Wednesday, October 26th, 2016 MST

SA power shortages pressure price of gold

Worldwide concern about the dollar is the primary reason gold has surged to new highs this year. However, the dollar is not the only factor driving the price of gold. A shortage of electric power in South Africa, the world’s largest producer of newly mined gold, is putting downward pressure on the supply.

In South Africa, 95% of the electricity is generated by Eskom, a public utility that now cannot supply enough to meet the country’s needs. The gold mines (and the platinum mines), although South Africa’s economic lifelines because they generate the country’s export revenues, are suffering along with the South African people. Last week Eskom cut power to the mines, which resulted in an industry-wide shut down.

Eskom is between the devil and the deep blue sea.

If Eskom allocates enough electricity to the mines so that they can operate, other consumers will do without, those consumers being not only South African homes but also small businesses. That is a political nightmare for a public utility and the politicians running the country.

However, if Eskom denies the mines the needed power, jobs and export revenues will be lost, further compounding South Africa’s social problems. South Africa has one of the highest crime rates in the world.

If the mines get 50% of the power they need, they can keep the mines open but with no production. The other 50% is needed to mine. If the mines get 90% of what they need, production can be cut not 10% but 20%.

In the last few days, after much lobbying by the mining industry and its supporters, Eskom has been supplying 90% of the power the mines need, which has enabled Anglo Platinum to assert that they will be able to operate at “sustained levels” within two weeks if they continue to get the promised 90%.

Gold Fields has been in constant dialogue with Eskom since having its power needs cut to 80% and has been promised, according to a article, that they will receive the minimum 90% needed to produce.

But a major concern for the mines is the reliability. Can Eskom continue to supply the 90% that the mines say is the minimum needed to operate?

Further, the miners—the guys doing the work—are at great risk if the power is cut unannounced. So far, that has not happened, but it remains a possibility. The power utility previously committed to give the mines at least four hours warning before power supply was shut down or reduced.

Mining in South Africa has always been a great challenge because of the depths of the mines. An unreliable power source makes mining in South African even more challenging.

I visited South Africa in 1979 and made a two-mile vertical drop in a cage attached to a cable (Technically, it was an elevator, but not the type most Americans are used.) into the bowels of the earth where the miners worked. The temperature at the bottom would have been something like 140°F had it not been for the massive—and I mean massive—air conditioning units.

Additionally, there were the electric trains that hauled ore from miles of horizontal shafts. The use of electricity was enormous. Plain and simple: South African mines cannot operate without electricity.

The root of the problems in South Africa lies in the country’s shift toward socialism, but that is a topic for another blog post.

Meanwhile, a one would expect, South African gold shares have not done well since the problem arose. Some analysts say South Africa’s power problems cannot be solved for years. I suspect they will not be solved at all and that in time South Africa will resemble Zimbabwe, which can only be described as a cesspool.

The circumstances in South African are positive for the price of gold, but sad on a human scale. South Africa is a beautiful country with vast resources, but the country is now in the grips of socialism, which, in the ends, spreads misery among the people.