Every element of South Africa’s ‘just energy transition’ is in question

This year’s Mining Indaba conference was notable for two things. One was the prominent presence of both Chinese and U.S. delegations looking for critical minerals partners in Africa. The other shone a spotlight on South Africa’s deepening energy crisis.

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BY ALISHA HIYATE

Just two days after speaking at Indaba in Cape Town, South Africa’s president Cyril Ramaphosa declared a state of disaster in response to rolling blackouts that have become ever more frequent in the nation.

The Feb. 9 declaration was not a surprise; instead, it finally reflected the reality that South Africans have been living for the past 15 years and has only worsened in recent months.

Last year, the population endured 288 days of electricity cuts, according to the BBC, with 2023 bringing blackouts of up to 15 hours per day. At the end of January, the country had experienced 94 consecutive days of scheduled rolling blackouts or “loadshedding,” according to a Bloomberg report. Not only have the blackouts knee-capped businesses, but when they happen at night, the total darkness has emboldened criminals and left citizens vulnerable — and infuriated.

State-owned Eskom produces over 90% of the country’s electricity, and its aging coal plants are starting to give out. Eskom’s R400 billion (US$22.3 billion) debt is a big factor in why it hasn’t made necessary investments in maintenance and new capacity over the years. (Observers point to corruption as a secondary factor.)

The situation has now reached a point where the crisis has become a disaster, South African energy analyst Clyde Mallinson told DW News in late January. Noting that average power demand in the country is about 27,000 MW — far above the 21,000 MW the country can produce, Mallinson said: “It needs almost a war-like effort to pull us out of this.”

Ramaphosa, who faces an election next year, has pledged that the disaster declaration, which will allow the government to bypass some of the bureaucratic processes normally mandated in the procurement and delivery of services, will help deliver a “massive increase” in grid power over the next 12-18 months.

Still the government has warned that loadshedding will continue for at least a year. Moreover, the last time such a declaration was used, which was in response to the Covid-19 pandemic, it resulted in fraudulent contracts of up to US$137 million.

The effect on miners in the nation — a big producer of coal, iron ore and PGMs — has been substantial. (A parallel corruption-driven rail crisis affecting state-owned Transnet has compounded difficulties for miners, crimping their access to global markets last year just as Russia’s war in Ukraine sent commodities prices soaring.)

In January, South Africa’s Minerals Council noted that with recent power price increases announced by Eskom, electricity will make up 12.5% of mining costs by the end of next year, up from 9% in January. Since 2008, electricity prices for the mining sector have risen eightfold.

According to the Minerals Council, which has advocated for greater private sector involvement in both the electricity and rail sectors, mining production declined by 6% last year. The mining sector is a big power consumer, buying about 14% of electricity generated by Eskom, or 30% if smelters and refineries are included.

“The adverse operating environment of unreliable and expensive electricity, and a crisis in transport logistics for bulk mineral exports erode the mining sector’s global competitiveness and may very well culminate in job losses in mining,” said Henk Langenhoven, the industry association’s chief economist, in a release in January.

At Indaba, Ramaphosa acknowledged the “huge impact” the crisis has had on miners. Until recently, miners have had limited ability to generate their own power. In mid-2021, the government changed the threshold requiring a licence for power generation for private generators and companies to 100 MW from 10 MW.

Ramaphosa said 89 projects had been developed by mining companies with a particular focus on renewables including solar and wind, as well as battery storage.

“Not only will these projects support mining operations themselves and bring down operation costs, but they will also add much needed power to the country’s overall supply and support South Africa’s decarbonization process,” he said in his address, according to Voice of America.

An insurmountable challenge

While Ramaphosa, who’s been president since 2018, has mostly sat on his hands as the crisis has worsened, the government did release an ambitious R1.5-trillion (US$83.5 billion) five-year energy transition plan last November.

The plan focuses on improving the energy grid as well as adding renewable energy; planning for adoption of electric vehicles; and investments in green hydrogen to aid in decarbonization and for export.

While South Africa has secured support from international partners (France, Germany, U.K. and U.S. as well as the EU) in the form of the Just Energy Transition Partnership (JETP) first announced at climate conference COP 26 in 2021, the amount pledged so far only comes to US$8.5 billion.

In the meantime, even if miners can now supply their own energy, South Africa is sliding down the list of preferred mining jurisdictions. In a note to clients, BMO Capital Markets mining analyst Colin Hamilton, who attended Indaba, said companies there also report they are bleeding talent to other jurisdictions.

It all adds up to even more obstacles to achieving a “just” energy transition that doesn’t leave the country’s poorest even worse off than they are now. If its electricity infrastructure is already in disarray, what are the chances that it can manage decarbonization in an orderly way while cushioning the effects for the country’s 91,000 coal workers?

Add a corruption scandal that broke late last year, dubbed ‘farm-gate,’ that points to possible “gross misconduct,” corruption and “violation of the constitution” on Ramaphosa’s part, and there is even less scope for optimism on short-term progress. TNM

THE VIEW FROM ENGLAND:

COLUMN | Gold at 550-year high

BY DR CHRIS HINDE Special to The Northern Miner

At the third time of asking, gold seems set to break decisively through the psychologically important barrier of US$2,000 ($2,686) per ounce. More importantly, the precious metal has matched an inflation-adjusted 550-year high when measured in sterling.

