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Hope only flickers for South African gold industry

The Fortis Yellow Book says if challenges are managed well the SA gold industry does not have die a slow death, but could rather see a graceful decline over 40 years.

JOHANNESBURG, 05 Aug 2008(Mineweb.com) By Tessa Kruger

The decline in South African gold production from an industry that accounted for 80% of world production as recently as 1970 - does not necessarily signify a "drawn-out death" for the industry, if challenges are managed well the industry could decline slowly and gracefully over the next 40 years.

The Fortis/VM Group's latest Yellow Book says South Africa still has a large amount of technically accessible gold underground of which 8,000-10,000t would be profitable at current prices, while a higher rand gold price has allowed it to invest more.

On the positive side, a high gold price in rand terms might be sufficient to encourage the South African industry to invest for the very long term, despite the fact that it might be difficult to access recources.

New industry leaders face a number of challenges, including an unreliable power source, rising costs, lack of skills, demanding shareholders and the most challenging issue of safety, but with hard work and co-operation the challenges were manageable.

"The result would be that gold mining in South Africa will decline slowly and gracefully over the next 40 years," said the Yellow Book.

On the negative side, the publication said that increased capex investment of R8bn ($1.08bn) in 2007 from R6bn ($811m) in 2006 was not sufficient to ensure any long-term expansion of the gold industry. The increased investment might only slow the pace of decline in production over the next three to five years.

South Africa has world-class gold deposits, but they are extremely deep and require engineers to go as deep as four kilometers underground to exploit them. This deep underground environment involves ambient rock temperatures of 55 degrees Celsius (131 degrees Fahrenheit), and higher risk of flooding and of seismic activity.

The Book said the costs involved in mining these deposits were "enormous" and required investment decisions that would play out over two decades, not two years, while demanding shareholders wanted to see results in every quarter of the year.

"The risk is that the country's gold mining sector might expire simply because it costs too much to get the gold out and not because there is no longer any gold left to dig."

Another factor pointing to gloom for the industry, is the uncertainty that South Africa's gold mines would have the kind of power supply required for much deeper exploration and mining. The Book alleges that although mines are learning to manage power better, Eskom has failed to convince mining companies that the power supply problem will not return "sporadically" over the next decade.

"The technical and financial problems of trying to extract gold from ever-deeper levels were perhaps the main reasons for South African gold production to decline yet more over the years ahead," said the Book.

On top of this were other factors that impinged on all economic growth in the country, such as the shortage of skills, rising consumer inflation and threat of strikes. Next year will also see the final implementation of South Africa's mining royalties bill that will see gold mining companies paying a royalty to government that will further erode profitability, said the publication.

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