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The South African energy crisis which brought mining operations to a halt looks set to rumble on in the short term according to those in the industry who are facing production cuts. Miners had to stop production last weekend as state energy group Eskom cut power to industrial customers amid a nationwide electricity shortage. Heavy rain has also reduced coal supplies to power stations, and South Africa’s energy supply is already under pressure from industrial growth and under investment in capacity. Power problems are also sweeping across Zambia, which could hamper copper production.

Crisis talks are being held between the South African government, Eskom and mining heads. Another session was scheduled yesterday (Wednesday 30 January) as Shares went to press. Speaking ahead of this meeting, Anglo American (AAL) suggested the mining industry could see a 10% reduction in power. Industrial customers were warned by Eskom that power cuts could last into February, while investment bank ABN Amro says it could take five years to fully correct acute power shortages in the country, citing reports from Eskom’s management.

Mining is so significant to South Africa’s economy the power outages have weakened its currency, the Rand. However, the potential corporate income loss from reduced production may be offset by higher commodity prices on supply disruptions.

Ferrochrome producer International Ferro Metals (IFL) was last week ordered to shut down two furnaces for up to three weeks, sending its share price down 10% to 89p across two days. Landsbanki analyst Martin Potts suggested the ferrochrome price could rise around 50% to $1.80 per pound as South Africa accounts for 45% of world supply. Anglo American’s coal operations have returned to normal while platinum production remains idle. Ridge Mining (RDG:AIM) is conferring with an energy consultant to find an alternative power source to Eskom for its Sheba’s Ridge platinum mine, currently under development.

Coal of Africa (CZA:AIM), which starts coal production later this year, said Eskom’s ‘low’ prices are driving South African coal producers to the export market. Chief executive Simon Farrell added: ‘Unless Eskom pays more for fuel supplies, producers like us will make more from export than domestic supply.’

Shares says: Until there is clarity on when power returns to normal, shares could become depressed in South Africa-based miners, particularly the metal producers

BUY Coal of Africa, Anglo American

HOLD International Ferro, Ridge Mining

by: Dan Coatsworth