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Aug 31, 2012

31/08/2012 (On-The-Air)

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Every Friday morning, SAfm’s AMLive’s radio anchor Xolani Gwala speaks to Martin Creamer, publishing editor of Engineering News and Mining Weekly. Reported here is this Friday’s At the Coalface transcript:

Gwala: The government of Papua New Guinea has the right to take up 30% ownership of a gold project South Africans are developing on the South East Asian island.

Creamer: Harmony Gold is developing the Golpu project with its Australian partner Newcrest in Papua New Guinea. It is a dripping roast. It is a copper gold deposit and just the copper alone would pay for the gold, so you’d get the gold free virtually.

That is a very existing project, but one of the issues is that the government of Papua New Guinea could take a 30% interest in it. It is said to be fully paid, but analysts with a little bit of scepticism look upon all the government interventions, because they can change the rules, they can move the goalposts.

Analysts are now saying to Harmony Gold don’t go to Papua New Guinea, you’ve got a ‘tiger by the tail’, rather swing back and look inward again at your South African operations, because we want to get some return on our investments, we don’t want to wait another seven years for you to get some gold out of the ground in Papua New Guinea at what we see is high-risk and high-cost and massive ore-bodies, which should be done by bigger companies.

The cost of the first initial stage would be $5-billion. Harmony is saying that it is up to their shareholders. Ten shareholders control 65% of the shares and they can tell them that they don’t want them to go that route. One of the biggest shareholders is Patrice Motsepe’s African Rainbow Minerals, which has the biggest single stake in Harmony, Gold.

It is going to be interesting to see how the company reacts to this local demand that you must start looking inward again. There was a time when analysts said look outward to reduce your risk, now they are saying look inward to reduce your risk and get the best value for shareholders.

So that's how things change in the industry and in the world, and, of course, mining companies have to adapt and perhaps Harmony will have to adapt with its ambitions with Papua New Guinea, where analysts see high-risks.

Gwala: The labour-ravaged platinum sector is talking about ditching its decentralised bargaining system and replacing it with centralised bargaining.

Creamer: This is the word along the corridors of power in the mining industry at the moment that the decentralised bargaining approach that was up taken by the platinum industry has not worked well. That means that individual companies do their own wage negotiations and bargaining systems and each company goes its own way.

With the coal and gold companies, they allow the Chamber of Mines to do centralised bargaining for them and they arrive at longer-term wage agreements. There is a track record of people of sticking to these agreements for the period. Both from a union point of view it seems to have been a better deal and from an employer point of view.

They are saying let’s try and put this context into the platinum section, let them go from decentralised bargaining to centralised bargaining, which at this point in time may not be a sliver bullet, but at least it will provide a better structure. That is what is happening and again one of the protagonists of this who came out outspokenly in favour of it was the fourth biggest platinum company Northam Platinum, in which the Tokyo Sexwale family has quite a big interest.

That was CEO Glyn Lewis and he was saying that there are very definite benefits to centralised bargaining, so he wants to move to that. He also revealed what he pays his rock-drill operators and that was interesting. He said that rock-drill operators get R11 000 a month, but if you look at the cost-to-company of a rock-drill operator, working for Northam Platinum, which is the fourth biggest just after Lonmin, which is the third biggest, the cost-to-company of a rock-drill operator working for Northam Platinum is R12 500 to R13 000 a month, depending if the person gets a living-in allowance.

Living-out allowances have also come about as a result of this decentralisation of bargaining within the platinum industry and they are turning up to be an issue. People going to Rustenburg area are complaining about the speed of which the informal settlements are developing.

This is one of the factors that has helped this is the living-out allowance. Mining companies are now rethinking this and they are going to keep their living-out allowance small and increase the living-in allowance to try and encourage people to take up some of the houses.

There are housing schemes and some of these companies have got hundreds of houses available to miners. There is also now a conversion with Implats, they have converted totally from the hostel system to single rooms and then to double rooms and things like that. There is a possibility of people taking up that accommodation. It seems to now be swinging back to living-in being the better option.

Gwala: The loss-making Buffelsfontein gold mine is facing possible closure.

Creamer: With the gold price flying we think that the gold mines are going to do really well, but one of them, Buffelsfontein gold mine in North West, has been making losses. In the first three months to the March quarter it lost R20-million and now they just reported that in the second three months to the June quarter doubled that loss to R41-million.

If things don’t happen they are going to take a decision to fix, close or dispose not later then the second week of September. When you think that one of our best underground brains, Bernard Swanepoel, who built Harmony Gold company, is on this to try and see.

He is part of Village, which is now owns Buffels, and they can’t get it right, it is continuing to haemorrhage and you start to wonder about some of our ageing gold mines, whether we can keep them going. In the gold sector, there are many demanding shareholders at the moment.

We started this by showing the Harmony shareholders are making demands, but demands are growing all round. Particularly we notice abroad in Canada the demands of the shareholders are so great that we’ve seen five CEOs heads roll of the top 20 Canadian gold producers.

Even the top one Barrick has changed CEO, Kinross, Centerra Gold have changed CEOs and closer to home we’ve had Ferdi Dippenaar at Great Basin Gold resign. So the pressure is on these CEOs to say look the gold price is doing well but your equities aren’t doing well, so you better get your equities up to what the gold price is.

People are saying now that they have got to set out, and particularly Gold Fields is adopting a new private-equity type of approach and saying that they must set out to provide returns that beat the exchange traded funds. People are now finding it easier to not try and measure a company and look at the promises of a company, but rather go to a non-gold mining company and buy an exchange traded fund, which means you are buying physical gold.

You then get the full benefit of price. So the equity companies like Gold Fields are saying that they must set out to provide returns that beat the exchange traded funds.

Gwala: Thanks very much. Martin Creamer is publishing editor of Engineering News and Mining Weekly, he’ll be back with us at the same time next week.

Edited by: Creamer Media Reporter
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