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GOLD IN SOUTH AFRICA

MINING REFINING FABRICATION TRADE

Photograph courtesy: Rand Refinery Limited

CONTENTS
CHAPTER 1 GOLD IN SOUTH AFRICA: INTRODUCTION AND OVERVIEW

GOLD IN GOLD IN SOUTH AFRICA SOUTH AFRICA

MINING | REFINING | FABRICATION | TRADE

CHAPTER 2 RESERVES TO DOR: THE GOLD MINING INDUSTRY

CHAPTER 3 DOR TO SEMI-FINISHED PRODUCT: REFINING AND RECYCLING

CHAPTER 4 FINAL PRODUCT: JEWELLERY

CHAPTER 5 FINAL PRODUCT: COINS, INDUSTRIAL END USES AND INVESTMENT

CHAPTER 6 TRANSFORMING THE INDUSTRY: LEGISLATIVE, FISCAL AND FINANCIAL CONTEXT

CHAPTER 7 TRADE

APPENDICES APPENDIX 1: APPENDIX 2: APPENDIX 3: APPENDIX 4: INTERVIEW LIST THE SOUTH AFRICAN ECONOMY IN AN INTERNATIONAL CONTEXT TRAINING AND SKILLS TRANSFER THE INTERNATIONAL GOLD MARKET

RESEARCH DIRECTORY: FACT SHEETS ON MAJOR INDUSTRY PARTICIPANTS GLOSSARY OF TERMS AND ACRONYMS

GOLD IN SOUTH AFRICA

Gold in South Africa was funded by AngloGold Ashanti Limited, the World Gold Council, the Department of Trade and Industry and the Industrial Development Corporation of South Africa Limited and researched by Virtual Metals Research & Consulting Limited. The publication is protected by international copyright law. All rights are reserved. No part of this publication (text, data or graphic) may be reproduced, stored in a data retrieval system or transmitted, in any form whatsoever or by any means (electronic, mechanical, photocopying, recording or otherwise) without obtaining prior written consent from the funders. Unauthorised and/or unlicensed copying of any part of this publication is a violation of copyright law. Violators may be subject to legal proceedings and liable for substantial monetary damages per infringement as well as costs and legal fees. While the funders and researcher have made all reasonable efforts to ensure that information in this review is accurate at the time of publication, there may be inadvertent errors and omissions and a lack of accuracy or correctness. They make no representation or warranty, express or implied, as to the accuracy or completeness of the review. The review is not and cannot be construed as an offer to sell, buy or trade any securities, equities, commodities or related derivative products, and the review in no way offers investment advice. The funders and researcher and their employees and office bearers therefore accept no liability for any direct, special, indirect or consequential losses or damages, or any other losses or damages of whatever kind resulting from whatever action or cause through the use of any information obtained directly or indirectly from the separate or joint sections contained in this review. The funders and researcher also have no obligation to inform recipients or readers if, in the future, they revise their opinions or modify or correct information contained in the review.

Gold in South Africa was published in January 2006.


Virtual Metals Research and Consulting Limited comprises a uniquely skilled team, with a collective 60 years experience in the precious metals markets. Clients include world-class mining companies, for whom Virtual Metals specialises in proprietary research covering gold, silver and the platinum group metals, refiners, bullion banks, equity brokers, trading houses and other institutions. Virtual Metals particular strengths include macro-economic analysis, the generation of supply and demand scenarios, costs analysis, derivative research and price forecasting. Project management: Lebone Resources Design and layout: Russell and Associates

FOREWORD BY THE FUNDERS

The objective of the funders in commissioning the research described in this document, Gold in South Africa, was to create a source of reference for the industry on the gold business in South Africa in its entirety. The scope of the research was ambitious; it aimed to cover the gold value chain from mining and refining through to the use of gold in jewellery, bars, coins and other applications, encompassing all aspects of the business of gold. This is the first time that a project of this scope and nature has been attempted in the South African context. The research relied on primary sources of information where possible, engaging with a broad spectrum of participants throughout the value chain to understand how the gold business in South Africa operates and to gather data on the individual businesses which make up this industry. Existing data sources were analysed as well as the legislative, social and economic framework in which the industry operates in South Africa. It is the hope of the funders that this review will prove a worthwhile source of reference to all those engaged in the gold industry in South Africa and that it will be a tool for both South African and overseas investors to identify and define opportunities for initiating or expanding business ventures in gold. The funders of this research would like to thank both those involved in its compilation and those who contributed to and supported the research by sharing information and insights during the course of the project.

Mandisi Mpahlwa (MP) Minister of Trade and Industry Department of Trade and Industry

Kelvin Williams Executive Director AngloGold Ashanti Limited

Geoffrey Qhena President/Chief Executive Officer Industrial Development Corporation of South Africa Limited

James Burton Chief Executive Officer World Gold Council

GOLD IN SOUTH AFRICA

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CHAPTER 1 GOLD IN SOUTH AFRICA: INTRODUCTION AND OVERVIEW


Contents: 1.1 INTRODUCTION AND METHODOLOGY 1.2 OVERVIEW OF RESEARCH FINDINGS 1.2.1 Reserves to dor: the gold mining industry (Chapter 2) 1.2.2 Dor to semi-finished product: refining and recycling (Chapter 3) 1.2.3 Final product: jewellery (Chapter 4) 1.2.4 Final product: coins, industrial end uses and investment (Chapter 5) 1.2.5 Transforming the industry: legislative, fiscal and financial context (Chapter 6) 1.2.6 Trade (Chapter 7) 1.3 OPPORTUNITIES AND CHALLENGES IN THE SOUTH AFRICAN GOLD BUSINESS 1.3.1 Opportunities 1.3.2 Challenges 14 14 16 11 12 10 9 10 4 5 7

Photographs: Courtesy of Gold Fields Limited

CHAPTER 1 CHAPTER 1

GOLD IN SOUTH AFRICA

CHAPTER 1
GOLD IN SOUTH AFRICA: INTRODUCTION AND OVERVIEW
1.1 INTRODUCTION AND METHODOLOGY In developing this review of the South African gold industry, research and analysis were conducted into the production, processing and use of gold in South Africa literally the business of gold in its entirety within the country. One-on-one interviews were conducted with sectoral market participants, and with associated governmental and commercial organisations. A list of entities interviewed appears in Appendix 1. The research directory included at the end of this review gives further details of the major industry participants and many of the companies interviewed in the course of compiling this review. Data on the smaller companies was in some cases either unavailable or uneven, and the focus of the research directory is therefore on the larger industry participants where data was more readily available. The research also entailed analysis of statistics that provide a context for this information, for example, trade data, employment equity plans, retail jewellery databases, South African Police Services data covering gold licences and jewellery permits and information relating to black economic empowerment (BEE). Wherever possible, data has been verified by cross-checking various sources. However, there are areas where data is not available or not verifiable, for example regarding gold production stolen from the mines, finished gold jewellery smuggled into the country to avoid import duties, or jewellery stolen locally. In these instances, reference is made to anecdotal evidence gleaned from industry discussions. The numbers have, however, been excluded from the statistics. There are also instances where the only statistics available are deemed to be unreliable. The report highlights these instances and explains how this data is treated. All volumes of gold are in metric tons (t) unless otherwise stated. All references to $ or Dollar relate to the US Dollar.

Research and analysis were conducted into the production, processing and use of gold in South Africa...

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1.2 OVERVIEW OF RESEARCH FINDINGS Key participants in the gold industry in South Africa are shown in the following table, along with the chapter in which they are referenced or described. Participants in the gold industry in South Africa Mining Large primary gold mining companies By-product gold mining companies Small-scale miners Informal miners Industry representatives Trade unions Primary refiners Recyclers Large manufacturers Medium sized manufacturers Small manufacturers Micro manufacturers Retail chains Discount stores Dedicated local retailers Dedicated tourist retailers Single outlet retailers Industry representatives Trade publications Mints Component fabricators Dental laboratories Department of Trade and Industry Department of Minerals and Energy South African Revenue Services South African Reserve Bank Mintek Industrial Development Corporation Mining Qualifications Authority JSE Limited Banks Universities of technology Universities Private and government initiatives Chapter 2 2 2 2 2 2 3 3 4 4 4 4 4 4 4 4 4 4 4 5 5 5 6 2 6 6 2 6 Appendix 3 5 5 Appendix 3 Appendix 3 Appendix 3

Refining

Jewellery manufacturing

Jewellery retailing

Coins, electronics and dental alloys Government and officials

Other

Training and skills transfer

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CHAPTER 1
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In 2004, South Africa produced 342t of fine gold, contributing 14% to global primary output... The following table summarises the main statistical findings pertaining to the gold value chain: The South African gold value chain in fine gold and metric tons 2004 Sector/Topic & chapter Description t Gold production South African gold production from: Chapter 2 Primary gold producers 312.1 By-product producers 7.2 Small-scale gold producers 22.7 Total 342.0 Refining and recycling Chapter 3 Gold to refining from: South African mine output Other mine output (Non-RSA) Dump retreatment (RSA) Recycling Total Gold from refining to: Bars1 Jewellery manufacture Coins2 Dental alloys Electronics Total Jewellery imports Jewellery exports Domestic sales (includes imports) Domestic sales (locally manufactured) Krugerrand bullion Krugerrand proofs Proteas Naturas R1 R2 Medallions Total Exports from South Africa3 Bars Coins Jewellery Total Imports to South Africa3 Bars Coins Jewellery Total

% 91.4 2.2 6.4 100.0

328.9 100.5 13.1 2.8 445.3

73.8 22.6 2.9 0.7 100.0

Gold fabrication Chapters 4 and 5

432.7 9.6 2.9 0.0 0.0 445.3 1.3 5.1 5.9 4.6 2.3 0.2 0.2 0.2 0.0 0.0 0.0 2.9

97.2 2.2 0.7 0.0 0.0 100.0

Gold jewellery Chapter 4

Gold coin fabrication Chapter 5

79.8 6.0 6.6 6.3 0.5 0.8 0.1 100.0

Trade flows of gold Chapter 7

421.0 0.7 5.1 426.8

0.0 0.3 1.3 1.6

All figures are rounded to one decimal. 1 Gold bars are made up as follows: 46% - 400oz bars, 51% - kilobars, 3% - other small bars including 100g bars and tola bars (small bars primarily sold in the Indian market). 2 Actual sales of coins were 3.4t, the difference being drawn from inventory. 3 As calculated from official import/export data. Difficulties associated with the interpertation of this data are discussed more fully in Chapter 7.

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Numbers employed in the South African gold value chain 2004 Sector Number of individuals employed Gold production 187,039 Refining and recycling 532 Jewellery manufacturing 2,680 Jewellery retailing 2,800 Coin fabrication 82 Other4 500 Total employed in the South African gold business 193,633 Close on 200,000 people employed in the gold business in South Africa...

% 96.6 0.3 1.4 1.4 0.0 0.3 100.0

4 The category other represents estimates of total employees in various gold-related spheres of activity, including for example dental laboratories, electronic hardware manufacturing, the Gold of Africa Museum and those directly involved with the ABSAs Exchange Traded Fund.

Key data and findings from the research are outlined below, ordered according to the chapters in which they appear. 1.2.1 Reserves to dor: the gold mining industry (Chapter 2) The discovery of the Witwatersrand Goldfields in 1886 led to the development of South Africas world-class gold mining industry which has dominated the worlds gold mining scene for 120 years. In fact, the Witwatersrand Goldfields will probably remain the greatest goldfield ever discovered, surpassing all others by several orders of magnitude. Since records of production were first collected in 1884 until 2004 the South African gold mining sector has produced 50,055t of gold which accounts for some 33% of all the gold estimated above surface. The total remaining South African gold ore resources are estimated to be some 40,000t, of which about 8,000 to 10,000t are economically recoverable depending on the Rand gold price and cost scenarios applied.

