Photographer: Waldo Swiegers/Bloomberg

Rand Recovery Punishes South Africa’s Aging, Costly Gold Mines

  • Sibanye, Harmony, AngloGold write down assets, reduce output
  • Country still has world’s third-largest gold reserves

A year ago, South Africa’s biggest gold producer was churning cash, sizing up acquisitions and plotting expansion projects. Today, Sibanye Gold Ltd. is making losses and shutting mines.

The main difference between then and now? A big rebound in the rand.

High costs and labor-intensive operations mean that Sibanye and other South African producers are highly leveraged to one of the world’s most volatile major currencies. 

Sibanye expects to report a first-half loss of at least $360 million, compared with a $22 million profit a year earlier, the company said on Thursday. The loss was partly due to the rand, which averaged 14 percent stronger during the period, and a big impairment charge on unprofitable mines it plans to close.

Since the first discovery near Johannesburg in 1886, gold hasn’t been hard to find in South Africa, which was the world’s biggest producer of the metal for a century until 2007. But with many of its mines dating back to the 1950s and 1960s, much of the low-cost metal has been found. That means production is now located much deeper in the Earth and costs more to extract.

A lot of the mining companies’ costs are priced in rand, which means that a weaker local currency opens up more profitable gold to be mined. But the reverse is also true -- a stronger rand means higher costs, in some cases rendering entire mines unprofitable.

Read: South African gold mine job cuts widen with 16,000 at risk

Last year, Sibanye was considering deepening some of its existing operations, restarting production at its mothballed Burnstone project and had a plan to re-mine old waste dumps for gold. 

Now it’s working on plans to close its Cooke and Beatrix West operations, potentially affecting 7,400 jobs, and said Thursday it will write down the value of those assets by 2.8 billion rand. The stock has dropped by 58 percent in the past 12 months.

Sibanye isn’t the only company feeling the pain from a stronger currency in South Africa, which still has the world’s third-biggest gold reserves, according to the U.S. Geological Survey.

AngloGold Ashanti Ltd., which gets about a quarter of its gold from South Africa, said Aug. 1 it will report a loss for the first half after writing down the value of local mines by $86 million. Harmony Gold Mining Co. also took a $129 million impairment after deciding to close some mines earlier instead of expending capital developing them further.

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