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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.

Disclaimer

This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.


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