DIRECTORATE OF INTELLIGENCE
Intelligence Memorandum
South Africa: Prospects for the Gold Industry
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CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence8
INTELLIGENCE MEMORANDUM
South Africa: Prospects for the Gold Industry
Summary
Potentially, South Africa could profitif the price of gold on the free market settles significantlyn ounce. Under these conditions, not only would the value of its major export rise, but also the life of thegold mines would be extended. If the free market price of gold increases only moderately (say upn ounce) it is far from certain that South Africa would decide to increase the current capacity to process ore, and hence the volume of gold production would be unlikely to rise. In the absenceignificant price increase, it is estimated that gold output in South Africa will soon begin to decline, unless the government takes measures to alleviate the tax burden on the industry or greatly increases subsidy payments.
In recent years the world demand for gold has grown enormously. This growth has far outstripped the increase in gold production. Industry, private hoarders, and speculators have taken the lion's share of newly mined gold and have left relatively little for additions to official monetary reserves.3ree World consumption byand the artsercent and purchases by private holders increasedercent, whereas production increased only 7 The sharp upturn in speculative activity
Note: Thie memorandum wae produced solely by CIA. It wee prepared by the Office of Economic Research and wae coordinated with the Office of Current Intelligence.
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become particularly acute in recent years. During theears since the price of gold was setn ounce, costs of production have risen greatly. Many mines have been forced to close, and prospecting in several countries has ceased completely. World production would have declined had it not been for the discovery of extremely rich deposits in South Africa after World War II. Extraction of gold from higher quality ores enabled the South African gold mining industry to offset the increase in costs per ton of oreand production rose dramatically. However, South African production now haslateau.
south Africa has contributed aboutercent of the World's production of gold0ercent came from other Free Worldandercent from the Soviet Union. outh Africa's share wasercent, while the rest of the Free World accounted for onlyercent and the Soviet Union for the rest.
Gold has played an extremely important role in the South African balance of payments. Net foreign exchange earnings in excessillion from gold sales since World War IIrucial factor in the transformation of South Africa from an agricultural to an industrial nation because theyarge share of the required imports.
The World Gold Supply
* Unless otherwise stated, gold is valued at the present OS priceer troy ounce. This prioe was set in January
n the long run, production and supply tend to be equal, but in the short run they differ because of Soviet sales, which are sporadic.
World demand for gold has expanded rapidly with the large increase in international trade, rising industrial production, and the development of new uses for gold. In recent years, there has been an increased desire by both governments and private individuals to hold gold in the belief that the united States will increase its price. Production recovered slowly after World War II and reached0 level ofillion* only Now it isillion, but this barely satisfies normal industrial requirements and other private demand, and total private demand for gold has exceeded new supply during periods of heavy speculation (seend The world's official monetary gold reserves have been declining sincend this decline accelerated during the public gold buying stampede of7 and
07illion was added to the Free world goldboutillion, orercent, was used byand the arts; only aboutillion entered official reserves, and the remainder was purchased by private holders. Official reserves increased by only aboutercent, in sharp contrastercent expansion in world trade duringyear period. By the third quarterfficial Free World monetary gold reserves reachedillion: illion was held by individual countries7 billion by the International Monetary Fund. Private holdings, believed to have been at least one-half the size of official reserves, have increased sharply in recent months as official reserves have been drawn down to meet the demand of speculators.
Production costs have risen rapidlyhereas the official price of goldroy ounce. Consequently, many
Table 1
Estimated Distribution of the Free World's Annual Gold
Billion US $
Net
New by Industry Private Official ^ear Supply and the Arts Holdings Holdings
.8
7
4
mines in South Africa and elsewhere have been forced to close, and production has leveled off or declined nearly everywhere except in the USSR, where the industry does not have to operate profitably by Free World standards (seend
South Africa's Role
4. South Africa has dominated world gold mining almost since the country began producing ins. Its share of world production wasercent0 andercent Now
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SfcSfiET
OUTPUT OF GOLD BY MAJOR WORLD PRODUCERS Annual6
2
Table 2
Output of Major World Gold Producers Annual6
Million US S
Annual Average
of South Africa
USSR
Canada
united States
Australia
Ghana
Japan
Southern Rhodesia
Philippines
Colombia
All others a/
666
3490 63
Africa accounts forercent of world production (seend
5. The phenomenal growth of the Republic's gold output in the post-war period6illion6 has more than compensated0 million decline from pre-war levels in production of other Free world countries. The expansion in South Africa was made possible chiefly by the discovery ofrich deposits after World War II andesser extent by technological improvements. Aboutercent of South Africa's total gold production now comes from goldfields developed in the pastears. Other factors favoring South Africa are the supply of exceptionally cheap and amenable labor and the economiesell-organized industry with large capital resources available for prospecting and for investment in the most modern mining equipment and techniques.
