After The Bell: SA mining companies find that the grass is not always greener on the other side

When JSE-listed Gold Fields over a decade ago spun off its conventional, deep-level and labour-intensive South African gold operations into Sibanye Gold, its CEO at the time, Nick Holland, had a vision for the company.

Gold Fields would pivot to mechanised mining and focus on expansion outside of South Africa, with the South Deep mine its last operational asset in the country.

It was and is a sensible strategy. Mechanised mining is far safer and more productive than conventional mining, and Gold Fields was also reducing its exposure to South African risk.

The Association of Mineworkers and Construction Union (Amcu) was on the rise at that time, unleashing a wave of labour and social unrest at South Africa’s gold operations in the wake of its dislodging of the National Union of Mineworkers (NUM) as the dominant union in the platinum sector.

Gold Fields CEO Nick Holland. (Photo: Freddy Mavunda / Business Day)

South Africa’s mining sector also faced plenty of other challenges. The power crisis was unfolding, crime and illegal mining were rampant, and government policy was uncertain. Power and labour costs were also surging, while BEE transactions were adding another layer of costs by diluting value for existing shareholders.

So Gold Fields was high-tailing it out of Dodge to greener pastures — pastures which, high up in the Chilean Andes, turned out to not always have a green sheen.

Last week on 13 June, Gold Fields’ share price fell 7% at one point after it reported that its Salares Norte project in Chile had hit fresh turbulence.

“As reported in the Company’s Q1 2024 operational update, ramp-up at the Salares Norte Project has been negatively impacted by the early onset of winter events which have persisted in recent weeks,” Gold Fields said.

“These weather events resulted in the freezing of material in the piping of the process plant causing temporary shutdown of the plant. These impacts have been greater than planned owing to the early onset and extended duration of winter conditions during the commissioning and ramp-up phase.”

While the plant had restarted, Gold Fields said the production outlook over the southern hemisphere winter months was marred by uncertainty.

As a result, the company revised its group 2024 production guidance down to 2.2 million to 2.3 million ounces from 2.33 million to 2.43 million ounces previously.

Salares Norte was long seen as one of the emerging jewels in Gold Fields’ asset crown, boasting high grades at shallow depths with 3.5-million ounces of gold. Gold Fields discovered the deposit in 2011, and has been busy since with the project, which poured its first gold earlier this year.

Liquid gold flows from a furnace into individual casting moulds to create 28-kilogram gold bars in the foundry at the South Deep gold mine, operated by Gold Fields Ltd, in Westonaria, South Africa. 9 March 2017. (Photo: Waldo Swiegers/Bloomberg via Getty Images)

Of course, at altitudes of over 4,000 metres above sea level, weather was always going to be a challenge.

“While winter storms may occur at these elevations, management plans have been established to mitigate any negative impact on mining operations,” Gold Fields said in a 2018 update on the project.

Those “management plans” seem to have been blown away in the wintry gusts that recently swept across the project, raising red flags about the ability to operate the mine year-round

Read more in Daily Maverick: Gold Fields pours first gold at Chilean mine during relocation of endangered chinchillas 

And Salares Norte has been plagued by other problems. The estimated costs of the project since 2020 have ballooned to over $1.1-billion from $860-million, underscoring the unexpected challenges that can crop up for a high-altitude mining project in a very remote area.

Then there is the small matter of the saga of the short-tailed chinchillas.

A colony of the endangered rodents happened to be in the vicinity of Salares Norte and Gold Fields’  environmental permitting for the project hinged on a plan to capture and relocate the critters.

The original operation launched in 2020 went pear-shaped after two of the first captured four chinchillas died, which led Chilean regulators to halt the project.

Construction of the mine was allowed to proceed, but Gold Fields said it might have to reconfigure its plans to accommodate the animals, and even considered taking one of the planned open pits underground to avoid encroaching on the rodents’ habitat.

Gold Fields was given the green light to relaunch Operation Chinchilla this year and directed its efforts to “Rockery 3”, a stony piece of prime habitat that was close to the mine waste dump.

During an operational update last month, Gold Fields’ CEO Mike Fraser said that none of the animals had been detected in the rockery — and that the chinchillas had conceivably relocated themselves — and so the company now had permission to remove the rockery.

It seemed curious that a heavily-monitored population of around 30 chinchillas, with 16 vets at their disposal working in rotation, could simply vanish into thin air.

Read more in Daily Maverick: Mystery of missing chinchillas at Gold Fields’ new Chilean mine

The upshot was that the dismantling of the rockery was halted by the Chilean government and Gold Fields’ share price tanked 6% on that news. The rodents and the relocation project are now a material risk, and Gold Fields provides updates on SENS announcements.

In the one issued last week detailing the weather setback, the company pointedly provided an update on the chinchillas in which it said that SMA — the Chilean environmental regulator — had extended the suspension of the removal of the rockery by another 120 days.

Mining is a risky business, and Gold Fields’ Salares Norte project is a prime example of the risks that can unexpectedly emerge outside of South Africa. Even rabbit-sized rodents are a risk.

Gold Fields’ offspring Sibanye-Stillwater has also run into unanticipated headwinds outside of South Africa.

Under CEO Neal Froneman — a deal-maker of note — what was once known as Sibanye Gold embarked on a diversification drive into platinum group metals (PGMs) and then green metals.

Miners seen underground at the Sibanye Gold mine in Carltonville, South Africa. 4 September 2015. (Photo: Gallo Images / City Press / Elizabeth Sejake)

This included major PGM acquisitions in South Africa but also abroad, including the Stillwater and East Boulder operations in the US state of Montana. The acquisition was viewed as such a game-changer that Sibanye Gold changed its name to Sibanye-Stillwater.

Like Salares Norte, this was regarded as a clear winner. The Montana mines contain the world’s highest-grade PGM deposits, are the only PGM operations in the US, and 78% of the ore is palladium — a commodity that subsequently saw its price soar to record highs of close to $3,000 an ounce.

But, as I detailed in a recent story, things went pear-shaped there as well. A locomotive accident derailed production at one point, and an unprecedented flooding event that submerged the access road in 2022 shut operations down for two months.

You can mine outside of South Africa, but climate change and extreme weather events are a global phenomenon.

The operation was also beset by rising labour costs — the North American mining sector has a pronounced skills shortage as a younger generation gives the industry a wide berth — and palladium prices collapsed into a heap.

Stillwater accounted for $2.1-billion of the $2.6-billion in asset impairments that took the company from a $1.2-billion profit in 2022 to a $2-billion loss last year. And in the face of depressed prices, Sibanye recently renegotiated its debt covenants to give its balance sheet breathing space until the commodity cycle turns upward again.

South Africa’s ming space still has a lot of risk for investors. But in this day and age, the grass is not always greener on the other side. Unexpected weather events and a colony of rodents can throw spanners into the works of the best-laid plans.

Good investing!

Ed

DM

(Tim Cohen is on leave).