SOUTH AFRICA: PROSPECTS FOR THE GOLD INDUSTRY

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500220039-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: December 16, 2016
• Document Release Date: December 27, 2004
• Sequence Number: 39
• Publication Date: April 1, 1968
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Secret
Intelligence Memorandum
South Africa: Prospects for the Gold Industry
Secret
ER IM 88-37
April 1988
Copy Nt 72
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
MOW I
Inshoisd free implemelis
driniretliag 1114
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1968
INTELLIGENCE MEMORANDUM
South Africa: ?Prospects for the Gold Industry
ESuTst
Potentially, South Africa could profit con-
siderably if the price of gold on the free market
settles significantly above $35 an ounce. Under
these conditions, not only would the value of its
major export rise, but also the life of the coun-
try's gold mines would be extended. If the free
market price of gold increases only moderately
(say up to $40 an ounce) it is far from certain
that South Africa would decide to increase the
current capacity to process ore, and hence the
volume of gold production would be unlikely to
rise. In the absence of a significant price
increase, it is estimated that gold output in
South Africa will soon begin to decline, unless
the government takes measures to alleviate the tax
burden on the industry or greatly increases subsidy
payments.
In recent years the world demand for gold has
grown enormously. This growth has far outstripped
the increase in gold production. Industry, private
hoarders, and speculators have taken the lion's
share of newly mined gold and have left relatively
little for additions to official monetary reserves.
From 1963 to 197, Free World consumption by in-
dustry and the arts increased 100 percent and
purchases by private holders increased about 200
percent, whereas production increased only 7 per-
cent. The sharp upturn in speculative activity
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
Intelligence.
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in recent months has drawn down the Free World's
monetary gold reservep significantly.
Gold production has failed to expand more
rapidly because of a cost-price squeeze that has
become particularly acute in recent years. During
the 34 years since the price of gold was set at
$35 an ounce, costs of production have risen
greatly. Many mines have been forced to close,
and prospecting in several countries has ceased
completely. World production would have declined
had it not been for the discovery of extremely
rich deposits in South Africa after World War II.
Extraction of gold from higher quality ores
enabled the South African gold mining industry to
offset the increase in costs per ton of ore ex-
tracted and production rose dramatically. However,
South African production now has reached a plateau.
South AfrIca has contributed about 56 percent
of the World's production of gold from 1950 through
1967; 33 percent came from other Free World coun-
tries, and 11 percent from the Soviet Union. In
1967, South Africa's share was 66 percent, while
the rest of the Free World accounted for only 21
percent and the Soviet Union for the rest.
Gold has played an extremely important role
in the South African balance of payments. Net
foreign exchange earnings in excess of $12 billion
from gold sales since World War II were a crucial
factor in the transformation of South Africa from
an agricultural to an industrial nation because
they financed a large share of the required
imports.
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in recent months has drawn down the Free World's
monetary gold reservep significantly.
Gold production has failed to expand more
rapidly because of a cost-price squeeze that has
become particularly acute in recent years. During
the 34 years since the price of gold was set at
$35 an ounce, costs of production have risen
greatly. Many mines have been forced to close,
and prospecting in several countries has ceased
completely. World production would have declined
had it not been for the discovery of extremely
rich deposits in South Africa after World War II.
Extraction of gold from higher quality ores
enabled the South African gold mining industry to
offset the increase in costs per ton of ore ex-
tracted and production rose dramatically. However,
South African production now has reached a plateau.
South AfrIca has contributed about 56 percent
of the World's production of gold from 1950 through
1967; 33 percent came from other Free World coun-
tries, and 11 percent from the Soviet Union. In
1967, South Africa's share was 66 percent, while
the rest of the Free World accounted for only 21
percent and the Soviet Union for the rest.
Gold has played an extremely important role
in the South African balance of payments. Net
foreign exchange earnings in excess of $12 billion
from gold sales since World War II were a crucial
factor in the transformation of South Africa from
an agricultural to an industrial nation because
they financed a large share of the required
imports.