Gold has economic growth, have
financed much of Since world war billion and have
South Africa's II, gold sales enabled South
Africa to develop rapidly into an industrial economy. Gold exports have accounted for aboutercent of total exports and have financed close to one-half of total imports. Moreover, government receipts from taxes on gold mining companies are an important source of government revenue, representing aboutercent of the Republic's receipts from direct taxes in recent years.
Goldfields
8. South Africa's first important gold mines were opened6 in the Central Rand. Soon after the turn of the century, gold was also discovered in the East and West Rands and both developed into major producing areas. The Kerksdorp area in the Orange Free State has accounted for one-third of South Africa's total output. The latest gold discoveries have been the Evander fields in the Eastern Transvaal, where the first mine was opened Output
there has since increased steadily and isto continue to increase as the Kinross mine begins productionB. The search for gold continues, and in the past tenillion has been spent on prospecting. All new discoveries have been extensions of existing fields, however, and hope is fading that rich new fields will be found. (For the geographicalof South Africa's goldfields, see the map,
)
Organization
9. The South African gold mining industry is made up of more thanining companies which are owned or controlled by seven major financial houses. Coordination of mining activities is done through the South African Chamber of Mines. The Chamber represents the industry in negotiating agreements with government departments and administrative
bodies and in wage contracts with labor unions. The Chamber issues statistics, carries on research, conducts safety campaigns/ oversees safetysupervises workers* welfare services, and, with the government, runs training schools for mineworkers. The Chamber owns the Rand Refineryhich refinesercent of the country's gold output. Cold bars are sold to the South African Reserve Bank, which has used the Bank of England as its agent on the London market. Because the Bank of England and other members of the former London Gold Pool have indicated that they will no longer buy newly produced gold, South Africa may develop other markets in addition to London-Labor
Cltu Peep gold mint*uivetfoa and kU
* Bantu is thm South African tern for black Africans.
10. The gold mines employersons, of whom aboutercent are Bantu.* On an average,ercent ofantu mineworkers come from the Republic, anotherercentercent from Lesotho, Horswana, and Swaziland, and most of the rest from Malawi.
More thanercent of the Bantu work underground, whereas only aboutercent of the whites do. Whites occupy all important supervisory positions. Bantu formercent of the labor force butabout one-third of the wage bill. Average Bantu earnings6 per year, compared0 for white workers.
Production Costs
rapid expansion of South Africa'sbeganhen the first ofmines developed after world War il 0in mining and processingcost of extracting gold from each ton ofmore than doubled, risingper ton (see At the samebecause South Africa was working oressubstantially higher gold content than intho revenue per ton rose even more esult, profit per ton
of ore, before taxes, rose0
Increase in production andost-price squeeze is ato extractive industries. As costsgradu ores become unprofitable and arethe ground (bypassed) and the industrythose oresigher metal content. gold is recovered per ton of ore minedand both production and profits rise.
In South Africa the gold content of mined orefrom one-fifthroy ounce per ton of ore8 to almost two-fifthsroy ounce6 (see The total amount of gold left in the ground in lower grade ores in the last five years because of rising costs is estimated4 billion, and0 an6 billion has been left untouched. Much of the lower grade ore bypassed in mines that are still being worked could be recoveredise in the price of gold warranted this. Gold remaining in abandoned mines, however, may be inaccessibleesult of flooding by ground water, and the cost of reopening could bo prohibitive.
