South Africa Mining Report Q2 2008

Following power shortages and a series of electricity cuts affecting the mining industry from early 2008, the government sparked controversy in March by indicating its support for proposals by Eskom, the stateowned power utility, to raise its tariffs by up to 60%. The proposed increases were criticised by both the ruling ANC party, and by COSATU, the Confederation of South African Trade Unions. Trade union Solidarity said that up to 20,000 mining jobs could be at risk because of the electricity cutbacks. Mining output fell by 10.7% year-on-year in January, a drop attributed to the power shortages by Statistics South Africa. Mining companies, along with manufacturing concerns had been restricted to 90% of their normal electricity use since the beginning of February. Although some additional energy supplies were later released, the move caused some to announce plans to reduce output and lay off workers. A spokesman for Gold Fields said electricity costs represented around 10% of the company's total outgoings, and that any increase in tariffs would have a significant impact on its profitability. The company had earlier said it might be forced to lay off 6,900 of its 53,000-strong workforce because of the power cuts. BHP Billiton said it was planning to shut down Bayside, one of its three aluminium smelters because of the power rationing. Harmony Gold Mining said electricity use represented around 12% of its total costs, and that it was waiting to see the size of Eskom's tariff increase, and hoping it would be below the 60% level.

Each of the company's mines had 12-month rollover contracts with Eskom, with increases applied once they had been approved by NERSA.

Accounting for nearly one-third of South Africa's total exports, mining can be described as a vital industry for the country's economy. South Africa hosts the world's largest deposits of gold and about 80% of the global platinum reserves. It is also a significant producer of diamonds. But the country's mining industry is observed to have matured and the pace of mineral exploration has fallen over the years.

Even though South Africa still ranks among the world's foremost mining nations, it needs to take note of the rapid depletion of its mineral base, especially gold, which has been major driver for the industry, has seen a consistent contraction. Further, continuous strengthening of the rand has made investments into the country more expensive - constraining its growth. International mining players now look towards other destinations for better and cheaper mining opportunities. But what may be seen as a respite to the mining industry is the gradually expanding population of junior mining companies that may hasten exploration in the wake of surging metal prices.

In order to promote its domestic diamond cutting and polishing industry, the South African government has passed a bill that levies 5% export duty on rough diamonds that cross the borders for processing elsewhere. The government is also in the course of revising its other mining laws to make them more investor friendly. Revision of royalties on different metals and minerals is one of the most important amendments that can be expected to be implemented by 2009.

Industry Forecast A strong currency, depleting resources and sluggishness in the pace of exploration of metals and minerals will be responsible for the country's mining industry growth slowing down over 2008-2012. However, platinum production can be expected to serve the role of industry course correction. Accordingly, this report forecasts the South African mining industry to log an average growth rate of 4.6% during 2008- 2012 to reach a value of US$21.8bn in 2012.