the government decided to supply shallow mining industries with only 90% of their previous requirements, supplying the deep level mines with 95% of their needs and allowing production close to previous levels to resume again.

   The consequences? For the entire report, covering the consequences long-term and in the near future, please visit GoldForecaster.com...