After production delays and fatal accidents, the plunging price of bullion is making Africa’s richest gold deposit the biggest burden for owner Gold Fields Ltd. And the bond market’s taking note.
The 81 million-ounce resource at South Deep near Johannesburg is still burning cash after Gold Fields bought it for $3 billion in 2006. The mine has helped lift the company’s break-even price to $1,105 an ounce, according to Moody’s Investors Service. Yields on the company’s bonds climbed to a six-month high during July as gold fell 6.7 percent to $1,093 an ounce.
“You’ve got a perfect storm now, with a low gold price environment and the potential for South Deep to continue to consume cash,” Douglas Rowlings, a Dubai-based analyst at Moody’s, said by phone. “The question on everybody’s mind is how much more cost can sustainably be taken out of South Deep and other mines?”
The failure to exploit South Deep profitably is hastening the decline of South Africa’s gold-mining industry, which has produced a third of all the world’s bullion over 120 years. The country is today ranked sixth in the world among gold producers, down from first just eight years ago.
South Deep, with the potential to produce 700,000 ounces a year costing as little as $900 an ounce for the next 70 years, may change that. Yet its complex ore body has so far proved too difficult for Gold Fields to extract profitably, even after $1 billion of investment over nine years.
The mine was closed temporarily last year after two workers died in accidents in the space of a fortnight. Nine employees died when a cage lift cable snapped in 2008.
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