The Sunday Mail
Gold is losing its lustre as prices continue to take a knock on the international market- File picture
Africa Moyo and Darlington Musarurwa
GOLD and platinum miners are girding their loins as they brace themselves for further commodity price slumps on the international market, with indications that miners will be forced to adopt additional belt-tightening measures.
Falling revenues will likely provide a damper to a sector that has been on a remarkable growth path since the beginning of the year.
Last week, Government upped its growth forecast for mining to 3,5 percent from 3,1 percent.
But a decline in prices is likely to give both platinum and gold miners a stern test.
Platinum prices have dropped markedly to US$980 per ounce in the quarter to June from US$1 500 per ounce in the same period a year earlier.
On the overall, platinum prices have plummeted by 44 percent since 2011.
After gaining six-fold in 12 straight years of gains through 2012, gold prices are beginning to tumble. On Friday prices of the yellow metal were US$1 088 per ounce.
Market watchers estimate that the price will fall to below US$984 an ounce before January 2016, a figure local gold producers consider catastrophic.
Gold reached an all-time high of US$1 921,50 on September 6, 2011.
Platinum and gold accounted for almost a third of Zimbabwe’s exports last year, with Zimplats – the country’s biggest platinum miner – contributing 17 percent of the US$2,2 billion mineral exports.
The miner was adjudjed the best exporter of 2015 after shipping minerals worth US$540 million.
Shedding jobs
Zimplats head of corporate services Mrs Busi Chindove told The Sunday Mail Business that the company lost 35 percent in revenue due to the price plunge and “no one is sure if the prices have hit rock bottom yet”.
She noted on-going efforts to reduce the overall costs of production and enhance cash generation and profitability.
“Basically this is a survival strategy anchored on cost containment across the entire value chain; productivity and efficiency improvement and cash preservation . . . Our responsibility is to preserve value for our stakeholders, including shareholders, employees, surrounding communities, and Zimbabwe and, therefore, we need to keep the company running sustainably until the metal prices improve.
“All costs need to be managed including those relating to labour. That is why the company had to take the recent painful but necessary decision to let go of 21 managerial employees,” explained Ms Chindove.
She would not say if Zimplats would shed additional staff.
Zimplats employs 5 000 people directly and indirectly and supports local business as 71 percent of all purchases are local.
The siutation is bad elsewhere.
Lonmin, South Africa’s biggest platinum producer, will be cutting 3 500 jobs in order to reduce costs by 10 percent. There are fears that prices could be in free-fall for the next two years.
Mimosa Mining Company executive chairman Mr Winston Chitando said if platinum prices continue to fall, they will be forced to park some of their capital project.
“It goes without saying that low prices result in reduced revenues available to fund capital projects.
“Inevitably some capital projects will have to be shelved due to low prices. Whilst we take a long term view of the business, availability of cash will however affect ability to fund capital projects,” said Mr Chitando.
Mimosa has always aspired to be in the lowest cost quartile of platinum producers and focus has been on increasing volumes and efficiencies as well as implementing sustainable cost management programs.
Gold starts to rust
Gold producers are similarly rattled.
Gold Miners Association of Zimbabwe president Mr Morgan Mugawu said falling prices were particularly bad because overheads continued to increase.
“For instance, where we have been producing a gramme of gold at US$17, because of the lower prices, producing the same gramme would require US$24. All this is happening at a time when employee salaries are not coming down.
“At the moment we are still managing (with all our employees since) all the impact of low gold prices is coming to us the miners,” said Mr Mugawu.
He warned that declining prices could limit production by small-scale producers.
GMAZ represents over 3 000 mainly small and medium-scale gold miners. So critical are small-scale miners that they have contributed more than 26 percent of the country’s total gold production since 2010.
Of the 8,8 tonnes that have been delivered in the first six months of the year – a remarkable growth of 29,3 percent from last year – small-scale producers accounted for 3,1 tonnes.
Treasury last week said it expected 2015 gold deliveries to reach 17,5 tonnes – an upward revision from 16 tonnes.
Zimbabwe gold deliveries peaked at 27 tonnes in 1999.