The Witwatersrand Basin

South Africa

Scale

Central Rand Group West Rand Group Granite Basement Gold Fields

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South Africa dominated the global gold mining industry for much of the past 120 years, rising to peak production of 1,000t (67% of global mine supply) in 1970. Today, the industry is in a mature, declining phase with production having declined to 342t in 2004. While South Africa is still the largest gold producer in the world, the closure of older mines and shafts could see the country lose this position over the next five years. Global gold production 2004 Country South Africa USA Australia China Peru Russia Canada Indonesia Uzbekistan Papua New Guinea Ghana Tanzania Mali Chile Brazil Colombia Argentina Mexico Kazakhstan Kyrgyzstan
Data source: Raw Materials Group, March 2005

t 342 260 253 220 173 159 129 100 90 71 60 48 40 39 34 30 27 24 22 22

Three of the six largest international gold mining companies in the world are South African. The South African gold mining industry can be divided into four sub-sectors: large, publicly-listed gold mining companies; companies producing gold as a by-product of other metal mining (mainly Platinum Group Metals (PGM) producers); tailings retreatment operations (operated either by large listed companies or by small-scale miners); and junior or small-scale miners There is also very limited, informal gold mining undertaken. The five large publicly listed companies AngloGold Ashanti, Gold Fields, Harmony, DRDGOLD and Western Areas dominate South African gold production, and were responsible for 312.1t (91%) of the countrys production in 2004. Historically, the gold mining sector in South Africa has been a large employer, although employment has declined substantially in recent years. As at June 2004, the gold mining sector employed 187,039 people, and was the mining industrys largest employer, accounting for 41% of all employment in mining. By comparison, the USA and Australian gold mining sectors employ approximately 14,300 and 6,300 people respectively, a function particularly of the type of mining in those countries in comparison with South Africa. (In both of these countries, mining tends to employ high levels of mechanisation.) Consequently, productivity levels for South Africa are significantly lower than those in the USA and Australia; it is calculated that South Africa produces 55oz fine gold per employee, in comparison with 1,220oz per employee in the USA and 1,342oz per employee in Australia.

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1.2.2 Dor to semi-finished product: refining and recycling (Chapter 3) In terms of both value and volume, gold refining in South Africa is concentrated in the hands of its two primary refiners; Rand Refinery and Musuku Beneficiation Systems. In 2004, the primary refiners and the recyclers treated 445t of gold, of which all but approximately 2t was treated by the two primary refiners. Primary refiners: Until very recently, Rand Refinery was the only South African operation to be accredited by the London Bullion Market Association (LBMA). Rand Refinery is also one of only five refineries in the world to have been appointed by the LBMA as a Good Delivery Referee, responsible for the testing of samples from Good Delivery refiners in support of the LBMAs Good Delivery system. Established in 1921, Rand Refinery has a long history. As well as processing feed from the South African operations of its shareholders, which it receives mainly in the form of dor, Rand Refinery treats mine output from non-South African mines in Ghana, Mali, Tanzania, Namibia and Argentina. Musuku Beneficiation Systems was established in 1997 by Harmony Gold Mining, Mintek and BAE Systems, and is currently wholly-owned by Harmony. Musuku processes feed from all of Harmonys South African gold operations. 98% of this feed is in the form of cathode slime. Musuku secured LBMA accreditation in September 2005. Recyclers: In addition to the primary refiners, there are at least another seven known but very small recyclers operating in South Africa. Global gold refining capacity utilisation in 2004 was estimated at 55%, indicative of an industry in a state of over-capacity. Africas gold refining capacity utilisation (of which South Africa represents 98%) was 61%. In 2004, 432.7t, or 97.2% of refining output, was in the form of bars for export. Kilobars of 99.5% and 99.99% purity accounted for 221.6t, or 51.2% of these sales and 99.5% London Good Delivery Bars accounted for a further 193.7t, or 44.8%. The balance of bar production was sold in the form of small bars, mainly of 100g. Analysis of South African gold bar sales 2004 t 400oz bars: 99.99 London Good Delivery 99.5 London Good Delivery Sub-total Kilobars: 99.99 99.5 Sub-total 500g bars 99.5 100g bars 99.9 10 Tola bars Sub-total Total 4.5 193.7 198.2 % 1.05 44.77 45.81

Global refinery utilisation was estimated at 55% in 2004...

83.6 138.0 221.6 0.3 12.0 0.5 12.8 432.7

19.32 31.90 51.22 0.08 2.77 0.12 2.97 100.00

Data Source: Rand Refinery Limited and Musuku Beneficiation Systems

Another 9.6t, or 2.2% of refining output was sold to the local gold jewellery manufacturing sector, mainly in the form of semi-fabricated product such as granules, plate and wire. The balance went into coins, electronics and dental alloys. In 2004, the gold refining sector employed 532 people, or 0.3% of total employees in the South African gold value chain.

The gold refining sector employed 532 people in 2004...

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1.2.3 Final product: jewellery (Chapter 4) Jewellery manufacturing is the largest category of gold fabrication in South Africa, as it is worldwide. South African jewellery manufacturers used an identifiable 9.64t of fine gold in 2004, and exported 5.07t of fine gold in finished jewellery, primarily to the USA and Europe. Official jewellery imports amounted to 1.28t. Local jewellery sales are therefore estimated at 5.85t, of which 4.57t is manufactured locally. Jewellery manufacturers were classified into four categories of business, based on size of manufacturing throughput. Data on a sample of 34 businesses, including manufacturers from all four categories, was analysed. These businesses accounted for 8.4t of fine gold consumption in 2004, or 88% of the total. Classification of manufacturers Micro Manufacturers using 20kg or less per annum Small Manufacturers using more than 20kg but less than 50kg per annum Medium Manufacturers using more than 50kg but less than 750kg per annum Large Manufacturers using in excess of 750kg per annum While there are a large number of jewellery manufacturing businesses in operation, only three of these businesses can be classified as large manufacturers (annual gold usage in excess of 750kg) and these three manufacturers account for 6.5t or 66.8% of the gold usage in the South African manufacturing industry. The top 10 manufacturers account for 7.9t or 82% of total fine gold usage. Jewellery manufacturing in South Africa is heavily concentrated in Johannesburg and Cape Town. Businesses are privately-owned, in 90% of cases family-owned. 80% of fine gold used in jewellery is used to manufacture mass-produced products, the remainder being used in cast or hand-made products. The bulk of jewellery purchases in South Africa are of 9 carat gold... The bulk of jewellery purchases in South Africa are of 9 carat jewellery, with 95% of gold jewellery sold in this format. The balance is sold as 14 or 18 carat. Mark-ups in jewellery manufacturing vary from approximately 5% in massproduced chain to between 15 and 20% for basic mass-produced product, and up to 40% for high caratage, hand-made or gem-set items. Capacity utilisation is highly seasonal, peaking in the period September to December as retailers increase stock for Christmas sales... Capacity utilisation is highly seasonal, peaking in the period September to December as retailers increase stock for Christmas sales. Jewellery manufacturing employs an estimated 2,800 individuals, or 1.4% of those employed in the total value chain, although this number is difficult to verify on the basis of existing data. Retail sales of all jewellery (including gold, silver, platinum and gem-set jewellery and watches) totalled R2.4bn in 2003 (latest available data). In both value and volume terms, the sector is characterised by a high level of consolidation, with four companies accounting for an estimated 64% of jewellery sales at retail level. These four companies own a total of 11 jewellery chains. Retail mark-ups range from 20 to 50% for non-core products in discount stores to 250% for core products in South African jewellery retailers, and up to 350% for specialist and fast-moving items. 1.2.4 Final product: coins, industrial end uses and investment (Chapter 5) After jewellery manufacture, coin fabrication is the second largest category of physical gold usage, and the only other end use to show significant offtake in South Africa, accounting for 2.93t of gold consumption in 2004. Consumption of gold in dental alloys accounted for only 0.04t of consumption per annum and electronics for 0.01t. Consumption in these three categories remains small in relation to total South African gold production, accounting for less than 1% of total production.

South African jewellery manufacturers used 9.64t of fine gold in 2004...

Jewellery manufacturers are classified into four categories of business: micro, small, medium and large. Only three of the manufacturers can be classified as large manufacturers (annual gold usage in excess of 750kg) and these account for 66.8% of gold usage...

After jewellery, coin fabrication is the second largest category of physical gold usage...

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The SA Mint produces several legal tender coins. The best known and most widely sold is the 22 carat Krugerrand. It also produces 24 carat legal tender coins, including the Natura, the Protea and R1 and R2 commemorative issue coins. South African coin fabrication 2002 to 2004 t 2002 Krugerrand bullion 0.76 Krugerrand proofs 0.22 Proteas 0.09 Naturas 0.18 R1 0.01 R2 0.03 Total 1.29
Data Source: SA Mint, Universal Mint and Gold Reef City Mint.

The best-known and most widely sold coin produced by the SA Mint is the Krugerrand...

2003 1.81 0.19 0.02 0.15 0.02 0.02 2.22

2004 2.34 0.18 0.19 0.18 0.01 0.03 2.93

Proof Krugerrands (limited edition, high quality coins) are sold at a high margin (42% in 2005). Bullion Krugerrands, the supply of which is not limited, sell at a margin of 3 to 9%, depending on size. Approximately 50% of Krugerrands produced in South Africa are exported, although the ratio of local sales to exports is heavily affected by the gold price and the Rand/Dollar exchange rate. Margins on 24 carat coins are approximately 30%. There is little demand for gold for use in dental alloys in South Africa; its use is not encouraged by medical insurance providers, only one of which subsidises its use. The use of gold in the electronics industry is insignificant, with only five South African companies involved in the manufacture of gold electronic components. Since the introduction of a gold Exchange Traded Fund (ETF) by Absa in November 2005, South Africans have invested in just less than 3t of fine gold via this vehicle. ETFs allow investors to trade shares representing gold, the value of which is fully backed by physical gold, on stock exchanges as easily as any other exchange-listed security. The South African ETF is the smallest of the four gold ETFs launched thus far (the others being in Australia, the UK and the USA), reflecting the small size of the potential market locally and the relatively short time for which it has traded. A Krugerrand futures contract is available, but this is very thinly traded. 1.2.5 Transforming the industry: legislative, fiscal and financial context (Chapter 6) Chapter 6 reviews key legislation affecting the gold industry, as well as the fiscal environment in which the industry operates, the financing methods available to the mining, refining and jewellery sectors, and the role played by Government and associated entities. Policy governing mining and mineral extraction vests primarily in the Deparment of Minerals and Energy. Legislation most relevant to the value chain includes: the Mining Rights Act of 1967 and its proposed amendments; the Mineral and Petroleum Resources Development Act of 2002 (MPRDA); the Broad-Based Socio-Economic Empowerment Charter for the Mining Industry (The Mining Charter); and the Mineral and Petroleum Royalty Bill. The Mining Rights Act of 1967 regulates the possession and trade of gold in businesses making use of gold as a raw material. One of the distinguishing features of the South African gold business, compared to other countries, is that South Africans are effectively prohibited from owning gold other than in bullion coins or jewellery1. The Precious Metals Bill, currently in the process of parliamentary approval, will reduce these restrictions to some extent, although it stops short of total deregulation of the metal.

Proof Krugerrands (limited edition, high quality coins) are sold at a high margin...

There is limited demand for gold in dental alloys...

Use of gold in electronics is insignificant... Limited demand for gold Exchange Traded Fund (ETF)...

Policy governing mining and mineral extraction vests primarily in the Deparment of Minerals and Energy...

Bullion coins are gold coins usually 22 or 24 carat. All bullion coins currently minted in South Africa are legal tender.

