Faced with increasing bouts of stage 4 to 6 load shedding and an 18% electricity tariff increase, South African precious metal producers are reeling as a result of Eskom’s woes. In this report, we attempt to quantify the impact of load shedding on the mining sector, both in terms of lost output and the cost to the fiscus (lost GDP). We also analyse the impact of electricity tariff increases on the precious metals sector and examine which companies are the most exposed.

The cost of no power

Load shedding – whether measured as lost output, revenue, profit or cashflow – is costing the precious metals sector dearly. Quantifying the extent of these costs is not straightforward, but we estimate that mining output lost due to load shedding increased from about 3% in 2019 to over 6% in 2022. This led to overall GDP declining by roughly 4% in 2019, increasing sharply to about 7.5% in 2022.

By our calculations, every 1 000 GWh of load shedding equates roughly to a 2% decrease in annual mining output. The ultimate costs of load shedding could go well beyond this, as we discuss in this report.

Paying a high price

We believe that the availability of electricity, or lack thereof, is only part of the problem; sharply rising electricity tariffs are another major challenge facing the SA mining sector.

With rising electricity costs generally accounting for at least 8% of cash cost increases in the PGM sector and 5% in the gold sector, electricity costs now account for 10-15% of the cost base in SA.

Eskom was recently granted an 18.65% electricity tariff increase for the 2023/24 financial year and these latest tariff increases could accelerate the structural shift in the cost base of the precious metals sector while exacerbating the existing above-inflationary cost pressures already in place.

It's not dark yet

Most SA mining companies have long anticipated a deteriorating situation at Eskom and have started to put contingency plans in place. While these measures have provided some reprieve, the deterioration at Eskom has been worse than expected over the past few months, and their resilience has been tested to the maximum of late.

We believe therefore, that companies have little leeway left, and ongoing high rates of load shedding could lead to sharp increases in production losses over the coming months.

But it’s getting there

In this report, we demonstrate how the economic impact of production losses and higher tariffs could materially impact the economics of the mining sector. Marginal mines, many of which have been battling high inflation and other operational challenges, may not be able to withstand the latest blows brought about by load shedding, especially in the gold sector.

We would not be surprised if there is restructuring at several marginal operations in the not-too- distant future, which organised labour may be quick to blame on management and capitalists. The authorities would likely soon follow in pointing fingers, but we believe that the latter should behold the fingers pointing back.