South African power crisis shuts down mines (January 25, 2008)

Vancouver – A nationwide energy crunch in South Africa has hit the country’s powerful mining sector hard with its major gold, platinum and diamond producers suspending operations as a precautionary measure.

The move comes on the heels of a request from state-owned electrical utility Eskom to its key industrial consumers, which includes most of the country’s major mining companies, to reduce consumption to the minimum load possible. Eskom said it cannot guarantee a stable supply of power to the mines and there could be blackouts a condition it says could last from two to four weeks.

South African gold miners Gold Fields (GFI-N, GFI-J), AngloGold Ashanti (AU-N, ANG-J, AGD-L) and Harmony Gold Mining Company (HMY-N, HAR-J) immediately suspended all mining activity in the country.

“This will have a serious effect on the South African operations and will negatively affect our gold production,” states Gold Fields CEO Ian Cockerill in a news release reacting to the situation. The company produces about 7,000 oz. gold daily from its operations in the country.

Additionally, major platinum producers Anglo Platinum (AGPPY-O, ANP-L, AMS-J) and Impala Platinum Holdings (IMPUY-O, IMP-J, IPLA-L) along with global diamond giant De Beers announced a halt of operations at essentially all of its South African mines.

The affect is substantial – with the shutdown expected to cost mining companies several tens of millions of dollars per day during the interruption.

Eskom, which generates 95% of the electricity used in South Africa, issued the request to its 138 largest industrial clients (that account for 20-30% of the draw load) it is reducing power loads to ‘survival levels’ and there could be load shedding (rotating blackouts) to balance the situation where demand exceeds available supply in the grid.

The utility confirmed it had to shed 4,000 megawatts on January 24th, its highest ever, citing exhaustion of supply contingencies along with depleted coal stocks, load losses and wet coal.

Strong recent growth in the South African economy has put increased strain on the power grid. Eskom, which produces about 90% of its electricity from coal fired generating plants, along with the government has faced strong criticism for failure to recognize the trend and is now playing catch-up to meet the demand. The utility has reportedly earmarked as much as 300 billion rand (over US$42 billion) for construction of new power plants and infrastructure.

With a long lead-time required for the building major power plants, it could easily be five years or more before any significant new generating capacity is added to the grid.

The South African government is examining possible energy rationing and is looking for cuts in use of 10-15%.

Metals markets reacted to the news by sending gold and platinum to new record intra-day spot highs of over US$920 per oz. and US$1,690 per oz. respectively. South Africa supplies about 75% of the world’s platinum.