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
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
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