The curse of South Deep
South Deep has one of the world’s biggest gold deposits, so why is profitability so elusive?
In the late 1980s there was a buzz of excitement in the mining industry over a rich gold deposit on the northwestern edge of the Witwatersrand basin, now known as South Deep.
Not only did it hold more than 81-million ounces of gold, but because of its unusual shape, which fans out like the pages of a book, it appeared to present the first genuine case for intensive mechanisation of an SA gold mine.
Gold Fields, which took South Deep over in 2006 from the late Brett Kebble, has been unable to make it work — despite pouring R32bn into the mine over the past decade.
And last week the company announced it would restructure the fully mechanised operation and cut almost a third of the workforce at the mine in a bid to staunch losses of R100m a month and, perhaps one day, recover some of its substantial investment.
South Deep remains one of the largest gold deposits in the world — but profitability has eluded all who have tried to mine it.
JCI’s Randfontein Estates and Western Areas gold mines (bought by mining magnate Brett Kebble in 1995) were among the first to make a serious effort at mechanised mining in the mid-1980s.
"It cost them a lot of money, it shortened their life and it wasn’t successful," says Peter Major, director of mining at Cadiz Corporate Solutions. "It kind of looked like they were doing things right, but the costs were just so high, as was the dilution.
"That’s the thing with mechanisation; it’s so difficult to control grade and costs when you are introducing it underground — and especially in Wits reef ore bodies. You are working with million-dollar pieces of equipment that aren’t always working. And when they are — often not in your favour."
JCI in 1998 sold 50% of South Deep to Placer Dome, which was acquired by Canadian miner Barrick in early 2006.
That year, Gold Fields bought South Deep, partially propelled by fear of losing out to Harmony Gold, which was said to be showing interest.
Gold Fields bought 50% of South Deep from Barrick for more than $1.52bn and spent another $1.5bn buying out JCI’s 50% and closing a toxic hedge book (for about $500m) — "an expensive but necessary move", says Major.
"Had [Gold Fields] waited a bit, it could probably have got South Deep for a lot less.
"The SA gold index had just doubled, hitting its highest level ever. South Deep was an attractive asset; I just thought they bought it at a crazy price, considering the legislative and political environment — especially with regard to the mining charters and BEE."
Former Harmony CEO, Bernard Swanepoel, today describes South Deep as the best deal he never did.
The solution for South Deep now is unclear. But, for that matter, so is the problem.
Gold Fields cites a raft of operational challenges that include: rising operating and overhead costs; repeated failure to meet mining and production targets; the need for extensive infrastructure and support services; poor equipment reliability; poor maintenance; and "significantly" below-average labour productivity.
All of these relate to the key challenge for this complex and unique mine — the transition to mining using a modern, bulk, mechanised approach.
Gold Fields CEO Nick Holland also blames unstable mine management. South Deep has not had the same management team for longer than two years.
South Deep has always been a hard slog, says Nedbank corporate & investment banking analyst Arnold van Graan, who recalls only one year in which the operation made some free cash flow.
"South Deep is quite unique. You don’t encounter bulk mechanised mining with these conditions and at this depth elsewhere in the world," he says.
Opinion on how to make a success of South Deep is split, says Major.
"Some claim it should have been laid out like a traditional mine, with a high man-count and narrow stoping. Other people say, ‘No, no. This ore body was made for mechanisation.’"
Analysts at Noah Capital Markets forecast in a note that conventional gold mining will be all but dead in SA within 10 years, as will the southwestern bushveld conventional mining methods.
"SA labour is unproductive and conventional mining is too labour intensive to survive," they say. But because South Deep is a mechanised bulk mining operation, its poor labour productivity and equipment reliability are very concerning.
Van Graan says: "South Deep has not been able to achieve anything close to what was needed to make the economics work. More importantly, the mine has never come close to the production levels for which [it] was originally designed."
Gold Fields’ problem, in a nutshell, is that it can’t get the mining method right, he says. "It looks great in theory, but the model developed on paper doesn’t work in practice — it’s too complicated."
After a decade of trying, it may be time to thoroughly rethink the mining method and possibly develop a new one from scratch, Van Graan says.
Looking back, Major says Gold Fields perhaps did not realise the effect BEE and the mining charter were going to have when investing in South Deep.
"So that decision to buy a nonproducing, deep-level, new gold mine for $3bn that still needed a lot more work and capital before even nominal production, was a bit too gung-ho, considering it is in SA," he says.
In their note, the Noah Capital Markets analysts say the government is more than partly to blame for the retrenchments at South Deep because of its "communist-collective mining mindset and mining charter short-sightedness without any thought for the long-term viability of the industry".
Major says he does not think South Deep can ever work, "because SA’s whole political, social, economic [and] labour environment is not at all conducive to underground mining — especially gold, but much platinum and coal as well".
Corruption and mismanagement at Eskom lead to high energy prices, he says.
"Combined with mining charter fiascos, BEE, constant state-owned enterprise and community and union disruptions, there’s barely a chance in hell any more of profitably mining gold in SA."