South African Mining Companies, Already Struggling, Brace for Wage Talks

CEO of Harmony Gold Graham Briggs and CEO of AngloGold Ashanti Srinivasan Venkatakrishnan (Venkat) during the Mining Consultative Forum convened in Pretoria earlier this month  by the South African government (Photo courtesy of GovernmentZA -- Flickr).

CEO of Harmony Gold Graham Briggs and CEO of AngloGold Ashanti Srinivasan Venkatakrishnan (Venkat) during the Mining Consultative Forum convened in Pretoria earlier this month by the South African government (Photo courtesy of GovernmentZA -- Flickr).

South Africa’s biannual wage talks are getting underway across the country’s gold, platinum and coal mining sectors, and they couldn’t come at a worse time for mining companies.


Mine workers are demanding double-digit pay increases at a time when companies are reeling from the negative effects of weak global growth and plunging commodity prices. Adding to the unease, memories of last fall’s illegal strikes, which involved 80,000 mineworkers and led to more than 50 deaths, are still fresh. The incidents caused global outrage and cost 15.3 billion rand ($1.5 billion) in lost production across all mining sectors, according to the South African Institute of Race Relations, a think tank.


But as tense as things seem, Tom Kendall, Credit Suisse’s Head of Precious Metals Research, says there is reason to be cautiously optimistic that this year’s talks can avoid last year’s catastrophes. Major companies are more deeply engaged in ongoing discussions than in the past, and the South African government appears to have become more involved in the process, he said. The ruling African National Congress party has considered sending in peacekeepers, and President Jacob Zuma has called for fair, peaceful negotiations.


“At the start of the year, the broader market was assuming it would be a very difficult, tense time,” Kendall said. “In the last couple of weeks, the heat has come out of it with a more conciliatory tone from government. But certainly, there is some potential there for things to get more tense again as we go through the summer.”


The stakes are high, and not just for South Africa, where mining makes up 6 percent of GDP and the rand has recently plunged on fears of unrest. South Africa produces roughly three-fourths of the world’s supply of platinum, and serious labor troubles could move the needle on both investor sentiment and prices.


“A significant chunk of the industry is already not cost competitive, and an increase in labor costs, which can account for between 35 and 50 percent (of costs) is then going to make things worse, all else being equal,” Kendall said. “It would mean more operations become sub-economic, and the pressure to restructure then becomes that much more intense. Ultimately, it becomes a greater threat to jobs.”


Nearly two-thirds of South Africa’s platinum mines are already in marginal or loss-making territory, according to the Chamber of Mines of South Africa, a local trade group. Anglo-American Platinum, the world’s largest platinum producer by output, recently proposed a restructuring that would result in 6,000 job losses.


“For at least the last 12 months, margins at a number of operations on a number of occasions have fallen to the point that substantial restructuring of the industry has looked likely,” Kendall said. “We have had some restructuring, and a number of mines have shut. A number of projects have been deferred or cancelled.”


Following a steep drop in February, fears of unrest had been nudging platinum prices higher in recent weeks, which normally would benefit mining companies. But Kendall said higher prices aren’t necessarily a panacea, particularly if they are offset by higher costs.


“Over the medium-term, prices will have to go up or the rand will have to weaken substantially against the U.S. dollar” for companies to remain viable, he said. “But how long the adjustment process takes and what cuts to supply have to be in place to get you to an equilibrium, those are tough questions and hard to forecast.”


South African gold mining operations have a much smaller impact on the global gold market, Kendall said, but they are experiencing the same struggles as their platinum-producing peers. Gold prices plunged in mid-April to their lowest level since 2011, dealing a significant blow to mining shares and sending companies scrambling to slash expenses.


“Wage negotiations are going to be difficult this year,” Harmony Gold CEO Graham Briggs said on an earnings call in April, after the company announced that continuing strikes in the first quarter reduced gold production by 15 percent over the previous quarter. The sudden drop in gold prices, he said, “requires us to look more carefully at our costs.”


South African miners won’t be easily swayed from their goals. Many earn as little as $550 a month to pay for food, accommodation, transportation and an average of eight dependents. Inflation of almost 6 percent and rising food prices make survival increasingly difficult.


“Our main gripes are low wages and inhumane conditions of service. Living conditions remain sub-standard. We demand better housing and medical aid benefits,” NUM spokesperson Lesiba Seshoka told The Financialist.


Complicating matters, the rapidly growing, militant Association of Mineworkers and Construction Union (AMCU) is trying to siphon members and power from the NUM – a turf war that was partially responsible for last year’s Marikana incident.


One thing is clear: In these negotiations, investors, companies, mineworkers and South Africans at large all have a great deal to lose.


“A wage negotiation process that descends into conflict and causes another wave of damaging workplace disruption will create new global uncertainty and probably induce further downgrades of South Africa’s sovereign credit rating,” Bheki Sibiya, CEO of the Chamber of Mines, cautioned in a recent editorial in Business Day, a South African newspaper.


But as Kendall noted, the consequences of failure might just help cooler heads prevail.


“No one really wants to be in the position of precipitating a repeat of the kind of violence that was seen last year,” Kendall said. “That would be the worst possible outcome, but I think it’s certainly less of a risk than it was even three or four months ago.”