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Table 1
Estimated Distribution
of the Free World's Annual Gold Supply
1950-67
Billion US $
Year
New
Supply
Net
Consumption
by Industry
and the Arts
To
Private
Holdings
To
Official
Holdings
1950
0.9
0.2
0.6
0.1
1951
0.9
0.1
0.6
0.2
1952
0.9
0.2
0.4
0.3
1953
1.0
0.2
0.4
0.4
1954
1.0
0.1
0.2
0.7
1955
1.1
0.2
0.2
0.7
1956
1.1
0.2
0.4
0.5
1957
1.2
0.2
0.3
0.7
1958
1.2
0.3
0.4
0.5
1959
1.4
0.2
0.4
0.8
1960
1.3
0.3
0.7
0.3
1961
1.5
0.3
0.6
0.6
1962
1.5
0.3
0.8
0.4
1963
1.9
0.3
0.8
0.8
1964
1.9
0.4
0.8
0.7
1965
1.9
0.4
1.3
0.2
1966
1.5
0.5
1.1
-0.1
-1967
1.5
0.6
2.3
-1.4
Total
23.7
5.0
12.3
6.4
mines in South Africa and elsewhere have been
forced to close, and production has leveled off
or declined nearly everywhere except in the USSR,
where the industry does not have to operate
profitably by Free World standards (see Table 2
and Figure 2).
South Africa's Role
4. South Africa has dominated world gold
mining almost since the country began producing
in the 1880's. Its share of world production was
40 percent in 1900 and 50 percent in 1920. Now
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IIILLION US .$
ESTIMATED DISTRIBUTION OF THE FREE WORLD'S
ANNUAL GOLD SUPPLY, 1946-67
Figure 1
NET CONSUMPTION BY
, INDUSTRY AND THE ARTS
NEW SUPPLY
?????
?RID AL-HICILDINGIV:
Plvi.rwr?"44.aDING
, ?
1946 1949
1952 1955 1958 1961 1964 ---"" 1967
58697 3.68 CIA
108
412
OUTPUT OF GOLD BY MAJOR WORLD PRODUCERS
Annual Average 1935-39 and 1966
MILLION US $
IIII Annual Average 1935.39
1966
16
i0
Figure 2
GHANA COLOMBIA
26 16
26 19
139
fit 14108 es 40 s2 JAPAN PHILIPPINES
100100
0 AUSTRALIA
a* SOUTHERN RHODESIA
UNITED STATES
CANADA
OTHER.
USSR
REPUBLIC OF SOUTH AFRICA
1?2
58698 3.68 CIA
*Excluding Communist L'Aina, Czechoslovakia, and Rumania.
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Table 2
Output of Major World Gold Producers
Annual Average 1935-39 and 1966
Million US $
Annual Average
1935-39 1966
Republic of South Africa
412
1,081
USSR
190
189
Canada
147
115
United States
139
63
Australia
46
32
Ghana
20
24
Japan
26
19
Southern Rhodesia
28
19
Philippines
26
16
Colombia
16
10
All others a/
171
63
a. Excluding Communist China, Czechoslovakia, and
Rumania.
South Africa accounts for 66 percent of world
production (see Table 3 and Figure 3).
5. The phenomenal growth of the Republic's
gold output in the post-war period from $417 mil-
lion in 1946 to $1.08 billion in 1966 has more
than compensated for a $260 million decline from
pre-war levels in production of other Free World
countries. The expansion in South Africa was
made possible chiefly by the discovery of ex-
tremely rich deposits after World War II and to
a lesser extent by technological improvements.
About 80 percent of South Africa's total gold
production now comes from goldfields developed
in the past 25 years. Other factors favoring
South Africa are the supply of exceptionally
cheap and amenable labor and the economies of a
well-organized industry with large capital
resources available for prospecting and for
investment in the most modern mining equipment
and techniques;
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Table 3
World Gold Production .4./
1950-67
Million US $
Year
World
South Africa
USER
Other
1950
972
408
126
438
1951
952
403
125
424
1952
977
414
125
438
1953
970
418
122
430
1954
1,018
463
121
434
1955
1,061
511
121
429
1956
1,097
556
117
424
1957
1,138
596
119
423
1958
1,174
618
123
433
1959
1,250
702
123
425
1960
1,301
748
123
430
1961
1,348
803
133
41.2
1962
1,444
892
144
408
1.963
1,510
961
154
395
1.964
1,567
1,019
161
387
1965
1,615
1,069
175
371
1966
1,631
1,081
189
361
1967 b/
1,615
1,068
200
347
a. Excluding Communist China, Czechoslovakia, and
Rumania.
b. Preliminary.
Importance to South Africa
6. The gold industry now accounts for about
10 percent of South Africa's gross domestic
product (GDP). The entire output, worth more
than $1 billion in 1967, is sold abroad and earns
about 40 percent of South Africa's foreign ex-
change. From 1961 through 1965 the industry paid
$788 million in taxes and spent $1,320 million
in wages and salaries and $1,741 million locally
on mining equipment and supplies.
