JOHANNESBURG (ResourceInvestor.com) -- Working cost issues might appear mundane when there's a takeover slugfest going on but there is particular needle in the September quarterly results due out next week.
First to report will be Harmony on Monday and CEO Bernard Swanepoel's neck is on the block for two reasons.
Harmony's June quarter results showed an average cash operating cost of R83,173/kg of gold produced against a gold price received of R81,543/kg.
Swanepoel's response was to vow that Harmony could operate at cash costs below R80,000/kg and that would achieved during the September quarter He also stated Harmony would get costs down to R75,000/kg in the December quarter.
That's despite a 7% rise in labour costs with effect from the September quarter. Labour is the largest cost factor on South African gold mines accounting for between 40% and 50% of total working costs.
Analyst reaction at the time was generally that Harmony would struggle to achieve this although Swanepoel believed the introduction of continuous operations (CONOPS) across the Harmony mines would make a major difference.
Whether Harmony does or does not meet its cost targets has a direct bearing on the Gold Fields takeover bid. Swanepoel maintains Harmony can drop Gold Fields' SA cost structure by 15% and take R1bn in costs out of the Gold Fields operations.
In fact, Harmony has to do this to get payback on the premium it is offering to take over Gold Fields otherwise the deal destroys value for Harmony shareholders.
Gold Fields CEO Ian Cockerill reckons Harmony can't do it because Gold Fields is already doing everything to lower costs that Swanepoel has put on his hit list. He has a lot of analyst support because Gold Fields is widely reckoned to be a well-run operation already. Yet the emphaticness of Swanepoel's claims suggests that he has not left himself exposed to a trap formed by his own rhetoric.
Neither Harmony or Gold Fields hedge. Gold Fields earned an average of R83,731/kg on gold sales in the June quarter but Cockerill says the September quarter figure will be lower. Reason is the continuing strength of the rand
It's only now - with gold well back above the US$400 mark - that rand gold prices show any improvement on June quarter levels. Currently the rand gold price is R84,255/kg with gold at $422/oz and an exchange rate of R6,20/US$1.
While the SA gold mines are losing out on the benefits of the rising dollar gold price because of the strong rand their rand cost base continues to be pushed up out of kilter with the country's inflation rate.
Reasons are labour costs and rises in prices which are set by government controlled organisations.
South Africa's CPI is up some 5% year-on-year yet the country's platinum mines have just settled wage increases at nearly double that level. That has potentially serious implications because the platinum mines are just as labour-intensive as the gold mines.
Impala Platinum settled at an effective 8% across the board after taking a 9 day strike while Anglo American Platinum settled at levels ranging between 7,75% and 9,5% depending on job category after taking a 13 day strike.
Impala linked its settlement to the introduction of new "drill jig" technology which is expected to bring about large increases in productivity which will more than offset the impact of the pay hikes.