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The MPRDA is based on the principle of state custodianship of mineral resources... The policies underpinning the MPRDA were developed in consultation with government, the formal and informal industry sector, labour and associated communities, in recognition of the fact that the countrys existing mineral policies required review to overcome the historical exclusion of the majority of the population. The MPRDA is based on the principle of state custodianship of mineral resources and abolishes the previous regime of private mineral rights. Applications for prospecting, exploration and mining rights must now be made to the state. Transitional provisions in the act allow for the conversion of existing rights, referred to as old-order to new-order prospecting and mining rights. The Mining Charter is the framework for redressing the historical, social and economic inequalities inherent in South Africas minerals industry. It provides for companies in the mining idustry to set specific targets regarding human resource development, employment equity, housing and community development, procurement and ownership. The Mineral and Petroleum Royalty Bill, scheduled to become effective in 2009, will introduce a royalty payable to the state by mineral producers. The structure of the proposed royalties (based on revenues rather than profits, with rates varying according to sector) is the subject of continuing debate. In the section of this chapter dealing with taxation, the impact of two categories of taxation (corporate tax and Value-Added Tax or VAT) is analysed. Mining income derived from gold is taxed on the basis of a formula... Mining income derived from gold is taxed on the basis of a formula, with more profitable mines paying tax at a higher rate. The effect of this is that each gold mines tax rate is calculated separately and (with certain exceptions, discussed more fully in the relevant section), ring-fenced to that mine. VAT was introduced in 1991 and amended in 2004. VAT is levied on all goods and services at a standard rate of 14% (except for specified exclusions). VAT payments and refunds operate on a two-month cycle a factor cited by jewellery manufacturers, especially the smaller ones, as adding to cash-flow problems for their businesses. The chapter concludes by analysing the various financing methods in place, and the role of the Department of Trade and Industry, the Industrial Development Corporation and the South African Reserve Bank (SARB). Insofar as project finance is concerned, mining and refining are capital-intensive processes that require long lead times and substantial financing. Projects in these areas are normally funded internally or by raising capital on the equity market. The jewellery sector has historically been hampered by a lack of cost-competitive facilities for financing the use of precious metals in the fabrication line. Issues relating to loan costs, collateral requirements and insurance are explained, and the new Gold Advance Scheme developed by AngloGold Ashanti, Gold Fields, BAE Systems, Saab and Standard Bank is described. The objectives of the scheme are essentially to reduce the cost of funding inventory for South African jewellery manufacturers, to increase the volume and value of South African jewellery manufacture and export, and to attract new investors and entrants to the jewellery manufacturing sector. 1.2.6 Trade (Chapter 7) Since 1994, the value of South Africas total exports has risen, on average, by 12% per year from approximately R85bn in 1994 to approximately R270bn in 2004. The contribution of mining to South African exports by value, however, has fallen from 50% in 1994 to 32% in 2004. USA, UK and Japan are largest markets for SA goods... The USA, UK and Japan are the largest markets for South African goods and, in value terms, represented 33% of the countrys total exports in 2004. Europe and Asia account for 60% of the value of all South African exports.

South Africa exports 2004, top five countries, Rand


30 25 20 Billions 15 10 5 0
Data source: Department of Trade and Industry

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Exports of fine gold in bars, as calculated from official import/export data, decreased from 452t in 1999 to 421t in 2004, a decrease of almost 7%. Exports of fine gold coins and medallions also decreased, from 1.07t in 1999 to 0.72t in 2004, a decrease of about 33%. In contrast, fine gold exports in the form of jewellery have risen since 1999 at an average of 23% per annum, from a base of 1.81t in 1999 to 5.07t in 2004. During this period, the value of these exports rose from approximately R110m in 1999 to R495m in 2004. In 2004, some 62% of jewellery in exports was destined for the USA, and 11% for the UK market. This increase in exports of gold jewellery has occurred despite a volatile Rand and the recent strength of the local currency against the Dollar. Since 1994, the value of total manufacturing and industrial sector imports by South Africa has risen by an average of 15% per year from approximately R75bn in 1994 to approximately R300bn in 2004. Germany, the USA and China are the top three exporters of goods to South Africa. Germany is the largest exporter to South Africa accounting for 14.6% of the value of imports into the country in 2004. Asia and Europe together account for 80% of the value of South African imports. Imports of non-South African dor for refining at Rand Refinery are not recorded in South African trade data. This is because ownership of the gold in the refining pipeline does not pass to Rand Refinery, but remains with the mine from which the dor originated. Imports of fine gold jewellery into South Africa increased by 50% from 0.85t in 1999 to 1.28t in 2004. In value terms, this equates to R65m in 1999, increasing to R150m in 2004. Together, Hong Kong and China accounted for one-third of these imports, as this region capitalised on increased general trade with South Africa, more competitive jewellery manufacturing charges and Rand strength. Imports of fine gold coins decreased significantly from 2.68t in 1999 to 0.32t in 2004. There is anecdotal evidence that the strength of the Rand has encouraged a high level of smuggling of finished jewellery into South Africa, to avoid both the 20% import tax and the 14% VAT. Since undeclared imports are not reflected in the official trade statistics, official figures may understate the true levels of gold jewellery entering the country, possibly by a significant margin. South Africa enjoys favoured nation status with the USA in terms of the African Growth and Opportunity Act of 2000 (AGOA), which allows South African gold jewellery fabricators to export their finished product to the USA free of import duties. This provides South African jewellery manufacturers with a cost advantage over their European and Far Eastern competitors, on whom a 6% duty is levied for jewellery product exported to the USA. Under the South African/European Trade Development and Co-operation Agreement (TDCS), a free trade area between South Africa and the European Union is being developed through the abolition of import and export tariffs between the two trading partners. Import and export duties will be reduced from their maximum of 20% in 2003 to zero by 2012. The country will then be able to export local gold jewellery duty-free into Europe. Thus over the next six years, the European market will progressively be opened up to South African jewellery manufacturers at an increasingly attractive fiscal rate. Tourist arrivals in 2003 (latest available data) totalled 6.5 million, 69% of whom were from Africa, and 20% from Europe. Many long-haul visitors (those from Europe, North America and Asia in particular) arrive with the intention of buying a piece of jewellery. The gold caratage associated with tourist purchases is higher than that in the South African domestic jewellery market, with 18 carat predominating especially in gem-set items. It appears that the Rand strength has encouraged a high level of smuggling of finished jewellery into South Africa...

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1.3 OPPORTUNITIES AND CHALLENGES IN THE SOUTH AFRICAN GOLD BUSINESS

Gold mining industry in South Africa is essentially mature...

The gold mining industry in South Africa is essentially mature and production tonnage is showing a declining profile. There is increasing debate on how growth of the downstream gold industry can be achieved, to add value to gold mined in South Africa. The research identified a number of challenges and opportunities in respect of the downstream gold industry in South Africa. Opportunities AGOA Inbound tourism: interest in jewellery Refining capacity and refining track record South African/European Trade Development and Co-operation Agreement (exporters) Emerging middle class among Historically Disadvantaged South Africans (HDSAs) Gold financing schemes Closer co-operation between industry and government Laws forbidding ownership of gold other than jewellery and bullion coins Current lack of access to cost-effective finance and insurance for jewellery manufacturers Start-up costs and cost of working capital associated with gold jewellery manufacturing Performance of the local currency Quality imports at competitive prices based on cheaper offshore labour and the strong Rand Technical limitations and ageing equipment Shortage of skills and concerns about training Low productivity Adverse effect of crime on jewellery sales Lack of co-operation in the gold business, especially in jewellery manufacturing Local jewellery retail sales are a small and declining proportion of all consumer goods purchased External perceptions of local jewellery/quality issues Lack of data South Africa/European Trade Development and Co-operation Agreement (local industry)

Challenges

1.3.1 Opportunities

AGOA - The African Growth and Opportunity Act of 2000


AGOA provides South African exporters to the USA with a 6% advantage over countries paying full duty as import duties are waived... Affected sector: Jewellery manufacturing targeting the export market AGOA was ratified on 18 May 2000 and amended in 2002 and 2004. It provides South African exporters to the USA with a 6% advantage over countries paying full duty since import duties into the USA for South African exporters are waived. The Act offers incentives for African countries to open their economies and build free markets. These incentives are to encourage trade between African countries and the USA by eliminating duties and introducing quotas in specified products. In 2004, 62% of South African jewellery exports were destined for the United States, partly as a consequence of AGOA.

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Inbound tourist interest in jewellery
Affected Sector: Jewellery manufacturing and retailing Inbound tourists frequently visit the country with the intention of buying a piece of quality jewellery, especially gem-set with diamonds or tanzanite. Gold jewellery sales benefit indirectly as a result. Since 1994, inbound tourist arrivals have increased substantially.

Inbound tourists intend buying jewellery...

Refining capacity and refining track record


Affected sector: Jewellery manufacturing and gold mining companies The two primary refiners offer localised refining services and capacity to refine gold competitively. Rand Refinery also offers secure warehousing. Both Rand Refinery and Musuku Beneficiation Systems have London Bullion Market Association accreditation and Rand Refinery serves as a referee in international quality control for the LBMA. In September 2004, Rand Refinery became the worlds first refinery to receive Dubai Good Delivery accreditation.

The South African/European Trade Development and Co-operation Agreement


Affected sector: Jewellery manufacturing targeting the export market The South African/European Trade Development and Co-operation Fund (TDCS) provides for the creation of a free trade agreement between the European Union and South Africa by no later than 31 December 2012. By this date, 90% of all trade between the two partners will be free of customs duties. The phase-down of import duties, from current levels of 20%, allowed for by TDCS has important implications for the local jewellery industry as the European Union will gradually be rendered a free trade zone in the way that the USA is under AGOA. The reduction of tariffs applies to jewellery fabricated from gold, silver and PGM. This means that locally produced precious metals jewellery will eventually enjoy access to this market free of import duties. This represents a major opportunity for exporters of South African-manufactured gold jewellery. However, it also presents a threat for local manufacturers reliant on domestic sales. (See below.)

The emerging middle class among HDSAs


Affected sector: Jewellery manufacturing and retailing In South Africa, a new middle class among the formerly disadvantaged is developing. Jewellery manufacturers have noted this trend, reflected in the increasing numbers of new accounts being opened with those jewellery retailers offering credit facilities. In response to this trend, jewellery manufacturers are adapting their product range to suit this new market segment.

A new middle class is developing in South Africa...

Closer co-operation between gold manufacturing industry and government


Affected sectors: Jewellery manufacturing and government Continued and expanded government assistance by means of financial incentives could improve the outlook for jewellery manufacturers. Government and the private sector could also work together on joint marketing efforts targeting both local consumers and tourists. Continued and expanded government assistance...

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Gold financing schemes
Affected sectors: Jewellery manufacturing and mining industry Access to affordable gold loans and other financing incentives would render the local jewellery manufacturers more competitive internationally and would facilitate growth in the jewellery manufacturing sector in South Africa. 1.3.2 Challenges

Affordable loans would make the industry more competitive...

Quotable quotes: The current focus on beneficiation is not right. We are trying to force people into beneficiation in the belief that this can be achieved by yet more legislation. But by creating a decriminalised environment of ownership of gold we will obtain greater organic growth. We were born and bred in an environment that criminalises ownership of unwrought gold. Getting rid of that law will solve the problem immediately. Office bearer, industry body

Laws forbidding ownership of gold other than jewellery and bullion coins
Affected sectors: Jewellery manufacturing and investment The Mining Rights Act of 1967 (and its subsequent amendments) restricts gold ownership by South African citizens to finished jewellery and bullion coins2. The regulatory system of recovery works licences and jewellery permits dictates the way jewellery manufacturers run their businesses. The fact that citizens are limited regarding ownership of physical gold products also restricts the local investment market in gold. Current proposed amendments to the Mining Rights Act, which would result in the deregulation of ownership of minted bars3, would go some way towards liberalising the South African gold market. However, proposed amendments still fall far short of entirely liberalising the ownership of gold.