7. Gold has financed much of South Africa's
economic growth. Since World War II, gold sales
have totaled $14 billion and have enabled South
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The seventeen bats o6 god button in thiA photogiLaph cote
vatued at appnoximatety US $595,000 at $35 pelt. tuy ounce
and teptesent about 2-1/2 days ptoduction o gotd by the
Angtovaat gtoup mines.
Africa to develop rapidly into an industrial
economy. Gold exports have accounted for about
40 percent of total exports and have financed
close to one-half of total imports. Moreover,
government receipts from taxes on gold mining
companies are an important source of government
revenue, representing about 19 percent of the
Republic's receipts from direct taxes in recent
years.
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Goldfields
8. South Africa's first important gold mines
were opened in 1886 in the Central Rand. Soon
after the turn of the century, gold was also
discovered in the East and West Rands and both
developed into major producing areas. The
Kerksdorp area in the Orange Free State has
accounted for one-third of South Africa's total
output. The latest gold discoveries have been
the Evander fields in the Eastern Transvaal,
where the first mine was opened in 1958. Output
Thea photopapha Ahow the pnoximity 06 the
gotd mina to the city oic JohanneAbukg.
there has since increased steadily and is ex-
pected to continue to increase as the Kinross
mine begins production in 1968. The search for
gold continues, and in the past ten years $42
million has been spent on prospecting. All new
discoveries have been extensions of existing
fields, however, and hope is 2ading that rich new
fields will be found. (For the geographical loca-
tion of South Africa's goldfields, see the map,
p. 11.)
Organization
9. The South African gold mining industry is
made up of more than 60 mining companies which are
owned or controlled by seven major financial houses.
Coordination of mining activities is done through
the South African Chamber of Mines. The Chamber
represents the industry in negotiating agreements
with government departments and administrative
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bodies and in wage contracts with labor unions.
The Chamber issues statistics, carries on research,
conducts safety campaigns, oversees safety regula-
tions, supervises workers' welfare services, and,
with the government, runs training schools for
mineworkers. The Chamber owns the Rand Refinery
Ltd., which refines 95 percent of the country's
gold output. Gold bars are sold to the South
African Reserve Bank, which has used the Bank of
England as its agent on the London market. Because
the Bank of England and other members of the former
London Gold Pool have indicated that they will no
longer buy newly produced gold, South Africa may
develop other markets in addition to London.
Labor
10. The gold mines employ about 425,000 persons,
of whom about 90 percent are Bantu.* On an average,
40 percent of the 380,000 Bantu mineworkers come
from the Republic, another 20 percent from Mozam-
bique, 20 percent from Lesotho, Botswana, and
Swaziland, and most of the rest from Malawi.
City Deep gotd mine4 main
compound bavtack4.
A 4unveyok and hi4 a44i4tant4
at wonk in a gotd mine.
* Bantu is the South African term for black
Africans.
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51E.
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TRANSVAAL
WEST RAND
Krugersdorp
FAR WEST RAND
Johannesburg
ORANGE FREE KINROSS
ORANGE FREE
STATE
ATLANTIC
OCEAN
SOUTH AFRICA: GOLD MINES
Mining lease area
Developing mine
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Government Policy
13. South Africa's policy toward the gold
industry is largely one of maximizing government
revenue while at the same time encouraging the
opening of new mines. As such, the industry has
borne an exceptionally heavy tax burden for many
years. Profits of less than 6 percent of gross
sales are not taxed. But above this, the tax rate
increases sharply to a maximum of 55 percent. There
are also other forms of taxes, including a temporary
surcharge of 5 percent and an additional 5 percent
tax called a "loan levy." The latter loan will be
repaid by the government in seven years under
present law.
14. Capital expenditures incurred in bringing
a mine into production are fully deductible --
that is, no tax is paid until these expenditures
have been fully recovered. An example of this is
the Welkom mine in the Orange Free State which
began production in 3.953 but did not incur a tax
liability until 1966 after producing more than 5
million ounces of gold. This tax writeoff was at
first limited to gold mines established after
February 1946 but has since been extended to all
deep mines to encourage older mines to maintain
operations by mining at deeper levels. More re-
cently, capital allowances have been extended to
106 percent, and a 108 percent writeoff is allowed
for mines established after 17 August 1966. In
specific cases involving exceptionally high capital
costs, such as the $56 million invested in the
Western Deep Levels mines, additional capital
allowances were made by special legislation.
