Back at the end of October, I wrote an article on the gold mining sector in South Africa, after a number of lethal strikes forced AngloGold Ashanti (NYSE:AU), Harmony Gold Mining (NYSE:HMY), and Sibanye Gold (NYSE:SBGL) to raise wages paid to miners.
At the time it seemed as if the unrest was over and things would return to normal. However, barely six months later things have started to escalate again.
The Financial Times reported earlier this week that South African trade unions are pushing for a doubling of pay for miners, and the world's largest platinum miners are bracing themselves for impact. The Association of Mineworkers and Construction Union, or AMCU for short, is South Africa's dominant miners' union within the platinum sector. The AMCU has called for its members to down tools at platinum mines around South Africa.
Now, you may be asking, how will this affect gold producers? Well, AMCU does have influence within the gold sector but the union's influence is much smaller; around 17% of gold miners are part of the AMCU. Still, there is a serious risk of a spill-over here, especially if the union gets its demands.
It's debatable whether or not gold miners can afford to raise wages further as the price of gold continues to remain depressed, but if history repeats itself, they will have no choice. In particular, back during September of last year, the National Union of Mineworkers led a similar strike, and 80,000, or two-thirds of the country's mine workers, walked out in sympathy. The union was calling for a 60% rise in wages for its workers, ten times more than the yearly increase being offered by mining companies. The AMCU was demanding wage increases of 150%!
With almost all of its workforce within South Africa on strike, AngloGold Ashanti had to give into demands. Nevertheless, the company still got off lightly, as workers only got a 7.5% to 8% pay raise for 2013, followed by an inflation-linked pay raise for this year.
The company also promised workers an annual 11% rise in their 'living out' allowance, which is the amount paid to workers when they work away from their usual premises .
There's no Harmony here
Harmony also produces more than 90% of its gold within South Africa, and just like AngloGold, the company was embroiled in labor disputes earlier this year. In the end, Harmony did not reveal how much it was going to increase wages for its workers.
That being said, Harmony did many to drive down its all-in sustaining cost of gold production by 14% in local currency (19% in U.S. dollars) during the fiscal first quarter of 2014. So, it would appear while Harmony is having to pay miners more, it has been able to improve efficiency and cut fat in other areas.
Yet more deals
Sibanye Gold, another South Africa gold miner, reached a similar agreement with AngloGold after the labor dispute earlier this year. High single-digit wage increases are penciled in for the next two years.
Fortunately, like Harmony, Sibanye has been able to cut costs in other areas to save itself from rising wage costs. The company announced within its fiscal third quarter results that it had managed to slash all-in-sustaining cost of production per ounce of gold by 23% to $1,089, through a combination of a 10% increase in output and 10% fall in total cash cost per ounce of gold produced.
All in all, if history repeats itself these three miners could be forced to give in to wage demands over the next few months. That said, there is still the possibility that gold miners won't walk out, although I feel that it is already a done deal and South Africa as a whole will join the platinum miners in a sympathy strike.
Whatever the outcome, one thing is for sure: Harmony, AngloGold, and Sibanye are in for a rough ride during the next quarter, and profits are likely to suffer.