Lack of access to cost-effective finance and insurance for jewellery manufacturers


Lack of access to affordable finance is a predominant reason for business failure, failure to grow and a disincentive to invest... Affected sector: Jewellery manufacturing especially small businesses Interviews with the manufacturing sector (especially the medium and small businesses,4) highlight the lack of access to affordable finance as the predominant reason for business failure, failure to grow an existing business, or as a primary disincentive to entering the sector in the first place5. Demonstrating the extent to which local manufacturers are disadvantaged, the table overleaf indicates a comparison of the different jewellery financing mechanisms currently in place in Dubai, Italy and South Africa. These figures are estimates as loan agreements are invariably confidential and can vary between different parties. The major difference between jewellery fabricators in Dubai (and in some cases in Italy) and those in South Africa is that the former are able to borrow metal at a cost close to the international gold lease rate against a letter of credit issued by a local bank. South African jewellery manufacturers are required to post collateral as local banks will not accept letters of credit. Furthermore, since they borrow Rands and not metal, they are obliged to borrow the currency at prime money market interest rates. Problems relating to cash flow were also noted in the research, with the manufacturers having to borrow funds at several percentage points above prime rates to finance short-term cash requirements. In most financial respects, these businesses are no different to those operating in other sectors, save for one that sets the gold jewellery manufacturer apart and that is the high cost and volatile nature of the jewellery manufacturers primary raw material. With the exception of the large manufacturers, South African gold fabricators do not yet have access to the metal financing structures enjoyed by their overseas competitors. Currently, they buy their raw material outright using working capital or they finance it at the local prime lending rate plus a risk premium. Again, collateral is required as loan security, usually 120% of the value of the gold borrowed. Small jewellery manufacturers have little or no credit standing, insubstantial balance sheets, insufficient personal loan guarantees... The disadvantage suffered by local manufacturers is the value of the raw material, compounded by the fact that small jewellery manufacturers have little or no credit

Quotable quotes: Of course I dont have a balance sheet I am a one-man band trying to run a tiny business. Micro manufacturer

2 3 4

See Chapter 6 for details of this Act and its billed amendments. See Glossary of Terms for full definition of minted bars. See Chapter 4 for the definition of the gold jewellery manufacturing categories used in this review. 5 See Chapter 6 for details on finance.

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standing, insubstantial balance sheets, insufficient personal loan guarantees and represent high credit risks to commercial banks. Gold jewellery finance Cost of loans as of mid 2005 Dubai Italy Loan Type gold gold Gold lease Gold lease Interest 2% 3% Risk premium 0.70% 0.70% LOC (Note 1) Local Bank Local Bank Cost of LOC 1% 1% Collateral (other than LOC) None None Total cost of loan 3.70% 4.75% Insurance needed over metal on loan Yes Yes
Data source: Vitual Metals

South Africa Rand Prime 10.5% 2%-3% None NA 120% 12.5%-13.5% Yes

Note 1: Letter of Credit. Not all Italian manufacturers make use of letters of credit. Those most affected by this situation are the small manufacturers. The larger companies potentially qualify for gold financing schemes. In addition, large retailers interviewed reported that, on placing an order with larger jewellery manufacturers, they settle immediately for the cost of purchasing the associated fine gold. This relieves the manufacturer of the related cash flow and financing issues. The small jewellery manufacturers tend not to supply the large retailers, since they cannot deliver finished product in the volumes required. Manufacturers of all sizes face an additional cost. Those interviewed noted that while they had insurance cover for third party liability and stock in transit, the premiums associated with insuring jewellery inventories and metal in the manufacturing pipeline are prohibitively expensive. Absence of insurance will automatically disqualify a jewellery fabricator from participating in gold financing schemes as sufficient insurance coverage is a pre-requisite. Premiums associated with insuring jewellery, inventories and metal in the manufacturing pipeline are prohibitively expensive...

Start-up costs and the cost of working capital associated with gold jewellery manufacturing
Affected sector: Jewellery manufacturing especially small businesses Without access to metal-based funding (as described above), local jewellery manufacturers have two options: they may either fund their businesses using their own capital or borrow from commercial banks. The former is usually not an option a problem not unique to the gold jewellery industry but experienced by small businesses in general. But the South African jewellery manufacturer is further disadvantaged on a number of levels. 1. Interest rates in South Africa have remained high relative to other countries. The chart on the right compares monetary interest rates in South Africa to the gold lease rate, which forms the basis of the borrowing cost to many overseas competitors of the South African jewellery manufacturers. 2. The high cost of start-up. Discussions with small manufacturers revealed that even a small workshop, for example, with two jewellery benches, a small furnace and equipped with basic tools and equipment, such as facilities for plating, can cost up to R250,000. Chain-making machines, imported from Italy, cost R150,000 each. Additionally, all spares and additional chain-making dies have to be imported. 3. The nature of gold as a raw material. The very high value of the basic raw material and the often volatile behaviour of the price of gold disadvantage the jewellery fabricator more than other manufacturing sectors.

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Performance of the local currency
Affected sectors: Mining, jewellery manufacturing (especially small businesses) The strength of the Rand during much of 2003 and 2004 against the Dollar, British Pound and Euro, was cited not only as a barrier to market entry but also a threat to the survival of the mining industry and to jewellery manufacturers in South Africa. The performance of the Rand since 2000 is shown on the left. With the Rand/Dollar exchange rate at R6/$, jewellery manufacturers in South Africa reported that finished jewellery can be imported at a cost less than the manufacturing cost incurred by local manufacturers for the same or very similar product. This is so even after taking into account the 20% import duty into the country and a clearance fee of 2% - 3%. Manufacturers also note that an unknown volume of foreign-manufactured gold jewellery is being smuggled into the country to avoid import duties and this has served to further disadvantage the local manufacturers. The stronger the Rand against other currencies, the greater the incentive to import finished jewellery legitimately, and, even more so, to bring these goods into the country illegally. In 2001, when the Rand weakened sharply against the Dollar to average R10.52/$ for the year, exports of gold jewellery from South Africa were robust6. Countries of destination were the USA, the UK and other parts of Europe, Australia, Israel and Panama. As the currency strengthened, reaching highs of R5.60 to the Dollar in 2004, these same manufacturers reported that their levels of exports were under pressure and they were restructuring their business models in an attempt to recapture local market share. The effect has been increasing pressure on the markups earned by local manufacturers given the added competition for local business. Throughout 2004, there is also evidence of: manufacturers importing finished gold jewellery from countries in the Far East, Israel and Turkey, rather than fabricating similar gold jewellery themselves; and larger retailers importing finished gold jewellery rather than placing orders with the local jewellery manufacturers.

The effect of the strong local currency has been increasing pressure on the mark-ups earned by local manufacturers...

Quality imports at competive prices based on cheaper offshore labour and the strong Rand
Affected sector: Jewellery manufacturing South African manufacturers are unable to compete with low labour costs in jewellery manufacturing in, for example, China, Thailand and Turkey. This is an area of concern and a threat to local manufacturing capacity. Italian jewellery still leads the field in terms of quality and finish. However, imports from Turkey have gained ground and compete with quality products from other countries. It was felt that goods from Far Eastern countries such as China were not yet on a par with respect to finish. However, in the mass market, especially where lightweight jewellery items were concerned, the decisive factor was price rather than quality. In environments such as China where there are no minimum wages or labour unionisation the cost of labour is lower than in South Africa. It is, therefore, difficult for local jewellery manufacturers to compete internationally.

South African manufacturers are unable to compete with low labour costs associated with jewellery manufacturing in China, Thailand and Turkey...

See Chapter 7 for details on the growth of jewellery exports from South Africa.

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Technical limitations and ageing equipment
Affected sector: Jewellery manufacturing The predominant jewellery manufacturing model is mass-production of either machined jewellery (particularly chain), or cast and stamped jewellery, targeting either the local market or direct export. Mass-produced jewellery represents 80% of the tonnage of gold fabricated each year in South Africa. During interviews with major retailers, concerns were expressed that much of the machinery being used by some small and medium jewellery manufacturers is outdated. The ageing machinery also raised concerns about operating efficiencies. However, new machinery is expensive and both hardware and spares need to be imported. This again raised the issue of lack of access to funding. Retailers also expressed concern that South African manufacturers were behind in the latest developments and fabricating techniques, such as electro-forming, various methods of gem-setting and the manufacture of hollow jewellery. These technological issues detract from local manufacturers ability to compete internationally.

Quotable quotes: In terms of costs, we are very uncompetitive. Imports from the Far East are of poor quality and are poorly finished but retailers dont care as long as it is cheap. Manufacturing jeweller

Shortage of skills and concerns about training


Affected sector: jewellery manufacturing Discussions revealed a mismatch between the training provided by the institutions and the needs of jewellery manufacturers when they employ graduates. Although students continue to graduate every year from the countrys universities of technology after completing jewellery courses, a lack of the skills required by jewellery manufacturers was cited by the fabricating sector as a major concern. In parallel, was the manufacturers contention that existing training programmes are turning out graduates insufficiently schooled to be able to take their place productively at a jewellery bench without considerable additional training and tuition. The training institutions counter that jewellery manufacturers have unrealistically high expectations of graduates. They suggested that the real reason behind the reluctance on the part of jewellery manufacturers to acknowledge the training courses was a financial one in that, by not acknowledging the qualifications, the jewellers were not obliged to pay graduates appropriate salaries. While many jewellery manufacturers denied this, others noted that there was an element of truth in the concern raised. The institutions also argue that the manufacturers failed to consider the structure of the jewellery courses and that the industry fails to account for the lead times involved in adjusting course content to address industry requirements.

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Quotable quotes: People would rather buy a DVD or CD player which they can lock up at home than wear jewellery on the street. Manufacturing jeweller Quotable quotes: A good client of mine asked me to remove her diamond from its setting and replace it with a cubic zirconia. She put the diamond in the bank and now wears the zirconia on the basis that if she loses it, its no big deal. Manufacturing jeweller Low productivity
Affected sector: All throughout the gold business Of concern for the gold industry is South Africas levels of productivity relative to its competitors, especially China, other parts of the Far East and India. The chart on the left compares South African wages rates, productivity and unit labour costs with those of a range of emerging economies, including Turkey, Mauritius, Poland, Hungary, Hong Kong, Singapore, India, Mexico, Chile, Zimbabwe ad Korea. Data later than 1998 is not available. South African wages were over 300% higher than the average wage in other developing countries in the period covered by this data. Productivity was also higher but, at just over 200% of the developing country average, it was not enough to offset the higher wages. Furthermore, relative productivity has not improved. This was a recurring theme in the jewellery manufacturing sector, especially among those running the large mechanised jewellery fabricating operations. Not only do local companies have to compete with established operations in Italy, they also have to deal with competition from newly emerging companies in Turkey and the Far East.

Relative pay and productivity in manufactured goods Compared with developing countries
350% 300% 250% 200% 150% 100% 50% 0%

The adverse effect of crime on jewellery sales


Affected sector: Jewellery manufacturing and retailing The high end of the jewellery product range, specifically those items with a substantial proportion of gems (diamonds and fancy stones such as tanzanite), is adversely affected by crime. Consumers no longer want to be seen wearing expensive jewellery. In other sectors of the market, this does not appear to be a problem, although it was felt that costume jewellery was gaining ground as consumers are less concerned about costume jewellery being stolen.

Lack of co-operation in the gold business, especially jewellery manufacturing


Affected sector: Jewellery manufacturing This research detected a lack of co-operation in the gold business in South Africa, primarily on the part of the jewellery manufacturers, not only among themselves but with other sectors of the gold industry and with government as well. To be specific, jewellery manufacturers do not: contribute meaningfully to industry trade groups such as the Jewellery Council of South Africa, in an attempt to collectively table and resolve issues affecting their industry. While a limited number of jewellery manufacturers do make an effort, by far the majority in terms of numbers, are not members of any affiliated organisation nor do they participate in any organised industry initiatives. Despite this, many were highly critical of the efforts of those who do involve themselves in industry trade groups; co-operate among themselves and outsource jewellery manufacturing orders (or the part completion of orders) to each other in an effort to become more efficient and cost-effective;

Wage rates Productivity Unit labour costs


Data source: Wage, productivity and export performance in South Africa: A dynamic panel analysis, Lawrence Edwards and Stephen Golub.

