While gold prices hit record highs during 2012, we unfortunately experienced a
sharp slide in 2013. This was despite the fact that gold demand was relatively strong, boosted
by increased demand for jewellery and investment, particularly from India and China.
Drop in gold recycling and limited
production growth by mining companies were the main
contributors to the drop in supply of the precious metal during 2013. Building a new mine requires significant upfront
capital and is an intensive, six- to 10-year process. Reductions in exploration expenditure have resulted in fewer new
discoveries, which impacts on the replacement and replenishment of gold reserves and resources by mining companies.
With gold reserves slowly depleting,
the cost of replacing deep-level gold mines is increasing and the
effects of ageing infrastructure are becoming more pronounced. However,
where proper forward development has occurred, mining companies
have been able to deal with these issues.
The South African gold sector offers a hedge against gold price fluctuation. But mining companies need to be more
flexible and be able to adjust cost structures quickly in response to the
fluctuating gold price. By delivering
consistent returns and showing value generation, the gold sector will eventually restore investor
confidence. This has to be further supported through the sensible use of
available funds, conservative capital expenditure outlays and an increased
focus on free cash flow generation. Governments also have
a role to play in partnering with mining companies and providing a
level of certainty about regulatory compliance, tax regimes, the administration
of mining licenses and social requirements.
Productivity levels affect the supply of commodities to
the market, which, in turn, impacts on the foreign currency. By understanding its role and engagement
with employers, productivity levels can improve and costs can be reduced. This
will attract producers for increasing the supply with an increase in demand.