SOUTH AFRICA: AVERAGE REVENUE, COST, AND PROFIT PER TON OF ORE
SECRET
Govcrp.rnent Pol icy
South Africa's policy toward the gold industry is largely one of maximizing government revenue while at the same time encouraging the opening of new mines. As such, the industry has borne an exceptionally heavy tax burden for many years. Profits of Lessercent of gross sales are not taxed. But above this, the tax rate increases sharplyaximum ofercent. There are also other forms of taxes,emporary surchargeercent and anercent taxloan levy." The latter loan will be repaid by the government in seven years under present law.
CapitaL expenditures incurred inine into production are fully deductiblethat is, no tax is paid until these expenditures have been fully recovered. An example of this is the Welkora mine in the Orange Free State which began production3 but did not ax liability until6 after producing moreillion ounces of goid. This tax writeoff was at first limited to gold mines established after6 but has since been extended to all deep mi ties to entourage older mines to maintain operations by mining at deepet levels. Morecapital allowances have been extendedercent, ercent writeoff is allowed for mines established attei In specific cases involving exceptionally high capital costs, such asillion invested in the Western Deepines, additional capital allowances were made by special legislation.
are made by the government to
less profitable mines to finance the cost of pumping water seeping in from abandoned underground Byeven mines had received about:illion for this purpose. In addition, between April 4 and the end7 ten mines had5 million in loans to cover operating losses up toercent of revenue. Inssistance had increased to an annual rate6ear. The total ofillion paid to marginal mines since theof these benefits is estimated to have been responsible for additional gold production ofillion ounces valued0 million.
An important indirect subsidy for marginal mines in South Africa has been government leniency if not actual encouragement of mergers of profitable and unprofitable mines. Because of the taxbenefits can be obtained from the application of tax losses, and mergers of this type can result in substantial savings for the companies involved.
The choice South Africa faces with respect to the future of its gold industry is essentially one of resource allocation. By reducing taxes on the gold industry, the government could maintain
a high level of gold production for many years, or it could use these tax revenues to develop other export industries to replace gold in part. Some officials emphasize that goldasting ausGt and the economy must be adjusted during thoyears of high output to an eventual loss of gold production. The gold industry contends that gold is still South Africa's cheapest means of earning foreign exchange and will remain so for some time. The government, however, appears toong-term decline of goldand will probably stress development of other exports.
Prospects
an increase in the price offuture of South Africa's gold industry isbright. Production now has reached aby thes output is likely to begin
a decline that will have little chance of being reversed. The sharpness of the decline will depend on how fast costs increase and on whether the government gives the industry tax relief and larger subsidies. As things now stand, the South African Chamber of Mines estimates that if costs per ton of oreercent per year, which seems realistic, production would drop from aboutillion00 millionfter which the decline would probably become quite abrupt. They further estimate that8 production would fall to0 million, and2 to5 million. An increase in the price of gold matchingercent annual increase in the cost of extracting the ore would bring the price of gold ton ounce8 (see
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19. If South Africa sold gold in the world's free markets at an average price significantlyn ounce, this would increase the receipts from gold exports and extend the life of the gold mining industry by allowing it to process lower grade ores profitably. But in the shortigher gold price probably would not result in increased production. The reason is that the South African gold mining industry is now extracting ore at rates that approach the capacity of existing processing facilities* If lower grade ore were mined, the recovery of goldivencapacity would be smaller. In the long run, capacity for processing ore could be expanded and gold production increased, but the South Africans are unlikely to undertake the investmentsto increase capacity unless they expect the average price at which they can sell gold to remain welln ounceong enough time to make the investment profitable. If the price increase were small (upn ounce) they might well decide not to increase capacity, but would be able to postpone the decline in production which is expected to begin about five years hence. In any case, the South Africans are likely to wait until the market and price prospects for gold have become clear before taking any important steps.
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SOUTH AFRICA: GOLD MINE OPERATIONS.6
Produced in Million font
MM
SOUTH AFRICA: PROJECTED DECLINE AND FALL OF GOLD PRODUCTION
Original document.
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