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address the issues of training and skills within the jewellery manufacturing sector nor engage the training institutions in any meaningful debate. They also, in general, do not make themselves available to assist with private sector jewellery training initiatives; take up skills training grants, schemes and initiatives made available to them by government to assist with in-house training. Two reasons for this emerged. Firstly, there appeared to be a lack of awareness of the financial assistance available to encourage training, but secondly there was a level of distrust among the manufacturers with respect to perceived government involvement in their businesses; work with government to find ways to grow their businesses, target export markets, or explore ways to invest new capital. The opportunities made available to the sector are discussed in detail in Chapter 6; and contribute towards BEE, skills transfers or support for black-owned businesses through procurement.

Declining local jewellery retail sales as a percentage of purchases of all consumer goods
Affected sectors: Jewellery manufacturing and retailing Data published by STATS SA7 and illustrated in the chart shows that jewellery sales as a percentage of total retail sales have been falling steadily since 1996. Between Rand Refinery and Musuku, supplies of fine gold to the local jewellery manufacturers have reportedly remained broadly constant over the last five years. Discussions with recyclers suggest that the volume of gold business with local jewellery manufacturers has also been broadly unchanged and in some cases has declined. Unless the illicit flows of gold to the industry (mainly in the form of finished product smuggled into the country to avoid import taxes and VAT), have been increasing sharply (something that cannot be verified), then this research confirms that the local gold jewellery business has not grown in recent years, and has lost market share to other consumer products. In the five years from 1999 to 2004, exports of South African manufactured jewellery have increased strongly, growing at an estimated average rate of 23% per annum by volume. If supplies of fine gold to local jewellery fabricators have been broadly unchanged and exports have risen, it follows that local sales of jewellery have been falling. Manufacturers and retailers interviewed commented that jewellery as a whole has been losing market share to other lifestyle products, especially to electronic goods and, more recently, to mobile telephones. The fact that a retail outlet such as Woolworths recently discontinued its range of gold jewellery in keeping with its self-service policy, but is still prepared to make an exception to this policy when it comes to selling mobile telephones, is indicative of the strength of demand for mobile communication at the expense of jewellery. Jewellery loses market share to other lifestyle products... Jewellery sales as a percentage of total retail sales have been falling steadily since 1996...

STATS SA has ceased to record monthly retail sales of all products including jewellery. Discussions with jewellery sector participants highlighted concerns about the quality and quantity of the data and consequently the series reliability.

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South African jewellery is not recognisable as a brand... Despite all this, those large jewellery retailers that offer credit to their customers8, report increases in the number of jewellery accounts being opened, especially during 2004. The emerging black middle class in South Africa was cited as a contributing factor. However, the reduction in local interest rates seen since mid2003 has also helped to expand jewellery sales on credit. As the South African Reserve Bank reduced interest rates from mid-2003, the commercial banks responded by reducing their lending rates to households. The lower cost of credit has resulted in households having more disposable income to spend and these factors combined have encouraged consumers to open accounts with retail jewellery stores. Jewellerys loss of market share to other lifestyle products is not a phenomenon unique to South Africa. A similar trend has occurred in the USA. The hiatus in the data series represents a change in definition and data collection on the part of the US authorities but it nevertheless illustrates a similar trend.

External perceptions of local jewellery


Affected Sector: Jewellery Manufacturing and Retailing In general, South African fabricated jewellery is not perceived, either locally or internationally, in the same light as jewellery fabricated in other major centres such as Italy and parts of the Far East. While, in most instances, the quality and finish are on par, and product designs are little different from machine-made jewellery elsewhere, the country has yet to establish a reputation as a gold jewellery manufacturer. South African jewellery is neither recognisable as a brand, nor is there any standardised means of establishing the basic quality of the product. While individual manufacturing jewellers will inscribe their own fabricated products with a personalised symbol or initial and an identification of caratage, there is no nation-wide centralised benchmarking of the origin and quality of South African gold jewellery compared to product from other gold jewellery producing countries.

Lack of data
Affected Sector: All This research was hampered by a widespread lack of data related to the South African gold business. With the exception of the mine supply figures in the formal sector, data was found to be either unreliable or non-existent. Difficulties were also encountered with official trade data. Data covering empowerment achievements, individual company employment equity plans etc., was unobtainable, or where this data was available, it was not in a form that could allow for direct comparison with other companies or sectors. There were instances where companies made available only empowerment targets and not achievements.

Research hampered by widespread lack of data...

See later in this chapter for details of credit options offered to customers.

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STATS SA has ceased to collect and collate data relevant to retail jewellery sales in South Africa, 2003 being the last year for which data is available. The absence of this information will leave the gold business without any benchmark or indication of whether or not the local jewellery industry is growing. Furthermore, it will not allow the gold industry to measure the success or otherwise of any initiatives that might be undertaken in an attempt to encourage growth in the local jewellery industry.

South African/European Trade Development and Co-operation Agreement


Affected Sector: Jewellery manufacturing targeting the local market While the South African/European Trade Development and Co-operation Agreement provides an opportunity for South African jewellery manufacturers eventually to export their finished product to Europe tax-free, the Agreement is a double-edged sword. This is because, reciprocally, European jewellery manufacturers will be able to export their finished jewellery product to South Africa, also eventually free of import duties. Unless local jewellery manufacturers increase their productivity, they may find it difficult to compete with the established European jewellery manufacturers.

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CHAPTER 2 RESERVES TO DOR: THE GOLD MINING INDUSTRY

Photograph: Courtesy of AngloGold Ashanti Limited

CHAPTER 2 CHAPTER 2

Contents: 2.1 INTRODUCTION 2.2 HISTORICAL CONTEXT 2.3 GLOBAL GOLD MINE PRODUCTION 2.4 STRUCTURE OF THE SOUTH AFRICAN GOLD MINING INDUSTRY 2.4.1 Large, publicly-listed gold mining companies 2.4.2 By-product and tailings retreatment gold production 2.4.3 Junior/small-scale gold mining companies 2.4.4 Informal gold mining 2.5 SOUTH AFRICAN GOLD COMPANIES IN A GLOBAL CONTEXT 2.6 ECONOMIC CONTRIBUTION OF GOLD MINING 2.7 COST OF PRODUCTION 2.8 EMPLOYMENT 2.9 TRANSFORMATION IN THE SOUTH AFRICAN MINING INDUSTRY 2.9.1 HDSA ownership 2.9.2 BEE through procurement 2.9.3 Employment equity 2.9.4 Women in mining 2.9.5 HDSA employment in mining 2.10 INDUSTRY BODIES AND INITIATIVES, GOVERNMENT BODIES AND UNIONS 2.10.1 Industry bodies 2.10.2 Government bodies 2.10.3 Trade unions 40 40 42 43 26 26 27 28 28 31 31 32 32 33 34 35 36 36 38 38 39 39

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2.1 INTRODUCTION The discovery of the Witwatersrand Goldfields in 1886 led to the development of South Africas world-class gold mining industry, which has dominated the global gold mining industry for 120 years. In fact, the Witwatersrand Goldfields will probably remain the greatest goldfield ever discovered, surpassing all others by several orders of magnitude1. From 1884 when records of production were first collected, to 2004, the South African gold mining sector has produced 50,055t of gold which accounts for some 33% of all the gold estimated above the worlds surface. Total South African remaining gold ore resources are estimated to be some 40,000t, of which about 8,000 to 10,000t are economically recoverable depending on the Rand gold price and cost scenarios applied. The emergence of the gold mining sector in South Africa led to the rapid development and industrialisation of the country and, ultimately, contributed to South Africa being by far the most industrialised country in Sub-Saharan Africa. Gold mining was a fundamental catalyst for the development of key infrastructure (water, roads, electricity, rail, etc), as well as many manufacturing and service industries. Soon after the discovery of the Witwatersrand Goldfields, Africas largest stock market, now the JSE Limited, was started in 1887 specifically for funding the mining sector. Many of South Africas large-scale parastatals (Eskom, Spoornet, Rand Water) and world-class financial services companies and institutions owe their existence to the gold and diamond mining sectors. The mining sector drove the development of Johannesburg, the industrial heartland of South Africa, which was known as as Egoli or place of gold. South Africa dominated the global gold mining industry for much of the past 120 years, rising to peak production of 1,000t (67% of global mine supply) in 1970. Today, the industry is in a mature, declining phase with production having declined to 342t in 2004. While South Africa is still the largest gold producer in the world, the closure of older mines and shafts could see the country lose this position over the next five years. Nonetheless, the gold mining sector continues to be a key driver of economic growth and a large employer, accounting for just less than 2% of GDP, 10% of export earnings and 187,039 employees in 2004. 2.2 HISTORICAL CONTEXT There is evidence that small-scale gold mining had been taking place in the countrys greenstone belt areas some time before the emergence of the modern gold mining industry, but little recorded history exists for the period prior to the 1830s. The more recent history of gold mining in South Africa started with the mining in the greenstone belts in Northern KwaZulu-Natal in 1836 and the development of mines in the Murchison, Giyani and Pietersburg greenstone belts. In 1875 gold was discovered on the farm Kromdraai, just north of present day Krugersdorp, and this led to the first proclamation of gold in the Witwatersrand region. In 1883 the Pioneer Reef was discovered in Barberton, and in 1886 the very rich Witwatersrand Main Reef was discovered. This led to the influx of miners from around the world, the establishment of many new companies and the commencement of the development of the countrys large scale gold mining industry. While many mining companies were formed in the latter part of the 1880s, South Africas gold production was dominated in the early years by the following companies: Company/event Union Corporation Gold Fields of South Africa Johannesburg Consolidated Investment Company Ltd (JCI) Rand Mines General Mining and Finance Corporation Anglo American Anglo-Transvaal Consolidated Investment Company (Anglovaal) Established 1886 1887 1889 1893 1895 1917 1934

JRF Handley, Historic overview of the Witswatersrand Goldfields, Handley book page VII

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These seven companies were the backbone of the South African gold mining industry for most of the 20th century. However, for all the reasons referred to earlier declining output, mining at increasing depth and increasing costs, weak international gold prices throughout the mid-1980s and mid-1990s, as well as increasing output from other countries a major restructuring of the industry became necessary. The industry, however, saw changes taking place throughout the 1990s, the most recent of which are detailed below. AngloGold Ashanti Ltd, South Africas largest gold producer, was formed in April 2004 through the merger of AngloGold Limited and Ashanti Goldfields of Ghana. AngloGold Limited was itself formed in June 1998 through a merger of the gold operations, mineral rights and exploration activities of Anglo American Corporation and the subsequent acquisition of a number of non-South African mining assets. Some of the companys South African mines have since been sold to other producers. Also in 1998, South Africas second largest producer, Gold Fields Limited, was formed as a result of the amalgamation of the gold assets of Gencor Limited (formerly General Mining and Union Corporation) and Gold Fields of South Africa Limited. Rand Mines was unbundled in 1992 when the mining interests were separated out as Randgold & Exploration (Randgold). In 1994 Randgold became a pure gold mining house with a portfolio of marginal gold mines. By 1997 this had been rationalised into three South African mining companies (Durban Roodepoort Deep (now DRDGOLD), Harmony Gold Mining and Crown Consolidated Recoveries) and an offshore gold company, Randgold Resources, operating the Syama mine in Mali. DRDGOLD Limited expanded in the late 1990s as a result of the acquisition of a number of mines from other operating companies. In 2005, DRDGOLD closed its North West operations following an eartquake. In 1995, Johannesburg Consolidated Investments was divided into a non-mining group, (Johnnies Industrial Corp), a gold, ferrochrome and base metals group, (JCI Ltd) and a PGM producer (Anglo Platinum). JCIs primary remaining gold asset is a 50% stake in Western Areas, in partnership with Placer Dome Inc. Harmony Gold Mining Company Ltd has grown since its unbundling from Rand Mines, expanding from its single gold mine in the Free State by acquiring both South African and overseas assets. Harmony acquired Elandsrand and Deelkraal from the then AngloGold and, together with ARMgold, the then only BEE gold company listed on the JSE, acquired Freegold from AngloGold. Subsequently, Harmony merged with ARMgold. In 2003, following the merger between African Rainbow Minerals (formerly a major shareholder in ARMgold, and now in Harmony) and Avmin, Harmony acquired Avgold. Western Areas was established in 1959 and merged with South Deep in 1995. In 1998, Placer Dome Inc took a 50% stake in South Deep, which it holds in partnership with JCI Gold. 2.3 GLOBAL GOLD MINE PRODUCTION South Africa remains the worlds largest gold producer, but the countrys output has been in decline for more than three decades, a substantial decrease from the 1,000t produced in 1970 which was equivalent to two-thirds of global supply at that time. In 2004, South African gold mining output fell by a further 9% to 342t compared with 2003. This amounted to 14% of global production in 2004, Australia and the USA each now producing around 10% of global supply, (although both countries are also mature gold producers and production has fallen recently). However, other countries have begun to expand their gold production, particularly China, Russia, Indonesia, Uzbekistan, Peru, Papua New Guinea and Tanzania. South Africa remains the worlds largest gold producer... Seven major mining houses were the backbone of the South African gold mining industry for most of the 20th century...

