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Great Basin Gold bucks the odds Add to ...

It might seem an odd place for a gold miner to start a new project: a country with an eroding gold industry, unreliable electricity supplies, inadequate transport, frequent political protests, rising fears of nationalization, and controversial rules on black empowerment.

This is the reality of South Africa - once the world's leading gold producer, now fallen into steady decline. But one Canadian junior, Great Basin Gold Ltd. , has bucked the trend with a new gold mine near Johannesburg that went into commercial production last month, delayed but not defeated by the many obstacles here.

The $324-million (U.S.) Burnstone mine is on track to become one of the lowest-cost gold mines in South Africa, the company says. Analysts predict that the mine will transform Great Basin into a mid-tier producer by the end of this year, with up to 140,000 ounces expected to be produced at the mine in 2011.

If successful, the project could begin to challenge South Africa's negative image, showing the vast mineral potential that still remains in the country. Despite its deteriorating output and rising production costs, South Africa still has the world's biggest gold reserves, along with 90 per cent of the world's platinum.

To build the new mine, Great Basin has endured the worst of South Africa's frustrations. It was targeted by violent protesters in nearby communities who accused it of failing to employ enough local workers. Its electricity supply was delayed for seven months by problems at the national power monopoly. And its long-term prospects were clouded by radicals in the ruling party who are pushing for nationalization of the mining sector, keeping the issue constantly on the South African agenda even when the government disagreed with it.

But most of these issues were "noise" rather than "showstoppers" for the mine, according to Ferdinand Dippenaar, president and chief executive officer of the Vancouver-based company, which also has mining operations in Nevada.

Great Basin coped with the headaches in South Africa by adjusting rapidly and creatively. Faced with long delays in getting a power transmission line, for example, it built the entire mine with generators and a temporary power line, and then installed energy-efficient motors to make the entire mine less dependent on the electricity monopoly.

After it reaches its peak production in 2013, the mine should be able to produce gold at a cost of $450 an ounce, Mr. Dippenaar said in an interview during the annual Mining Indaba conference in Cape Town.

Those kinds of innovations could be crucial to the revival of the once-dominant South African mining industry. For almost a century, South Africa produced more gold than any other place on the planet. Of all the gold ever produced in the world, 40 per cent was dug up from Johannesburg's gold mines.

But today, South Africa's gold grades are barely a fifth of what they were. Its gold mines have become deeper and more expensive - some are now burrowing nearly four kilometres below the earth's surface, making them the deepest in the world. As a result of the diminishing grades, South Africa's gold production has dropped by more than 7 per cent annually for the past decade. And now it has slipped to third place in the ranks of the world's top gold-producing countries, behind China and Australia.

Even as the gold becomes more complex to extract, producers are squeezed by poor infrastructure. South Africa's railways and ports are unable to keep up with volumes of exports. Electricity supplies have become increasingly sporadic, especially in 2008 when power blackouts were lengthy and frequent.

On top of these problems are the political complexities. Rules on black empowerment, including an obligatory share of ownership for "previously disadvantaged" groups, are often difficult to fulfill and can lead to corruption. Militant groups, including the youth wing of the ruling African National Congress, have demanded the nationalization of a controlling stake of the mining sector. While the ANC has never adopted nationalization as a policy, the intense lobbying forced the ANC to promise a formal review of nationalization, ensuring that it will stay on the agenda for debate until next year at least.

"The continued talk of nationalization is a concern," Mr. Dippenaar said. "It's not the fact of nationalization, but it's just that there is always something. There is always noise."

He argues that South Africa's investment climate is not nearly as bad as some outsiders perceive. "In a declining industry, there are challenges. But to an extent, South African producers are their own worst problem - always blaming someone else, instead of saying, 'What are the issues we can sort out in making the industry more attractive?' A lot more could be done to sell South Africa as a competitive mining region."

Despite its delays in reaching the production phase at its South African mine, Great Basin is earning praise from analysts. The company has made "impressive progress" over the past year, according to a research report this month by Raymond James Ltd.

"Great Basin is just on the cusp of a turnaround," said the report, written by analyst Brad Humphrey. "We suspect Great Basin will successfully make the leap from a junior producer to mid-tier producer by the end of 2011."



Follow on Twitter: @geoffreyyork

 

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