David Hargreaves

A minor rally in Gold only underscored the continued pressure on PGMs and the reversal of the Pt:Au ratio. From a onetime 2.0:1.0 in platinum’s favour it is now 0.92:1.00 and no reason for a reversal soon. Johnson Mathey no less, warned of a Pt surplus growing into 2012 and perhaps beyond. This did not deter the miners from expanding throughout the Bushveld and from sending a clear message to Uncle Bob that they needed his sources no matter at what cost. None of this was lost on South Africa’s increasingly powerful union the NUM. It sought and got double digit annualised wage increases, locked in for 2-3 years. Let’s look at what this means: Direct wages on those labour intensive mines can be easily 30% of the operating cost. The indirect-cost overspill hits power and supplies as those workers want increases too.

So 40% on the op. Cost bottom line. Over 2 years that is 80%. Many of those mines have a breakeven in excess of $1000/oz, of which 80% is $800. If that is squeezed by 2 years x 10%/year that is $160/oz. So the breakeven before taxation becomes $1160. It makes the prospects of a dividend remote, particularly in a falling market. Mines Minister Shabangu says not to fear nationalisation. At this rate there maybe no alternative. We are not alone in voicing pessimism. Liberium Capital says the (RSA) sector has fallen below the marginal cost of production. The metal price has fallen 25% in Rand terms since Sept 21st. It has also removed its ‘buy’ recommendation from Aquarius (FTSE, JSE), the world No.5. Congratulations Anglo, Impala, et al; in times of war they shoot you for self inflicted wounds. Gold has resumed its self-appointed role as the arbiter of real value and put its ratio to PT and AG into perspective once more.

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About David Hargreaves

David Hargreaves is a mining engineer with over forty years of senior experience in the industry. After qualifying in coal mining he worked in the iron ore mines of Quebec and Northwest Ontario before diversifying into other bulk minerals including bauxite. He was Head of Research for stockbrokers James Capel in London from 1974 to 1977 and voted Mining Analyst of the year on three successive occasions.

Since forming his own metals broking and research company in 1977, he has successfully promoted and been a director of several public companies. He currently writes “The Week in Mining”, an incisive review of world mining events, for stockbrokers WH Ireland. David’s research pays particular attention to steel via the iron ore and coal supply industries. He is a Chartered Mining Engineer, Fellow of the Geological Society and the Institute of Mining, Minerals and Materials, and a Member of the Royal Institution. His textbook, “The World Index of Resources and Population” accurately predicted the exponential rise in demand for steel industry products.