Financial Sense's "Roving Reporter" Rob Kirby at the
Annual Convention & Trade Show
March 2-5, 2008 Toronto
"Precious Power"
Rob Kirby's Daily Report, March 6, 2008
I attended the Canada-South Africa Chamber of Business 9th Annual Mining Breakfast at this year's PDAC seeking clarity on the extent and implications of power curtailment [brown-outs] by South Africa's national power utility, Eskom.
South Africa's power shortages threaten growth
Gold and platinum futures hit record highs; miners' shares drop sharply
By Polya Lesova & Steve Goldstein, MarketWatch
Last update: 4:25 p.m. EST Jan. 25, 2008
NEW YORK (MarketWatch) -- Worsening electricity shortages in South Africa halted mining operations Friday, propelling gold and platinum prices to record highs and threatening to seriously dent the country's economic growth prospects...
Mining companies are dealing with cut backs of 10% of the electricity they formerly used and I wanted to hear how this was impacting their businesses and specifically, if recent price increases in precious metals [platinum group in particular] stemming from this situation are justified and / or sustainable.
The market is clearly reacting to anticipated reductions in output of these metals:
AngloGold ops hurt by power shortage
Thu, 07 Feb 2008
Gold miner AngloGold Ashanti said on Thursday that its first quarter 2008 production from South African operations had been "severely disrupted" by the power shortages.
The group said, in its outlook for 2008 at the release of its December quarter and full year results, that it expects to produce between 4.8 million and 5.0 million ounces of gold.
"This outlook statement is made in the context of the power shortage currently facing AngloGold Ashanti in South Africa, which will account for an estimated reduction of approximately 400 000oz of gold in 2008, and assumes that a sustainable 90 percent power supply is achieved for the remainder of the year," it said..."
Except, of course, GOLD - which counter-intuitively sold off [or was beaten with a stick, perhaps?] when this bullish development occurred:
The odor you might be detecting at this point, in case you are unfamiliar with its unmistakable nose, is the reek of gold market price manipulation. It is a well known fact that Central Banks and their agents do not have readily available caches of physical platinum or palladium at their disposal which they can mobilize to suppress price - like the do and traditionally have had in gold and silver.
But what I really wanted to know was this: Is this situation of power disruption likely to be superficial and readily fixed or is it more likely systemic and going to require a great deal of time to address?
What I found was that everyone I spoke to [both in government and in private industry] was acutely aware of the problem but NOBODY wanted to be named, speaking on the record regarding the issue.
One chap with South African Ministry of Mines [who did not want his name used] acknowledged that power shortages have reduced AngloGold's output but told me that AngloGold was examining ways and means of changing the way they do business to hopefully regain that lost output within a year's time.
He added that addressing this issue was now priority-one with the government of South Africa and that some new power generation capacity is due to be completed around 2012.
Another senior mining executive with local knowledge explained to me that South African power shortages were the result of economic growth far surpassing forecasts [perhaps a good thing]. But he insisted that this was known as far back as the millennium. Due largely to wholesale management changes at the public utility - which he strongly indicated was a major political football - new management decided to ramp-up capacity utilization of existing infrastructure instead of following a more prudent course of planning for capital investment in new capacity. He explained to me that coal fired [steam] electricity generation is ideally meant to operate in the mid 80 % capacity utilization range - allowing for the scheduling of down time to conduct maintenance and repairs. Instead, he told me, existing electrical generation was been running in the unsustainable [long term] 90+ % range.
Stuff is beginning to wear out.
Strangely enough, the person who did speak about the issue [although indirectly] was none other than Mr. Peter Kinver, Executive Vice President and Chief Operating Officer of Barrick Gold Corp. in his keynote address at the mining breakfast.
Barrick Gold EVP, COO, Mr. Peter Kinver
Mr. Kinver's speech lasted about 20 minutes and dealt with two major themes: Energy and Mine Safety. Mr. Kinver presented the audience to a power-point presentation showing how Barrick is involved in the business of building power generation facilities in virtually every jurisdiction that they operate. This runs the gamut from natural gas generation in Nevada to solar power generation facilities and wind farms in Africa and South America.
Peter Kinver Slide Presentation
I couldn't help but think to myself, if the Chief Operating Officer of Barrick Gold is delivering a keynote speech outlining his company's own power generation efforts all over the world - the stuff must be worth its weight in gold.
The fact that no-one is willing to speak on the record about this issue along with the dialogue I was able to have - power issues are likely to remain a major factor for the foreseeable future. It is likely that this will have a material effect on the number of ounces of physical precious metal being produced in South Africa for some years to come.
Rob Kirby
Your Roving Reporter for Financial Sense at PDAC 2008
March 6, 2008