Government engages miners
Mines and Mining Development Deputy Minister Engineer Fred Moyo last week said since falling prices were exogenous factors Government had little control over, the State’s interventions would be premised on fair utility charges and taxation.
Government is expected to meet gold miners August 3 to chart a way forward.
“We are not big enough producers to be able to use our production capacity to influence the movement of prices.
“For instance, holding back supply hoping that there will be shortages then push prices up; we can’t do that.
“I think the only window we have is that we improve on our efficiencies; that is what every country is trying to do – technological efficiencies, labour efficiencies, logistics efficiency and fiscal efficiencies – are the words we need so that we are aligned to what other people are charging in the form of taxes (and) power tariffs in order to compete.
“There are issues to do with utilities and issues to do with taxes; these are Government driven while the companies themselves have got to be efficient in their own operations through increasing output per machine, per person, lower overheads and so on.
“So we expect that those issues are attended to. That is the only lifeline we really have,” said Eng Moyo.
Power tariff battle
Eng Moyo said there was need to lower electricity tariffs for gold producers from USc13 per kilowatt hour.
Though the tariff was part of a condition to ensure uninterrupted power supplies, it is now considered unsustainable.
“I think we will need to discuss this with our sister ministry (of Energy and Power Development). The rest of the country is around USc8/kWh; even platinum itself is not at those higher tariffs.
“We are aware that it will be futile if we get Zesa to try and give power at uncompetitive tariffs, but, certainly, 13c is much higher and cannot be sustained by mining companies when prices are doing what they are doing,” he said.
RBZ weighs in
Reserve Bank of Zimbabwe Governor Dr John Mangudya told The Sunday Mail Business that the country had to slash the cost of doing business.
“It means that us, as authorities, need to put in place measures to mitigate and stabilise production. It means that the cost of doing business in Zimbabwe will have to be reduced so that the producer will continue to benefit the same margin they used to enjoy before the decline in prices.
“So we are talking about electricity, we are talking about water, we are talking about licences, we are talking about whatever costs. We need to reduce costs to ensure that we proportionately mitigate the risk of declining prices.
“For example, this country is (charging) 13c (but) if it goes down to about 10c, it means it would have material effect on the revenue for the company. We are talking about variable costs not fixed costs,” said Dr Mangudya.
The apex bank boss added: “Platinum and gold are the major export items in this country.
“Gold is a half-a-billion export item, so is platinum . . . it means the two of them are more than 30 percent to the economy and if you add tobacco, those are three major products driving the economy.”
Gold is valued as a reserve asset.
Government has been trying to cushion miners by providing a conducive production environment.
Gold royalties for small-scale producers have been revised to five percent from seven percent. Big mining houses are still expected to pay seven percent.
Royalties for diamonds and platinum are pegged at 15 percent and 10 percent, respectively.
As international commodity prices slump, so too has the contribution of royalties to the national purse.
The Zimbabwe Revenue Authority last week said royalties collected in the first six months of 2015 at US$39,8 million were 65 percent lower than a year ago.
On July 1, 2015 the Zambian government acceded to mining companies requests to slash royalty tax for underground mines to six percent from a proposed nine percent.
Open-pit mines, however, still have to pay nine percent.
Future of platinum
Zimbabwe’s government has said platinum miners had the technology and resources to better manage effeciencies than the rest of the mining sector.
“Luckily, their technology – mining systems – are more modern than gold so one would hope that they improve efficiencies in a better way.
“Their working capital is much bigger than that of gold mines so we expect them to manage their supply chain very tightly.
“Supply chain obviously brings in the financial sector, what they charge for supporting the supply chain.
“ They must try and make sure that we don’t have middle people.
“We know they purchase from South Africa so they must make sure their buying is to best advantage,” said Eng Moyo last week.
He said Government discouraged postponement of capital development “because it will be a backward step because when the price takes an upturn they will then suddenly have to quickly develop and be in a position to tap the situation.
So, it is our hope that capital projects are not the first target to be affected negatively”.
Zimplats has stated that “now more than ever” it is critical to assess the viability of all aspects of its business, and hinted that “several tough decisions” would be made in this regard.