15. Payments are made by the government to
less profitable mines to finance the cost of pumping
water seeping in from abandoned underground work-
ings. By June 1966, seven mines had received
about $2 million tor this purpose. In addition,
between April 1964 and the end of 1967 ten mines
had received $9.5 million in loans to cover
operating losses up to 10 percent of revenue. In
mid-I967, assistance had increased to an annual
rate of $5.6 million a year. The total of about
$15 million paid to marginal mines since the in-
ception of these benefits is estimated to have
been responsible for additional gold production of
about 4 million ounces valued at $140 million.
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16. An important indirect subsidy for marginal
mines in South Africa has been government leniency
if not actual encouragement of mergers of profitable
and unprofitable mines. Because of the tax struc-
ture, benefits can be obtained from the application
of tax losses, and mergers of this type can result
in substantial savings for the companies involved.
17. The choice South Africa faces with respect
to the future of its gold industry is essentially
one of resource allocation. By reducing taxes on
the gold industry, the government could maintain
a high level of gold production for many years, or
it could use these tax revenues to develop other
export industries to replace gold in part. Some
officials emphasize that gold is a wasting asset
and the economy must be adjusted during the re-
maining years of high output to an eventual loss
of gold production. The gold industry contends
that gold is still South Africa's cheapest means
of earning foreign exchange and will remain so
for some time. The government, however, appears
to anticipate a long-term decline of gold produc-
tion and will probably stress development of other
exports.
Prospects
18. Without an increase in the price of gold,
the future of South Africa's gold industry is far
from bright. Production now has reached a plateau,
and by the early 1970's output is likely to begin
a decline that will have little chance of beim,.
reversed. The sharpness of the decline will depend
on how fast costs increase and on whether the
government gives the industry tax relief and larger
subsidies. As things now stand, the South African
Chamber of Mines estimates that if costs per ton
of ore increase 4 percent per year, which seems
realistic, production would drop from about $1
billion in 1970 to $950 million in 1974, after which
the decline would probably become quite abrupt.
They further estimate that by 1978 production would
fall to about $700 million, and by 1982 to about
$125 million. An increase in the price of gold
matching the 4 percent annual increase in the cost
of extracting the ore would brine./ the price of
gold to almost $40 an ounce in 1970, $46 in 1974,
and $54 in 1978 (see Figure 6).
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19. If South Africa sold gold in the world's
free markets at an average price significantly
above $35 an ounce, this would increase the
receipts from gold exports and extend the life of
the gold mining industry by allowing it to process
lower grade ores profitably. But in the short run
a higher gold price probably would not result in
increased production. The reason is that the South
African gold mining industry is now extracting ore
at rates that approach the capacity of existing
processing facilities. If lower grade ore were
mined, the recovery of gold from a given process-
ing capacity would be smaller. In the long run,
capacity for processing ore could be expanded and
gold production increased, but the South Africans
are unlikely to undertake the investments neces-
sary to increase capacity unless they expect the
average price at which they can sell gold to
remain well above $35 an ounce for a long enough
time to make the investment profitable. If the
price increase were small (up to $40 an ounce)
they might well decide not to increase capacity,
but would be able to postpone the decline in
production which is expected to begin about five
years hence. In any case, the South Africans are
likely to wait until the market and price prospects
for gold have become clear before taking any
important steps.
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SOUTH AFRICA: GOLD MINE OPERATIONS, 1966
Ore Produced in Million Tons
Gold Recovered in Million Ounces
21.19
Imo
s.06
KLERKSDORP
FAR WEST RAND
EAST RAND
ORANGE FREE STATE
58701 3.68 CIA
4.81
EVANDER
CENTRAL RAND
Figure 5
3.33
" WEST RAND
Figure 6
SOUTH AFRICA: PROJECTED DECLINE AND FALL OF GOLD PRODUCTION
1954-2002
Million Ounces
30
25
20
15
10
0
a
%IN
?
?
Past results
? ?? ? ? 2% Per annum escalation In working costs
48 Per annum escalation in working costs
umm rim Government Mining Engineer's forecast
(Jan 1966) 2 1/2Z Per annum cost
escalation
Estimates of future output are based on existing price
and do not allow for opening of new mines.
?
PAST I FUTURE ? \
? 444I (Estimated) %lie
N
Iwoo ?
.??????
I S...
1 I 1 1 1 ? 1
?
?
1954 1962 1970 1978 1986 1994 2002
58702 3.68 CIA
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