South African gold
A new vein

STUFFY, vain and set in their ways, the men who run South Africa's gold mines are fitting heirs to Cecil Rhodes and his fellow Randlords, who discovered gold on the Witwatersrand in the late 19th century. South Africa's mining houses are paralysed by tradition. They have been ill-equipped to cope with the collapse in the gold price over the past 21 months. But, behind this monolithic exterior, new minds are at work that are less reverent of tradition.

A fresh approach is desperately needed. Though two-fifths of all known gold lies beneath South African soil, making it the world's biggest reserve, the country has been digging out less and less of the stuff. South Africa's share of the world's gold output shrank from over half in 1980 to just over a fifth last year. This decline has been due to a mix of low productivity, poor industrial relations and the hazards of geology: whereas recent discoveries in other countries have been at the surface, South African gold tends to lie buried deep underground, making it increasingly costly and complicated to dig out.

Owing to a weak gold price, which has fallen by over 13% this year, the industry has performed pitifully. In the second quarter of 1997, according to ING Barings, a stockbroker, the six big gold-mining houses together made a combined loss of 60.4m rand ($13.5m) after tax, down from a profit of 233.6m rand in the first quarter. Only two of the six groups, Anglo American Corporation and Gencor, made a profit in the second quarter.

If nothing else, this miserable performance has concentrated minds wonderfully. Traditionally, South Africa's mining bosses have been cushioned in head offices far away from the dust and heat of the shafts. This remoteness was institutionalised: groups split operating mines from the head office, and listed them separately on the stockmarket. The mines then paid a fee to the head office, for services it provided under management contracts.

These fees, based on complex formulas, take a fixed share of the mines' revenues, regardless of their profits. The mining houses argue that they are justified because the head office provides skills, including accounting and geological expertise, more efficiently than any individual mine could by itself. Critics retort that the system is resented at the mines. Overstaffed head offices take too much money, while interfering in the running of a mine that is hundreds of miles away from them. Investors are not much more keen, fearing that they have second call on the mines' revenues.

Randgold, however, one of the big six, has now ended this arrangement. Since he took over in 1994, Peter Flack, its boss, has freed the firm's various mines from all management contracts with head office. The mines are now grouped in two separately listed mining companies, Harmony and Durban Deep, whose managers can take their own decisions. The payroll at Randgold's head office has been trimmed from 128 employees to just 14. “Ultimately,” says Mr Flack, “I can't see the point of a head office at all.”

Other traditions are also going. Historically, the boundaries of South African mines followed those of the farms under whose land the gold lay. This may have pleased mine bosses sentimental about their links with the Randlords, but it makes no geological sense, because farm fences seldom follow the lines of an ore body.

Recently, however, Gencor has ripped up the fences between four of its formerly listed mines near Evander, east of Johannesburg, and merged them into one company, Evander Gold Mines. Others have swapped properties. Earlier this year Anglo and Gencor swapped mineral rights that each held next to the other's existing mines. Brett Kebble, who heads the new gold division at JCI, another of the country's large mining houses, says that such rejigging leads to savings on overheads and capital expediture, as well as pleasing investors who can more easily trade in the shares of a mine with a larger market capitalisation.

Few of these changes, adventurous as they are, will be enough to make South Africa's mines profitable while the world gold price languishes. Nor do they do much to cut the industry's wage bill, which is over half the cost of running a typical mine. Blasting and hacking at the rockface deep underground requires squadrons of miners, who often work in cramped and treacherous conditions. Relations with the mine bosses have long been hostile, and productivity low.

Which is why one other development is intriguing. Mesmerised by the vast, rich gold reef of the Witwatersrand, the big mining houses have not sought deposits elsewhere in the country. Now, helped by new prospecting technology, a surface “greenstone” gold deposit is being explored about 300 kilometres (190 miles) west of Johannesburg. The Kalahari Goldridge Mining Company, a small outfit digging out rock from a vast open pit, is not yet making money. But, thanks to the shallow deposit, labour represents only 15% of its costs.

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