Screw it, let's do it

Oct 15 2012 07:36
*Jarred Myers

WITH all this talk about nationalisation, it’s time to acknowledge the elephant in the room.

The elephant in the mining sector is mechanised mining; frankly, almost every protesting miner in the past few months could be replaced with machinery, which is why this is a good idea.

The engineers will be quick to point out that mechanised mining doesn’t work well in much of the South African context since we mine along narrow corridors which current technologies are not designed to operate in, resulting in high wastage of ore bodies and fundamentally changing the cost equation of many mines.

To get slightly technical for a moment, mechanised mining is efficient in conditions with widths above 1.2 meters as is common in the mining industry in Canada and Australia.

Due to the environment of reefs such as the platinum-rich Merensky Reef near Rustenburg, where widths can be as narrow as 70 cm, current technology is neither efficient nor cost effective and human miners at current cost levels are in fact the best option from a financial perspective.

Narrow widths are used to maximise recoveries of metals, a crucial factor where operating profits are even narrower than the reefs. 

It is important to reflect on this point since most of the brouhaha lately has revolved around miners' cost to company, and each mine will have a tipping point at which it will favour mechanised mining based on cost considerations alone.

This shouldn’t sound too dramatic - for centuries machine has replaced man as technologies advance.

Each time man is made redundant by machine the same pattern is followed; jobs are lost, productivity is gained and in a growth economy this labour is reallocated up the value chain to where it is more productive.

Also, each time this occurs in the absence of a growth economy or where strong lobbying powers exist - be it in the form of a pork-barrel Congressman in the US or labour union Cassandras in SA - the result is parochial obstructionism, and the greater good of the many is sacrificed on the altar of popular protectionism.

Taking a deep dive into the economics of mechanised mining, let’s do a back of the envelope calculation.

North West Province employs 100 000 miners, so a R1 000 increase in cost to company per miner adds R1.2bn in costs per year. At the same time, a 1% reduction in head count saves R180m per year, which by the end of the mine's life will save R50bn a year.

With a fraction of this saving spent on implementing mechanised mining, 80% of miners could be replaced. Translate these cost savings over the life of the mines into profits and you have R25 trillion; tax these profits and you get R7 trillion. Even the SA government could generate 80 000 replacement jobs with R7 trillion.

A peek inside the head of any mine boss in SA will reveal the same conundrum: if I continue to use multitudes of manual labour, I will continually revisit labour unrest; if I replace labour with mechanised mining, I will continually be revisited by ownership uncertainty.

Wages up, profits down, insolvency around the corner. Faced with this dilemma the rational mine boss, which describes most of this breed, will make the decision to mechanise.

The trade-off is simple: either face the slow puncture death of diminishing solvency, or call the bluff on nationalisation.

The mine boss' argument before being manicured by the PR department is simple: government had the chance to prop up employment by managing labour relations, they failed and now it’s their problem - why should shareholders of mine companies pay the price for institutional incompetence?

Government for its part could also make a rational decision, unlikely as it may seem, and may recognise that it can either use taxes from mining to combat unemployment, or deal with the joblessness which will ensue after mines collapse without tax revenues.

The clock is ticking, the tide receding, the economy is in play - a decision will be made through action or the absence thereof.

 - Fin24

*Fin24 user Jarred Myers doubles as guest columnist.

*Follow Fin24 on Twitter and Facebook

mining unrest  |  jobs  |  mining


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