SA’s gold industry will be destroyed if Eskom gets the green light for annual increases of 15% over the next three years, says the Minerals Council SA.
Once the largest source of the world’s gold, SA would be down to a single gold mine from the 21 held by listed companies, with production falling to just 20 tons a year from 140 tons in 2018, council executives said on Wednesday. The council declined to name the mine.
Three-quarters of SA’s platinum mines — the world’s largest source of the metal — would be made marginal or unprofitable — up from 52% now — if the National Energy Regulator of SA (Nersa) approves the debt-laden state utility’s application for the three-year tariff increase of 15% a year.
The consequence of these closures would be the loss of 150,000 jobs as these mines and other mineral producers, smelters and refineries cut back production to remove unprofitable chunks of their businesses, said council chief economist Henk Langenhoven.
Price up 523% since 2006
Tariff increases since 2006 resulted in a 523% increase in electricity prices for mining companies, resulting directly in the loss of 18,300 out of the 53,500 jobs cut since then.
These costs — combined with Eskom’s electricity supply crisis in 2008, when the poorly managed power utility effectively stopped and then curtailed power to mining companies — led to the premature closure of old gold shafts, plunging employment in the sector to below 100,000 for the first time since 1905, said council CEO Roger Baxter.
In 1994 gold mines employed 400,000 people and gold production topped 580 tons.
The 15% increase would result in a cumulative increase in prices of 75% by 2021, seriously damaging an already fragile industry, Langenhoven said. "A price increase is not the solution on its own. Eskom has to be restructured and the state has to intervene," said Langenhoven at a media briefing ahead of a February 1 presentation by the council to Nersa.
Mining is a major source of demand for electricity, accounting for about a third of SA’s power consumption, and it is a key source of baseload demand. A 15% annual tariff increase would put a large number of this core customer base out of business, making a nonsense out of Eskom’s plans to double its revenue from miners, smelters and refineries to R50bn a year by 2021, he said.
"The number of mining and smelting customers would fall
to 650 from 1,000 if tariffs of 15% were introduced and revenue would instead fall to R19bn as mines, smelters and refineries closed. They will accelerate their death spiral."
Eskom has debt of R419bn and has to begin servicing it in March. CEO Phakamani Hadebe has warned debt could balloon to R600bn if it is not granted the 15% increase. "We are aware of the impact on the economy and on the poor, but we need to go through this pain because of what has happened," Hadebe said in mid-January when the Nersa hearings started.
The disastrous state of Eskom’s finances and its difficulties in providing a sustainable source of power to all its customers are identified by business as the key risk to the economy. The implication this holds for SA, with its faltering economy and burgeoning unemployment, is well understood by the government under the leadership of President Cyril Ramaphosa and his ministers, who have held regular meetings with business.
Public enterprises minister Pravin Gordhan told business leaders on Tuesday that a decision on whether to split Eskom into three parts as part of an urgent restructuring was needed in the next month.
One proposal being considered is splitting Eskom into power generation, transmission and distribution business units, with the possible involvement of the private sector in one or more of these units.
A serious commitment from the government on how it planned to deal with Eskom, even if it was over a number of years, would allay the fear of ratings agencies and lenders, Baxter said.
One of the obvious areas for the private sector to participate in SA’s power sector would
be the construction and management of power plants, he said, pointing out this would fit the global model where companies compete to generate electricity and governments handle its distribution.
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