Strikes at South African gold mines do not mean higher
prices
April 1, 2005
You probably already know that 20,000 mineworkers
at Harmony Gold's Free State operations (in South Africa) are on
strike. The National Union of Mineworkers (NUM) is threatening to
expand the strike action to all of Harmony's operations, affecting
as many as 50,000 workers.
A similar NUM strike at Gold Fields that caused 30,000 workers
to walk out on Wednesday was called off on Thursday after a court
labeled the action illegal. There are strict rules that both sides
(the mines and the NUM) have to abide by in order for a strike to
be legal.
South African mine production currently accounts for about fourteen
percent of global gold mine output, with Harmony producing roughly
one quarter of all the gold in South Africa. If the strikes at Harmony
continue and impact all of Harmony's mines, global mine production
of gold could be reduced by three to four percent -- temporarily,
of course. Should the NUM be successful at reinitiating strikes
at Gold Fields, half of South Africa's gold production could be
at stake, or seven percent of the world's mine production.
These strikes are in response to proposed job cuts by Harmony,
and are also an attempt to coerce the mining companies to increase
wages by raising the living allowances paid to workers. Labor contracts
for the gold mining industry in South Africa are negotiated primarily
between the mines and the labor unions, of which the NUM is the
largest. The current labor contracts expire in July this year and
when the mines and the unions begin their labor negotiations, strikes
are often called to put pressure on the mining companies. This year
we are seeing tension between the companies and the unions before
the labor negotiations even start. Or perhaps this is the start.
If labor negotiations get particularly ugly this year we could
see strikes initiated at Harmony, Gold Fields and Anglogold. If
the strikes continue for an extended period of time, would the resulting
loss of gold production cause the gold price to rise across all
currencies?
A general strike in South Africa back in 1987, when South Africa
produced forty percent of the world's gold, caused the gold price
to temporarily rise by almost ten percent. I find it hard to believe
that a temporary loss of gold production from South Africa would
have a very material impact on the gold price these days when South
Africa only produces fourteen percent of the world's gold.
What's more, there is virtually no evidence that minor, short-term
changes in mine production have any lasting impact on the gold price.
Looking at the data from 1990 onwards I found no correlation between
the difference between mine supply and fabrication demand and the
gold price. See "Gold, a commodity?" at http://www.paulvaneeden.com/displayArticle.php?articleId=47
for more details.
In the unlikely event that we do see a spike in the gold price
due to labor unrest in South Africa, remember, it's a spike. It's
not the marker of the beginning of a long-term increase in the gold
price. If the gold price rises in anticipation of a general strike
in South Africa it will most likely decline rapidly soon afterwards.
Gold mining is very important to the South African economy. Both
the mining companies and the labor unions understand this and as
much as they'll threaten each other and poster, they will resolve
their differences and life will go on.
From a practical standpoint, as investors, rather than looking
at the labor situation and wondering what impact it will have on
the gold price we should be looking at those companies that appear
to be taking it on the chin, but that we know will not get knocked
out: Harmony and Gold Fields.
If you've been waiting for a good opportunity to buy South African
gold stocks I suspect you're looking at one right now. And between
now and July, when labor negotiations start in earnest, you may
get an even better one.
That's not to say the South African gold stocks have bottomed.
But they're certainly a better investment today than they were six
months ago. I'm also not advocating buying South African gold stocks.
I'm not convinced that the strength in the South African rand is
behind us, and the combination of currency risk with the social
and political risk in South Africa makes South African gold mining
stocks unattractive in my opinion. But that's just my opinion. The
point is that if you're going to buy South African gold stocks then
buying them during labor negotiations, when they typically get trashed
in the news and whacked in the market, is a much better strategy
than buying them when everyone loves them.
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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