Is Bankruptcy Rising for South African Mines?
By Greg Nunan
Many who watch the markets lately have begun to fear for the once booming South African metals mining industry. The industry that many saw as the salvation of the economy for South Africa is currently embroiled in a huge bust, one that many in the industry fear may only be relieved with the help of some smart bankruptcy lawyers. The rising expectations of the metals market, especially the gold market, in the booming 90s has turned sour as lower demand feeds poor results. Many are claiming that a winnowing out of the industry is the only solution. But is that the only way out for producers? Others are looking for options for the struggling industry to give it a turn-around that some say is out of reach.
The Drop of Commodity Prices
It is hard to argue the logic of seeing at least a few of the leading metals mining producers go belly-up when the current commodities market has taken such a plunge, particularly when it comes to the price of many metals including gold. The 2015 market has seen the third year in a row for base metals to drop below the yearly average of the previous year’s market. But while big names such as Rio Tinto may be seen to be immune, the same cannot be said for producers in the high-cost market or smaller marginal mines.
A Loss of Value
Even amongst the major mining names the value of the stock has dropped considerable in the last year or two. With this degrading of the value comes the risk of more costs for loans to continue operations or even the possibility of banks deciding the risk is too high and calling in old loans. It is exactly this situation in China that has created a run on the Chinese gold market and many fear the same situation here in South Africa.
A Question of Supply and Demand
Even though many companies have cut down their production due to decreased demand for metals in the manufacturing trade, it has not been enough to offset the changes in the marketplace. Many investors are calling for a further cut in production to help the current companies achieve a total production that is more in line with real demand. Without these changes, more producers will need to make some hard decisions about whether to continue to sink money into a product that is not as in demand as it was twenty years ago.