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The following table lists the top 20 global gold producing countries in 2004. Country South Africa USA Australia China Peru Russia Canada Indonesia Uzbekistan Papua New Guinea Ghana Tanzania Mali Chile Brazil Colombia Argentina Mexico Kazakhstan Kyrgyzstan
Data source: Raw Materials Group, March 2005.

2004 (t) 342 260 253 220 173 159 129 100 90 71 60 48 40 39 34 30 27 24 22 22

2.4 STRUCTURE OF THE SOUTH AFRICAN GOLD MINING INDUSTRY Three of the six largest international gold mining companies in the world are South African. The South African gold mining industry can be divided into four sub-sectors: large, publicly-listed gold mining companies; companies producing gold as a by-product of other metal mining, (mainly PGM producers); tailings retreatment operations (operated either by the large listed companies or by small-scale companies); and junior or small-scale miners.

There is also very limited, informal gold mining undertaken within the country. Collating production information is not a simple task. Data was sourced from the Chamber of Mines of South Africa as far as possible, although not all companies are members of the Chamber or provide it with data. 2.4.1 Large, publicly-listed gold mining companies There are five large, publicly-listed gold mining companies in South Africa: AngloGold Ashanti, Gold Fields, Harmony, DRDGOLD and Western Areas. Five companies accounted for 91% of the fine gold produced in South Africa in 2004... These five companies accounted for 312t, or 91% of the fine gold produced in South Africa in 2004. The following is a brief account of these producers. Further details may be found in the Research Directory of this document. Information on these companies South African ore reserves is contained in section 2.5 of this chapter. AngloGold Ashanti AngloGold Ashanti is headquartered in Johannesburg and has operations in 10 countries around the globe. Its primary listing is on the JSE limited, although the company is also listed on the New York, Australian, London and Ghanaian stock exchanges as well as on Euronext Paris and Brussels.

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In 2004, AngloGold Ashanti produced 181.3t of fine gold, of which 95.8t (56%) came from its South African operations. The company currently has seven operating mines in South Africa in two regions. The Vaal River region, near Klerksdorp in North West Province, comprises three mines Great Noligwa, Kopanang, Tau Lekoa and the West Wits region, near Carletonville, comprises three mines Mponeng, Savuka and TauTona. The four largest mines Great Noligwa, TauTona, Kopanang and Mponeng contributed 80% of gold output. The companys dump retreatment operation, Ergo, was closed in March 2005, although a number of other surface assets are still being processed. The Savuka mine is currently in closure mode. The Moab Khotsong mine is currently under development and is expected to come into commercial development in 2006. As at the end of December 2004, the company was involved in the following growth projects in South Africa: Mponeng shaft deepening (R1.2 billion, of which R50 million was remaining), various projects at TauTona (R1.5 billion, of which R1.2 billion was remaining), Moab Khotsong (R4.0 billion, of which R409 million was remaining). At the end of 2004, AngloGold Ashanti employed 65,400 people globally (including contractors), 69.4% or 45,380 people in South Africa. Gold Fields Gold Fields is also headquartered in Johannesburg, South Africa, with operations in South Africa, Ghana and Australia. and is listed on the JSE Limited (primary listing), New York Stock Exchange, London Stock Exchange, Euronext in Paris and Brussels as well as the SWX Swiss Exchange. The company was the subject of a takeover bid by Harmony during 2004/2005, which it successfully defended. Gold Fields own plans to merge with North American gold producer IAMGOLD were thwarted as a consequence of the Harmony takeover bid. In 2004, the company produced 129t of gold, 68% or 88t from its South African operations, Driefontein and Kloof, near Carletonville, and Beatrix, near Welkom in the Free State. The two primary operations, Kloof and Driefontein, produced 78% of the companys South African gold output. Planned capital expenditure (reported at the end of June 2005) amounted to R280 million on the Driefontein Expansion project, R230 million at Kloof and R250 million on the Beatrix north section project. At the end of June 2005, the company employed some 43,942 people (excluding contractors) across its operations, 94% or 41,500 people in South Africa.

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Harmony Harmonys headquarters are in Virginia in the Free State, although the companys corporate office is in Johannesburg. The company is listed on the JSE Limited, on the New York, London and Berlin stock exchanges and on Euronext in Brussels and Paris. The company has operations and projects in South Africa, Australia and Papua New Guinea. In 2004, the company produced 92t from its South African operations. However, following significant restructuring, the company expects production to decline in 2005. Harmony has structured its operations into Quality shafts, Leveraged shafts and Growth shafts or projects and does not report production on a mine-by-mine basis. Harmony is currently undertaking a R3.4 billion capital expenditure programme, with five projects underway in South Africa - the Tshepong Expansion, Elandsrand new mine, Doornkop South Reef projects and new mines at Masimong and Phakisa. Harmony employed 53,588 people (including contractors) at the end of June 2005, 51,610 (96%) of whom were employed in South Africa. DRDGOLD Based in Johannesburg DRDGOLD is listed on the JSE Limited, the London, Australian and Port Moresby stock exchanges and on Nasdaq in the USA. The company has operations and interests in South Africa, Australia and Papua New Guinea. Following an earthquake at its North West operations in March 2005, the company successfully applied for the provisional liquidation of the wholly-owned subsidiary in which these assets are contained, thereby significantly reducing its South African asset base. DRDGOLD subsidiary Crown Gold Recoveries is the countrys largest dump retreatment operation. In 2004, DRDGOLD produced 23.2t of gold from its South African operations. (10t or 58% came from the now-closed North West operations). This includes 4.3t attributable to Khumo Bathong Holdings (KBH), DRDGOLDs BEE partner. In 2005, agreement was reached with KBH that KBH would acquire an 11% stake in DRDGOLD, with the option to acquire a further 15%, and that ERPM and Crown Gold Recoveries would once again become subsidiaries of DRDGOLD. Prior to this, KBH held a 40% stake in Crown Gold Recoveries and ERPM. No significant new projects are currently being undertaken in South Africa. The total number of people employed at DRDGOLDs South African operations was 6,390 as at the end of June 2005.

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Western Areas Western Areas has a 50% stake in the South Deep mine, together with joint venture partner Placer Dome. In 2004, the South Deep mine produced 13.4t, of which 6.7t were attributable to Western Areas. As at 31 December 2004, Western Areas employed a total of 4,914 individuals. The following table shows gold production attributable to large, publicly-listed companies. 2004 (t) Production AngloGold Ashanti 95.8 Great Noligwa mine 24.7 TauTona mine 17.7 Kopanang mine 15.1 Mponeng mine 13.6 Tau Lekoa mine 9.1 Savuka mine 4.9 Surface operations 3.7 Ergo 6.9 Gold Fields 87.8 Driefontein mine 35.8 Kloof mine 32.9 Beatrix mine 19.1 92.0 Harmony DRDGOLD* (includes 40% interest in ERPM and CGR by KBH) 23.2 South Deep mine (50% attributable to Western Areas and 50% to Placer Dome) 13.4 Total 312.11 2.4.2 By-product and tailings retreatment gold production In addition to gold mine production, 7.2t of fine gold was produced as a by-product, mainly from PGM mines. The major PGM producers in South Africa are: Anglo Platinum, Impala Platinum Holdings Limited, Lonmin Platinum and Aquarius Platinum. These companies do not report separately on gold production. The two major dump retreatment operations active in 2004 are accounted for under AngloGold Ashanti (Ergo, now closed) and DRDGOLD (Crown Gold Recoveries). Total dump retreatment production is estimated at 13.1t for 2004. Other small-scale dump retreatment operations are accounted for under smallscale producers. 2.4.3 Junior/small-scale gold mining companies The National Small Business Act of 1996 defines each sector of the economy, including mining, in terms of the number of employees, annual total turnover and total gross net asset value. With respect to mining, junior or small and medium companies would employ at least 200 people, have an annual turnover of R30 million and total gross net asset value of least R18 million. In 2002, the Minerals & Energy Policy Centre2 (MEPC), completed research into the development of the junior mining sector in South Africa.3 The report noted the existence at that stage of 20 junior or small-scale mining companies, of which eight were mining gold4.

The MEPC was established in 1994 to research the local economy and specifically issues pertaining to minerals and energy. The Netherlands, through its Ministry of Co-operation and Development, provided seed funding. Other income is now increasingly derived from commissioned research and services. 3 Mitchell, G.C., et al: Research Report 1 to the Interim Committee of Small and Junior Mining Companies on the Development of a Junior Mining Sector in South Africa: Opportunities and Options, MEPC, 2002. 4 The others were involved with the mining of PGMs, diamonds, ferrous and non-ferrous metals as well as coal.

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Small-scale gold producers and small-scale dump retreatment operations contributed 22.7t of fine gold in 2004... Data from the major refineries and the Chamber of Mines indicates that small-scale gold producers and small-scale dump retreatment operations contributed some 22.7t of fine gold in 2004. (This figure excludes Ergo and CGR.) 2.4.4 Informal gold mining In addition to the formal mining sector, informal gold mining takes place in those areas of the country where there are old mine workings or tailings dams, for example in the vicinity of Nigel in Gauteng, and Barberton and Sabie in Mpumalanga Province. This informal sector is distinct from the illegal operations in which mine output is stolen from the formal mining sector either at the mines or from the smelters. Informal miners tend to be one-man operations working on abandoned mine sites and dumps. As they are unregistered with any fiscal or regulatory authorities, the numbers of informal miners and their gold output are impossible to estimate. Discussions with the Department of Mineral and Energy indicate that these informal miners are also transitory, moving frequently from one location to another, making their existence and activities more difficult to trace. According to the CSIR5, it was estimated that in 1998 there were at least 1,250 informal gold miners active in South Africa. Since then, no other figures have been collated. Collectively, these miners are thought to produce less than 1t of gold annually, much of which is believed to be traded mainly with their suppliers of mercury based in Swaziland and Mozambique. 2.5 SOUTH AFRICAN GOLD COMPANIES IN A GLOBAL CONTEXT A number of South African gold producers have become global players, having extended their exploration activities and asset base beyond the borders of the country. Of the worlds six largest gold producers three AngloGold Ashanti, Gold Fields and Harmony are from South Africa. Although it is estimated that close to 50,000t of gold have been mined in South Africa since 18876, South Africas gold resources still make up 40% of the worlds known resources. It is also estimated by the US Geological Survey (USGS) that South Africa has six times more gold resources than the USA and Australia7. Ore reserves held by the major South African gold mining companies in South Africa are estimated as follows: Estimates of available (proved) ore reserves in South Africa of major South African publicly listed mining companies as at 30 June 2005 Calculated on the 000t Grade Contained basis of a gold price (g/t) gold per kg (R/kg) (kg) AngloGold Ashanti (South African) 94,764 30,900 5.21 160,800 DRDGOLD 88,960 55,341 2.07 114,344 Gold Fields Driefontein 92,000 30,100 7.90 237,800 Beatrix 92,000 14,400 5.50 79,200 Kloof 92,000 13,600 10.20 138,700 Harmony South Africa surface 92,000 26,000 0.45 12,000 South Africa underground 92,000 55,400 6.49 360,000 Western Areas Extended SV1 area 91,429 2,012 7.70 15,490 Phase 1 area 91,429 4,120 10.5 43,265
Data source: Chamber of Mines of South Africa and company annual reports/websites

5 6 7

32 GOLD IN SOUTH AFRICA

Council for Scientific and Industrial Research. Source: Chamber of Mines. This discussion of resources makes use of the definitions as quoted by US Geological Survey as follows: A reserve base is defined as the in-situ demonstrated (measured plus indicated) resource from which reserves are estimated. The resource base includes reserves that are currently economic (reserves), marginally economic (marginal reserves) and some that are currently sub-economic (sub-economic reserves).

