Gold Town Turns to Dust as Metal Decline Shutters Mines (Dec 2013)

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Source: Bloomberg – Gold Town Turns to Dust as Metal Decline Shutters Mines

Notable excerpts:

A half-dozen unemployed workers from the Blyvooruitzicht gold mine southwest of Johannesburg finish off the last scraps of a slaughtered cow in the searing October heat. Since losing their jobs in August, meals have become much less predictable.

The men stand near a small wood fire as the sun shines off a hill of extracted earth, in sight of a housing block that was supposed to be vacated. One holds a jaw bone over the flame, nibbles the meat off, and tosses the rest into a rusty barrel. What’s left of the carcass with its entrails spilling out is starting to dry at their feet.

The scene, resembling something from an apocalypse film out of Hollywood, is an extreme example of the impact gold’s 25 percent drop this year may have on towns around the world that are dependent on the precious metal. Mining companies have announced plans to shutter mines or reduce operations from Nevada and Peru to Papua New Guinea in the Pacific Ocean, as gold heads toward its first annual loss in 13 years.

Blyvooruitzicht’s name means “happy prospect” in Afrikaans. These days that’s not such a sure thing. The mine’s most recent operator, Johannesburg-based Village Main Reef Ltd., cut funding and closed it last summer, letting go the remaining 1,700 workers. Plunging prices made it difficult to profitably extract gold, especially with electricity prices soaring and workers demanding higher wages.

No well-known mining companies have shown an interest in the mine, though this month buyers have surfaced, according to one of the liquidators.

South Africa, home to one of the world’s richest reserves, has been hit hard. Gold’s decline this year is the biggest drop since 1981. The gold mining industry eliminated 14,461 positions in the first nine months of the year, bringing the total remaining jobs to 126,587 in September, according to Statistics South Africa, the state statistics agency. The industry has been reeling from labor strikes that have swept the country.

Aging Mines

The end of gold’s 12-year bull run also compounded the impact of rising operating costs as mines aged and companies had to dig deeper to find better grades of ore. After more than a century as the world’s biggest gold producer, South Africa has slumped to sixth position.

The Blyvooruitzicht site, also known as Blyvoor, is situated in the Witwatersrand Basin in central South Africa, a geological deposit billions of years old that’s produced as much as half of all gold ever mined. Though production peaked in the 1970s, the area remains home to some of the biggest assets owned by South African companies including AngloGold Ashanti Ltd. and Harmony Gold Mining Co.

After production started in 1942, profits from the Blyvooruitzicht mine flowed through the mining village and the town of Carletonville, four miles away. Within a decade, Blyvooruitzicht was said to be the most profitable gold mine to date, according to the 1968 book Golden Age, chronicling South Africa’s mining industry. Dividends of 100 percent or more were paid out for five straight years, the book said.

Blyvoor was partly crippled in 2009, when a seismic shift knocked out access to some of the gold. It recovered, and since 2011 its financial stress resulted mostly from the declining gold prices and an increase in local electricity costs, said James Duncan, a spokesman for DRDGold Ltd., which owned the mine before the planned rescue by Village Main Reef.

‘In the Dwang’

The company, which specializes in taking over older mines, was undeterred. Village Main Reef officials forecast they could keep it operating profitably until 2030, if not longer. The company invested 190 million rand ($18 million) in the site, taking operational control in June 2012.

“Blyvoor can be a good transaction if the gold price stays favorable and we can do the things we hope we will find the opportunity to do there,” Bernard Swanepoel, Village Main Reef’s chief executive officer at the time, said in an interview with Mining MX magazine in November 2011. If prices were to fall below a certain level, he said, “we would be in the dwang” — local slang for muck.

The price of gold was $1,715.67 an ounce when Swanepoel, now the company’s non-executive chairman, made the forecast. By the end of June this year, a month before Village pulled funding, prices had plunged 29 percent. (It closed at $1,230.10 in New York yesterday.)

Seismic Shift

Blyvoor was struck by another seismic shift, and more strikes. The mine lost 90 million rand in the quarter ending June 2013. Village cut its financial assistance to Blyvoor on July 30, and a court approved it for provisional liquidation a week later.

“Based on the review we did, we were confident that there was a viable operation at the time,” Village CEO Ferdi Dippenaar said in an e-mail.

The unemployed miners these days hang onto any reason for optimism, hoping for a rescue despite declining prospects at other mines. Village shut down another site about 60 miles away at Buffelsfontein. Johannesburg-based AngloGold Ashanti and Harmony Gold also have cut spending.

In the last two weeks, two deals have been entered into for the mine and the real estate at Blyvoor, subject to a number of conditions, said Leigh Roering, a director at Harvard Corporate Recovery Services, one of the liquidators. He wouldn’t name the buyers, and said he couldn’t say how many jobs might be saved.

Today the area is falling into ruin. It took as many as two months for workers’ final pay checks to be delivered, and the money didn’t last long. Meals at the hostels ended a month after the liquidation began, said Mthuthuzeli Naki, regional organizer for the National Union of Mineworkers.

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