Johannesburg - A 10% cut in electricity supply has a disproportionate effect on gold output because actual mining operations account for only 10% of total consumption, Terence Goodlace, head of Gold Fields' SA operations, told Thursday morning's briefing on the December quarterly.

Mining groups have different profiles, as conditions vary from mine to mine depending on factors like depth, water pumping and ventilation/refrigeration requirements. But Gold Fields consumes just over 600MW at full operation.

A full third of this would still be needed if all the mines were mothballed, and about 350MW is what Gold Fields calls the base load that covers minimal pumping, ventilation and refrigeration. Gold Fields has calculated how many of its 21 shafts could be operated if the group receives various proportions of its total normal requirements.

With 70%, it could operate nine shafts; with 80%, 12; and at the 90% Eskom says it should soon be able to supply, 15. The other six are obviously the least economic and some smaller shafts, so while they're almost 30% numerically, they're responsible for only about 20% of output by volume.

Though operations are being gradually stepped up, Gold Fields still has nowhere like 15 shafts up and running. As CEO Ian Cockerill says, shafts can't just be switched back on immediately. And even if Eskom does get back to the promised 90%, how confident can anyone be that it's sustainable?

Back-ups

Gold Fields is buying stand-by generators, which will be delivered in the second half of this year. This decision was made to allow for the possibility of a sudden 24-hour national outage, but Cockerill stresses that they will only be used in a worst-case emergency to bring workers to the surface and preserve essential infrastructure, and won't be able to support any production.

As far as co-generation is concerned, Cockerill says using methane generated in the Free State could yield 10MW-20MW, but as Beatrix alone consumes about 100MW, the gain would only be marginal - though in this national crisis, every little helps.

Because of all the uncertainty, Gold Fields has decided to pass its interim dividend, which one analyst reckoned, on these results, should have been about 80c. Normalised earnings were 93c in the quarter, making 155c for the six months.

FD Nick Holland says that Gold Fields is proud of its dividend record which, had the board met before last Thursday, would certainly have been extended. As it was, after lengthy - and, I'd guess, at times heated - debate, it was eventually unanimously decided at Wednesday's board meeting to keep the powder dry.

No doubt the board will also have spent some time discussing the latest draft of the royalty bill, released in December, which changed from the previous flat 1.5% to a profitability-linked formula that for Gold Fields, at a gold price of R190 000/kg in the December quarter (and it's even higher now) would have worked out at 3.5%.

No wonder the industry is making further representations to government about this.

It's a pity that all this is happening at a time when, as Cockerill says, the SA gold mining industry is at last - some would say, far too late - benefiting from the buoyant bullion price. Gold Fields' own operating margin rose from 34% to 38% during the quarter, though Cockerill concedes it should be closer to 40%.

Paradoxically, the energy crisis may have little apparent impact on this quarter's results, as with costs little changed a higher bullion price should offset the lower SA output. But that's an illusion, as under normal conditions Gold Fields would have looked for a usefully better March quarter.

In the longer term, Gold Fields is reviewing all its operations, though it's refusing to talk about labour retrenchments yet, and Cockerill emphasises that infrastructure spending must continue, especially at South Deep, which is key to the company's future.

With good progress being made at Cerro Corona, the briefing should have been a much happier affair. But it left no doubt that, whatever garbage the politicians spew forth, the power crisis will have a serious impact on the economy, for which there is no quick fix.

Upcoming reports from the likes of AngloGold Ashanti, Harmony and the platinum miners can only reinforce this sad conclusion.

- Fin24