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2.6 ECONOMIC CONTRIBUTION OF GOLD MINING The gold mining industry played a substantial role as a foundation industry in the evolution of South African industry. The discovery of the rich Witwatersrand Goldfield in 1886 led to a substantial influx of engineers, geologists, miners, technicians, financial people, etc., that were attracted from all over the world to the new opportunities presented by the gold rush. The need for housing, water, power, explosives, equipment, communications, food and liquor, were initially met by importing the products from overseas and then transporting the goods by wagon from the coast. Within five years a railway line had been developed from Cape Town and was followed by another line from KwaZulu-Natal. A year after the discovery of the Witwatersrand Goldfields a telegraph service was operational. The material and services requirements of the gold sector ultimately led to the establishment of financial services and manufacturing companies. Roads, railway stations, electricity services and water reticulation, all evolved on the back of large demands from the mining sector. The requirements of the mining sector were increasingly met from local sources and services and industry boomed. Over time the banks, stock market, service providers and manufacturers were able to generate their own critical mass and start providing goods and services to industries and consumers outside the mining sector. The gold mining sector has been the dominant foreign exchange earner for the country over the past century. More recent numbers indicate that gold export earnings in 1980 accounted for over 50% of South Africas merchandise exports in that year. The decline in the Dollar gold price, combined with the fall in South African gold production and the increasingly diversified structure of the economy meant that by 2004 gold exports accounted for a smaller 10% share of total merchandise exports. Similarly, the direct contribution to GDP of gold mining peaked at 16.3% in 1980 and by 2004 was a smaller 2% of GDP. Although the relative importance of gold mining has fallen over the last decade with the performance of the gold price, gold mining still contributed just under 2% directly to GDP in 2004. Taking into consideration the indirect contribution to the economy and the multiplier effects, gold mining's total contribution to GDP is closer to 4.4%. These multiplier effects include: backward linkages, which arise from the purchase of goods and services by the gold mining industry, which stimulates industrial production and the provision of services (e.g. gold mines consume 15% of all electricity generated in South Africa); forward linkages, arising from the use of mineral products in other domestic industries, such as jewellery fabrication and production of refined gold; social multipliers which arise from the role of mining in the development of human resources and infrastructure such as schools, colleges, clinics, roads, and housing; the primary incomes multiplier which arises from household expenditures of primary incomes derived from mining (in 2004 R13.1 billion was paid to employees in the form of salaries and wages); the employment multiplier, which arises from the employment created in other industries as a result of gold mining. In 2004, the Chamber of Mines estimates that in addition to the 187,039 people employed in gold mining another 63,000 jobs were created in related industries linked to the gold mining sector. This multiplier includes the benefits of the provision of employment for workers from deep rural communities and the transfer of funds back to these areas; the income terms-of-trade multiplier which arises from the positive impact that gold export earnings have on the balance of payments, foreign reserves,

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monetary policy and ultimately upon the general level of business activity in the country. In 2004, gold export earnings of R29.5 billion accounted for 10% of the countrys merchandise exports; and the capital formation multiplier which arises from minings influence in attracting foreign capital to the country (via the JSE Limited or via direct investment), and in domestic capital formation.

2.7 COST OF PRODUCTION The cost of producing gold in South Africa varies between mining companies and operations, as each operates with unique geological and metallurgical circumstances. The Chamber of Mines collates information on the components of mining costs from its members. Components of cash costs for 20048 Company employees (including foodstuff) Power and water Stores and services (excluding foodstuff) Other costs Total cash costs % 58.36 12.36 23.33 5.96 100.00

In terms of world ranking, an international gold cash cost curve comparison for the years 2002 and 2004 is shown below and overleaf. The cost curve positions gold mines on a cumulative production chart in a way that allows for direct comparisons between operations.9 South African gold producers feature in red and the two different graphs show the deterioration in South Africas competitive position over the time period. The movement of South African producers up the global cost curve and to the right, between 2002 and 2004, illustrates particularly the impact of the strong Rand on local costs relative to their international competitors.

8 9

The costs shown here are cash costs and exclude capital expenditure, amortisation and depreciation. Source: Chamber of Mines, Virtual Metals, Raw Materials Group and USGS.

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2.8 EMPLOYMENT This section analyses the employment profile of the gold mining industry in South Africa. As an initial starting point, industry data collected by the Chamber of Mines was used. More details on particular mining companies can be found in the Research Directory at the end of this review. Historically, the gold mining industry has been a significant employer although employment levels have decreased substantially in recent years. As at June 2004, the gold mining industry was still the largest employer within South Africas mining sector, with 41% of all employees, or 187,039 people. Over the past 20 years, this number has fallen, with mine closures, restructuring and mergers contributing to the decline in employment levels. In 1987, the industry employed 537,000 people. By far the greatest job losses in this industry have been among unskilled workers. The fact that they have historically made up the greatest grouping within the total work force has contributed to this, and when measured in percentage terms the decline in the numbers of unskilled workers (between 1984 and 2003) at 73% was larger than the 52% for skilled workers. The most recent data (for 2004) shows that this trend has continued. Employment levels in the diamond and the PGM mining industries have been increasing as both the diamond and PGM sectors have experienced expansion and development over this period. On an international basis, the South African gold mining industry employs substantially more people than do other major gold mining countries. This is due, in part, to the fact that the local industry is engaged in deep-level hard-rock underground mining which by nature is labour intensive. By comparison, the gold mines in Australia and North America are more commonly open pit and are suitable for mechanisation. Historically, the gold mining industry has been a significant employer, although employment levels have decreased substantially in recent years...

187,039 people were employed in the gold mining sector as at June 2004...

By far the greatest job losses in the industry have been among unskilled workers...

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2.9 TRANSFORMATION IN THE SOUTH AFRICAN MINING INDUSTRY The South African mining industry is regulated by a range of legislation and regulations in respect of transformation and Black Economic Empowerment (BEE). This legislation and the regulations are dealt with in Chapter 6. The following is a brief description of the progress that has been made in the mining industry in respect of transformation. The MPRDA requires that mining companies transform their ownership structure... The Mineral and Petroleum Resources Development Act (MPRDA) requires that mining companies transform their ownership structures or facilitate BEE such that they can show 15% Historically Disadvantaged South African (HDSA) ownership of equity in their companies or the equivalent attributable units of production to HDSA owners within five years of enactment (that is, by 2009) and 26% within 10 years (that is, by 2014). It also requires that mining companies substantially and materially increase the economic participation of HDSAs within the industry, from employment to procurement. In order to assess progress against BEE strategy in the gold industry, three distinct areas of economic transformation need to be considered: HDSA ownership of existing and new enterprises; procurement of goods and services from HDSA entrepreneurs and businesses; and delivery on employment equity plans. 2.9.1 HDSA ownership Total mergers and acquisitions in the gold mining industry (including BEE transactions) are recorded in the following table, which shows both the number of transactions and their total value. Gold mining - Total mergers and acquisitions Number of transactions 1999 19 2000 16 2001 13 2002 25 2003 43 2004 35 Total 151
Data source: Ernst & Young.

Value R million 16 7,172 6,853 8,097 38,341 13,432 73,910

Of these transactions, the following levels of BEE transactions were identified, again in total number of transactions and value. Gold mining - BEE transactions Number of transactions 1999 n/a 2000 0 2001 5 2002 6 2003 7 2004 8 Total 26
Data source: VM analysis of Ernst & Young data.

Value R million n/a 0 2,618 403 13,442 695 17,158

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This data shows that between 2000 and 2004 (inclusive), an average of 19.7% of the total number of transactions in the South African gold mining industry were associated with BEE, as was 23.2% of the total value. The annual breakdown of this figure for the period is shown in the table below. BEE transactions as percentage of total M&A activity in gold mining Number of transactions Value R million 1999 n/a n/a 2000 0 0 2001 38.5 38.2 2002 24.0 5.0 2003 16.3 35.1 2004 22.9 5.2 Average (2000-2004) 19.7 23.2
Data source: VM analysis of Ernst & Young data.

Between 2000 and 2004 (inclusive) an average of 19.7% of transactions in the South African mining industry were associated with BEE...

Individual BEE transactions that can be identified during this period are listed below. Black economic empowerment transactions in the gold mining sector Acquirer Target Seller Value 20011 Rm
Komanani Mining Komanani Mining African Rainbow Simane Security Harmony/ARM2 Harmony Harmony Assets Harmony Free State mines of AngloGold Crown Crown Afrikander Lease 10% Elandskraal Stone & Allied Stone & Allied ETC Assets Doornkop African Rain SA Gold Assets Afrikander Lease Viking Pony Prop Harmony Luxinge Alluvial Dando Kwanza Somba Sul Mining Equip & Assets Western Areas Lunda Alluvial Makonjwaan mining Harmony Harmony AngloGold Harmony AngloGold 394 6 10 8 2,200

2002
Khumo Bathong Khumo Bathong Lwami Invest Khumo Bathong Masakhisane BEE Stone & Allied Ind DRDGOLD Crown Undisclosed Hanson AngloGold AngloGold AVGOLD Harmony Shareholders Gold Fields Peter Skeat Phikoloso mining ARM Koketso Anglo JV Masupatsela Quantum African mining Trans Benguela Log Anglo American Undisclosed Simmer & Jack 105 68 120 105 na 5 255 250 4,900 4,100 127 268 3,542 24 28 25 28 515 57 3

2003
Metorex/ Millennium Cons African Vangueard Harmony Mvelaphanda Kabusha mining Randgold & EX Anglovaal

2004
Randgold & EX Randgold & EX Randgold & EX Randgold & EX Inkwenkwezi Gold Randgold & EX Undisclosed

Data Source: Virtual Metals analysis of Ernst & Young data. Note 1: prior to 2000 data on individual transactions is not available. Note 2: Only ARM was a BEE company.

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The process of transfer of equity to HDSA participants will inevitably take time to gather pace... The volume of the above transactions shows that progress has been made towards HDSA ownership in the gold mining sector. It would, however, be misleading to use this data to estimate the proportion of the gold mining sector which is now HDSA owned, given the debt structures of the transactions that have been undertaken to enable transfer of ownership to HDSA participants. It is also clear that, given the capital-intensive nature of the gold mining sector, the process of transfer of equity to HDSA participants will inevitably take time to gather pace. 2.9.2 BEE through procurement Gold mining and refining companies largely source goods and services via a tender process. Decisions on the awarding of tenders are usually based on price, quality of goods, reliability of services and, additionally, the BEE status of the vendors. Where data on individual companies BEE procurement was available, it was not in a format which made consolidation and comparison possible... Mining companies are required to identify current levels of BEE procurement in terms of the Mining Charter. However, at the time of publication, this data was not available in a consolidated form for the industry. Where data on individual companies BEE procurement was available, it was not in a format which made consolidation and comparison possible. However, the following information reported by the primary gold producers offers some indication of the aggregate volume of HDSA procurement which has been achieved: AngloGold Ashanti reported that, in 2004, R711 million of total procurement spend in South Africa was attributable to companies with at least 25% HDSA ownership, and offers the following breakdown of this spend in 2004, and HDSA procument targets for 2008: Procurement category Site works Consumables Services Capital Total % HDSA spend in 2004 41 39 17 7 22 % 2008 Target 41 99 22 9 48

Gold Fields reported that the company is increasingly doing business with small and medium-sized enterprises on a competitive basis. Procurement from such companies (excluding capital expenditure) increased from 18% in the 2004 financial year to 25% in the 2005 financial year; Harmony reported that, for the 2005 financial year, HDSA spend increased to 28% of procurement spend; DRDGold reported that procurement spend with HDSA suppliers rose to 12% by the end of 2004; and Western Areas reported that 48% of its R368.3 million spend in 2004 was with companies accredited by the South African Materials Preferential Procurement Forum (SAMPPF) detailed as follows: 26%: BEE ownership 0 to 5%; 13%: BEE ownership 5 to 25%; 8%: BEE ownership 25 to 50%; 1%: BEE ownership above 50%. 2.9.3 Employment equity The Employment Equity Act No 55, which prescribes employers responsibilities in respect of employment equity, came into effect in 1998 and is described in Chapter 6. The Mining Charter also deals with employment equity, particularly relating to the participation of HDSAs at board and management level, as well as women in mining. While the legislation requires that employment equity information be made publicly available, once again the format of reporting differs from company to company. Information on the individual mining companies is made available in the research directory at the end of this document.