Gold recently achieved an alltime nominal high of £1,593 (US$2,600) per oz. in the U.K. but, in real terms, we’ve been here once before, in 1470. Much of the recent price increase is due, of course, to sterling’s worsening exchange rate with the U.S. dollar in the face of an economic recession and mushrooming labour unrest as wages fall behind inflation.

Our currency has suffered a long decline. A pound sterling is currently trading at US$1.20, whereas during most of the Second World War it was worth US$4. Until decimalization in 1971, our ‘half-crown’ coin, first issued in 1549, was worth 2s 6d, with eight in a pound (there were 12 pence, ‘d’, in a shilling, and 20 shillings in a pound). It was nicknamed ‘half dollar’.

Even in dollars, gold is performing well. Recent price rises follow record demand of 1,337 tonnes for the metal in the final three month of last year. This demand was helped in December by China increasing its gold reserves for a second straight month. The People’s Bank of China raised its holdings by 30 tonnes (after November’s addition of 32 tonnes), which brought the nation’s year-end stocks to 2,010 tonnes.

The World Gold Council reported that central banks globally added 1,136 tonnes last year to their official gold reserves, which is the highest level of buying in more than five decades. Indeed, 2022 saw the strongest gold demand overall for a decade, with global purchases (excluding over-the-counter trade) jumping 18% to 4,741 tonnes. In addition to the huge buying by Central Banks, there was buoyant bar and coin investment.

The gold price was supported by only a modest growth in mined production last year, with output remaining below the 2018 peak.

Gold has previously achieved US$2,000 per oz., albeit only briefly, in August 2020 and March 2022. In the U.K., gold was over £1,500 on both those dates, plus in September last year (coinciding with Liz Truss’s short-lived administration). Measured in sterling, the precious metal has boomed since the turn of the millennium (gold was valued at just £170 per oz. at the end of 1999), which rivals the price-multiple performance of the 1970s.

There was a comparable goldprice rise in the 14th and 15th centuries. We know the real price of gold back to 1270 courtesy of annual inflation figures from the Bank of England (£1 then was worth some £830 in today’s money). In real terms, gold peaked at around £1,600 in 1470. This was 19 years before the Royal Mint issued the first £1 sovereign, with the coin containing 0.5 oz. of 23 karat gold, i.e. 95.8% pure (‘crown’ gold was devalued to 22 karats in 1545 by Henry VIII).

The 16th and 17th centuries were dire for the gold price, with the precious metal flooding into Europe following Spanish conquests in Central and South America. By the start of the 18th century, gold was worth less than £250 per ounce (in 2022 money).

Since 1601, a troy pound (containing 12 troy oz.) of silver had been coined into £3 2s 0d, valuing an ounce of silver at 5s 2d. At the official gold-silver conversion rate of 14.35, gold was valued at £3 14s per ounce. New £1 gold coins were struck in 1663, and called guineas because they were made out of gold from the Guinea coast of Africa.

Gold-price stability was established in 1717 thanks to the Master of the Royal Mint, Sir Isaac Newton, who was an English mathematician, physicist, astronomer and author. His Principia book, published in 1687, established classical mechanics and is considered one of the most important works in science.

Although most famous for discovering the law of gravity, Sir Isaac was also a practising alchemist and, although he never managed to turn lead into gold, Sir Isaac did launch the world’s first gold standard. It worked; gold was stable, at around £350 per oz. (2022 money), for the next 200 years.

In 1717, Sir Isaac changed the gold-silver conversion rate to 15.2, and set the ‘crown’, 22 karat, gold price at £3 17s (£3.89; making 24 karat, fine, gold worth £4.25). He also lifted the value of the guinea to 21s by proclamation (the gold content remained the same). In 1816, at the end of the Napoleonic wars, a new coin was introduced that contained 95% of the gold in a guinea, thus making it worth one pound sterling.

This history is a worry. The real price of gold in a local currency is apparently a measure of national risk. If so, the U.K. is now in a much worse position than during the Black Death of 1348-9 (which killed 50% of the country’s population) and the Great Plague of 1665-6 (which killed 25% of Londoners). In terms of 2022 money, gold was valued at £890 during that first catastrophe and at £550 during the second. Struth. TNM ization of $49.6 billion. bidder, Barrick Gold’s (TSX: ABX; NYSE: GOLD) chief executive, Mark Bristow, told Financial Times on Feb. 6 that his company, which in 2019 attempted an unsuccessful hostile takeover of Newmont, did not plan to table a rival offer for Newcrest.

—Dr. Chris Hinde is a mining engineer and the director of Pick and Pen Ltd., a U.K.-based consulting firm. He previously worked for S&P Global Market Intelligence’s Metals and Mining division.

“It doesn’t make sense right now,” he said. “Growing bigger for the sake of growing bigger is not a strategy.”

Newmont’s offer implies a 21% premium to Newcrest’s share price before the bid was announced.

Its proposal is via an agreed scheme of arrangement that would need to be recommended by the Newcrest board and subject to due diligence as well as a shareholder vote that could stretch out for months.

The Australian government would also have to approve the transaction as it would put four of Australia’s five largest gold mines under the control of one company.

Newmont shareholders would also have to approve the deal.

Its shares dipped by more than 3% in Toronto at press time, reaching $62.33 apiece, in a 52-week window of $51.44 and $108.98, giving it a market capital-