South African Gold Output Falls to Lowest in 84 Years (Update2)

Gold production in South Africa, the world's biggest source of the metal, will probably decline again this year after a drop in 2006 to its lowest level since 1922.

Gold production fell 7.5 percent to 8.85 million ounces, following a 13.1 percent drop the previous year, Roger Baxter, an economist the Chamber of Mines, an industry body, said in a telephone interview from Johannesburg. Production, which has dropped for all but one of the past 37 years, may decline again next year, he added.

Most of the country's bullion is mined from deep shafts, some more than two miles (3.2 kilometers) beneath the surface, by AngloGold Ashanti Ltd., Gold Fields Ltd. and Harmony Gold Mining Ltd., Africa's three largest producers of the metal. As they tunnel deeper, the cost of extracting the metal increases, making parts of the world's largest ore bodies unprofitable to mine.

``We're expecting a slower rate of decline this year,'' Baxter said.

The pace of the drop in output may be slowed by the rand's 5.4 percent decline against the dollar this year, which has boosted the price of the metal measured in the local currency, Baxter said. South African miners pay most costs in rand and sell their metal at dollar-denominated prices.

Last year's production was the lowest since an industry-wide strike in 1922, when white miners led a revolt against plans to cut their wages and replace them with lower-paid black workers. The Rand Revolt, as the violent uprising became known, left hundreds of miners dead and cut production to about 7 million ounces.

Costs Rise

Costs at South African gold mines last year jumped 12 percent to 99,725 rand a kilogram, or $420 an ounce, the chamber said. Gold traded at $643.10 an ounce, or about 152,790 rand a kilogram, at 10:20 a.m. Johannesburg time. It averaged $604.51 an ounce last year.

South Africa's bullion production peaked at 1,000 tons in 1970. Since then it has dropped each year, save for a 0.3 percent increase in 2002, when a 9.7 percent drop in the local currency boosted prices, making more ore profitable to extract.

``The mines are getting deeper, more complex and costlier to operate, while the grades are declining,'' Ian Cockerill, chief executive officer of Gold Fields, said in an interview from Johannesburg. ``The drop in production is a natural consequence of ore bodies that are very mature.''

Falling Output

South Africa, with production of 300 tons, or 9.6 million ounces in 2005, led Australia's 254 tons and the U.S. with 250 tons, according to the latest figures available from the U.S. Geological Survey. Each had declining production that year.

South Africa's output may drop to 240 tons in 2007 and fall every year until 2010 when it will ``reach a plateau'' as new production replaces dwindling output from older mines, said Credit Suisse Standard Securities analyst David Davis.

The decline will be mirrored in other large gold-producing nations as companies struggle to replace the gold they produce with new reserves of the metal, he added.

``The survival of the gold industry depends heavily on the replacement of reserves,'' Davis, South Africa's top-rated gold analyst according to an annual survey by Financial Mail magazine, said in an interview from Johannesburg. ``That just hasn't happened fast enough in South Africa, or in the U.S.''

To contact the reporter on this story: Stewart Bailey in Johannesburg Sbailey7@bloomberg.net