Margins routed

The strike in the platinum sector is still dragging on, it has been going since 23 January. In terms of progress NUMSA accepted the wage offer from the mines on the 20 March, which is great news for the companies, miners and the local communities who rely on miners spend. AMCU the more militant union is still on strike and are calling for the coal and gold miners to join in as solidarity.


In response to the strike the platinum companies have started talking about closing their marginal mines and moving to mechanisation for the mines that can be converted.
South Africa has cheap labour due to the large number of unskilled workers; not the place that we want to be in but it is the reality. Due to having large amounts of cheap labour the platinum mines structured themselves to be labour intensive instead of mechanised. Labour intensive means that more ounces can be taken out of the ground as compared to mechanisation. The biggest advantage though is that many jobs are created for the many unskilled people in South Africa, which has downstream advantages for their communities and dependants.


A quote I found in a Bloomberg article, "Operating margins at the platinum business (Anglo Platinum) declined 85% between 2000 and 2012, even as the price of the metal increased almost threefold to $1,532/oz, Mr Gait said. Paul Gait ... a London-based Bernstein analyst." Labour is not the only reason for the increased costs, but also substantial increase in the cost of electricity and increased costs of extracting deeper ore.

To give you an idea of the differences between labour intensive and mechanised mining, Impala Platinum are looking at changing their Leeukop mine which when running would have employed 10 000 people, when mechanised though it will employ between 2000 and 3000.


Having a look at Goldfields, who are not in the Platinum sector but have underground mines both in South Africa and Australia, who have mechanised mines. The average mine worker in Australia earns about 10% more than the average Australian, which is great for the miners themselves but they are skilled and there are far fewer of them. Goldfields South Deep mine (South Africa) has 4,124 workers and produces 270,000 ounces of gold a year, meaning that ounces per employee is 65.5. Their St Ives mine in Australia has 808 people producing 450,000 ounces a year, so ounce per employee is 557 (8.5 times their South African counter parts). Another Australian mine has ounce per employee at 351, not quite the 8.5 times but still significantly more. Clearly there is a numbers difference between the two models, the problem for South Africa is that mechanisation means less jobs, but an even bigger problem is that the jobs now moved to skilled individuals. Amplats have their ounces per employee at 29.3.


Amplats have said that their Rustenburg mines will be unprofitable for the next year, and if the strike continues for another month, they will be unprofitable for the next two. Amplats also say that they still have 215 000 ounces of platinum left in their stock pile, about half of what they had when the strike started. Does this mean that Amplats is in a better short term position now with the strike? Their revenues are largely unchanged due to their stock piles but their costs are lower due to not having the mines running.


Even if they don't close those mines now, it will happen in the near future. Closure of loss making mines is good for the bottom line and it means that there is less supply to the market which is good for their remaining mines. Mechanisation is also well on the way, so all in all it paints an ugly picture for the current generation of unskilled workers in the platinum belt.