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2.9.4 Women in mining As can be expected in the mining industry, men far outnumber women in the South African gold mining workforce. There is a legacy of legislative exclusion of women from the South African mining industry, this restrictive legislation only having been removed in the last decade. According to the Department of Mineral and Energy (DME), in June 2004, there were only 3,739 full-time female employees, or 2% of the total number of people employed in gold mining, and they were employed mainly in administrative and technical roles as opposed to actual mining. An analysis of the published statistics contained in the individual companies employment equity plans bears out the predominance of men in the mining industry. The following table gives a breakdown of the presence of women in the various job categories, as reported by the mining companies. Women in gold mining by job description Dec 2003-June 2004 Weighted averages Senior Management Professional Technical Clerks Craft related Machine operators Unskilled Temporary

There is a legacy of legislative exclusion of women from the South African mining industry...

% of total employees 6.4 8.1 7.6 28.3 6.2 1.7 2.1 2.3

Data Source: Analysis of individual company data. Employment equity plans where available.

With the exception of clerical staff (at 28%), job categories in the local gold mining industry have less than 10% of their payroll consisting of women. 2.9.5 HDSA employment in mining The weighted average number of HDSA employees by job category for the gold industry is tabulated below. HDSA employees in gold mining by job description Dec 03-June 04 Weighted averages % of total employees Senior management 14.2 Professional 12.3 Technical 36.3 Clerks 85.6 Craft related 55.2 Machine operators 98.1 Unskilled 99.5 Temporary 90.9
Data Source: Analysis of individual company data where available.

This analysis was undertaken on the basis of the available data. Only AngloGold Ashanti included a job description to cover temporary workers employed by the company, of which 91% were HDSA. The other mining companies appear to have incorporated temporary employees in other categories of employment and therefore the HDSA percentages may be overstated.

The South African gold mining industry is staffed predominantly by black people...

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2.10 INDUSTRY BODIES AND INITIATIVES, GOVERNMENT BODIES AND UNIONS 2.10.1 Industry bodies The Chamber of Mines of South Africa The Chamber of Mines was formed on 7 December 1887 in Johannesburg and was succeeded by the modern Chamber on 5 October 1889. Funded by its members, it is a producers organisation, representing mine owners to government, labour and others. Its key mandate is to promote and protect the interests of mining groups and the mining industry in general. During the 20th century the Chamber of Mines was one of the most effective employers organisations in South Africa... During the 20th century it was one of the most effective employers organisations in South Africa. As well as dealing with government, it also negotiates with trade union bodies and sets labour policy and standards for its membership. Currently, membership of the Chamber consists of two financial corporations, eight gold mines, and a large number of coal, diamond, PGM and other mining companies and associated bodies. The Chamber of Mines members account for some 90% of South Africas mineral production (by value) or 86% of gold production. The Chamber is organised around a committee system, the most senior of which is the Executive Council, responsible for setting the overall policy direction of the Chamber. As far as gold mining is concerned, the Gold Producers Committee (GPC) is responsible for directing policy in this sector. In addition to the GPC, there are committees dealing with such common industry concerns as environmental issues, occupational health and safety, health issues such as HIV/AIDS, human resources, education and skills development, taxation, mining titles and mineral rights. In recent years, the Chamber has responded to the changing environment in which it operates and has redirected many of its core activities... In recent years, the Chamber has responded to the changing environment in which it operates and has redirected many of its core activities by: refocusing to position itself as the principal advocate to government of major policy positions endorsed by the mining industry; ending its direct involvement in the financial subsidisation of various industry services; and expanding its membership base.

The South African Mining Development Association (SAMDA) was formed to promote the interests of the junior and black economic empowerment sector in South African mining...

South African Mining Development Association (SAMDA) The South African Mining Development Association (SAMDA) was formed to promote the interests of the junior and black economic empowerment sector in South African mining. Founded in 2000 and funded by its members, it was registered as a Section 21 company at the end of 2002. Its key function is to lobby stakeholders such as government, labour and organised business on behalf of its membership. Junior mining companies in this instance are defined as those companies with annual sales valued at between R30 million and R1 billion. The lower end of the scale is obtained by using the definition of small-scale mining in the National Small Business Act of 1996 with the upper end limit agreed at an interim committee of SAMDA in 2002. SAMDAs membership includes 62 companies (comprising 181 individual mines including diamonds, coal, gold and other minerals); 94% are involved in production. The rest are involved in contract mining. Of the 62 companies, 14 (22%) are BEE companies, wholly-owned and managed black enterprises; 15 (24%) are involved in gold production, with 21 individual gold mining operations.

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SAMDAs current work includes: developing a coherent position on the Royalty Bill; lobbying government with respect to new mineral policies; conducting local and international research into junior mining issues; negotiating with the Chamber of Mines on matters of mutual interest; negotiating with banks and other financial institutions; assisting BEE and junior companies with advice on policy and mining; assisting educational institutions with curriculum development; skills development; and consultations with the National Union of Mineworkers. Mintek Mintek was established in 1934, initially as a technical adviser to the mining industry in general. Since then, the organisation has broadened its service base considerably. Apart from specialising in mining, metallurgical and engineering projects, Mintek has branched out into social and human resource initiatives as they apply to the mining industry, including training, HIV/AIDS treatment and prevention, and jewellery manufacturing projects. Details of Minteks jewellery projects and the small miners programmes are discussed in Appendix 3. Mintek is financed by a combination of government grants and fees earned from external services. The ratio of these revenue sources is broadly 50:50. Mintek is directed by a Board, which includes a Chairman and Minteks CEO, plus an additional six to nine other members. The Chairman is selected by the Minister of Minerals and Energy. The CEO is supported by an executive management team, 18 divisional managers and over 400 employees. In 2001, Mintek signed a three-year letter of intent with the South African Government in terms of which the main focus of the organisation would be to: add value to South Africa's mineral resources; expand the country's mineral technology industries; develop minerals industries in the Southern African Development Community (SADC) and throughout Africa; and support the growth of small, medium and micro enterprises in the minerals sector. Since 2004, this relationship with the Government has become known as the Mintek Compact. Apart from the technical services offered, Mintek also has an information centre through which fee-paying members access data. Currently, Mintek has partners in Canada, India, Brazil, Argentina, Bolivia, Uruguay and Peru, and is actively undergoing a process of commercialisation via wholly-owned subsidiaries. Currently, Mintek has partners in Canada, India, Brazil, Argentina, Bolivia, Uruguay and Peru, and is undergoing a process of commercialisation via wholly-owned subsidiaries...

Apart from specialising in mining, metallurgical and engineering projects, Mintek has branched out into social and human resource initiatives as they apply to the mining industry...

The commercialisation of Mintek In 2002 Mintek established Mindev (Pty) Ltd, a wholly-owned holding company designed specifically to support the commercialisation of Minteks technologies via joint venture partnerships.
Mindev currently has non-controlling shareholdings in four companies namely Apic Toll Treatment (Pty) Ltd, Mogale Alloys (Pty) Ltd, Musuku Beneficiations Systems (Pty) Ltd and Tollsort (Pty) Ltd. Of the four, Mintek has capital invested only in Apic Toll Treatment, and is involved in the remaining entities as the provider of licences and Mintek technology. Musuku is discussed in more detail in Chapter 3 as is the associated Minataur (Mintek Alternative Technology for Au Refining) process that was developed by Mintek. Tollsort was formed in conjunction with MikroSort SA, B&E International and the SPA Group to assess and develop optic sorting to upgrade ore types.

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2.10.2 Government bodies Department of Minerals and Energy (DME) The DME is the primary government department responsible for formulating and implementing mining and minerals-related policy. It reports to and advises the Minister of Minerals and Energy who, in consultation with the cabinet, takes final responsibility for policy. Within the Department, the Electricity and Nuclear Branch is responsible for electricity and nuclear affairs; the Hydrocarbons and Energy Planning Branch is responsible for coal, gas, liquid fuels, energy efficiency, and renewable energy planning, including the energy database; while the Mineral Development Branch manages, among others, mineral prospecting and mining rights. The Mine Health and Safety Branch is responsible for the application of mine health and safety legislation. With respect to the gold industry, the main function of the DME is the administration of minerals and environmental regulation through the MPRDA. Other departments of the DME are: the Mineral Regulation Branch which is tasked with processing applications for prospecting and mining rights, and mining permits; the Environmental Management Directorate which administers issues concerning environmental management; a Social Plan Directorate which deals with mining rights; the Mine Economics Directorate which deals with issues such as royalties; the Mineral Policy and Investment Promotion Chief Branch of which the DME has a Small-Scale Mining Directorate for the promotion of small-scale mining, although its function also incorporates SMMEs involved in the beneficiation of gold, mainly jewellery and craft manufacture; and the Directorate of Mineral Economics through which the DME deals with statistics and mineral economics in relation to gold. The statistics section collects and assimilates production, local sales, export sales and labour data in relation to gold mines and recovery works. The DME also monitors developments in the gold mining industry regarding both mineral economics and policy. The department disseminates mineral economic statistics and information on developments in reports, annual reviews and bulletins. If the Precious Metals Bill (See Chapter 6 for further details) is enacted in its current form, the Minister of Minerals and Energy (through the proposed Diamonds and Precious Metals Regulator) will assume administration of the Precious Metals legislation, except for exchange control and security-related matters. Mining Qualifications Authority (MQA) The MQA is a statutory body made up and funded by the State, and by employer and employee organisations in the South African mining industry. It was established as a result of the South African Qualifications Authority (SAQA) Act 58 of 1995 and the Mine Health and Safety Act 29 of 1996. The MQA advises the Department of Minerals and Energy on matters relating to education and training standards and qualifications in the mining industry. It has adopted a constitution, set policy and devised a business plan.

The Department of Minerals and Energy reports to and advises the Minister, who, in consultation with the cabinet, takes final responsibility for policy...

The Mining Qualifications Authority (MQA) is a statutory body made up and funded by the State, and by employer and employee organisations in the South African mining industry...

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The MQAs objectives are to: develop the mining industry; promote a safe, healthy, competitive and productive industry; promote access to education and training for all who participate in the industry; and redress inequalities of the past, especially in training and education. The MQA has five core functions. These are to: develop and implement a skills plan specific to the mining sector; develop standards and qualifications for the sector; establish, register, administer and promote learnerships and apprenticeships; maintain quality and learning provisions; and regulate the distribution of grants from the Skills Development Levy. In order to meet the need for a higher level of skills in the mining and minerals sector, the MQA, via the National Skills Fund (NSF), offers bursaries to students who are currently registered at a university or at a university of technology. The MQA/NSF bursary funds are available for 2002, 2003 and 2004. MQA-supported fields of study include: mining engineering; mine survey and mapping; metallurgical engineering; chemical engineering (with minerals processing); mechanical engineering; electrical engineering (heavy current); geology; jewellery design and manufacture; environmental studies; analytical chemistry; and industrial engineering; The MQA is also discussed in Appendix 3 in connection with training and skills transfer. 2.10.3 Trade unions National Union of Mineworkers The National Union of Mineworkers (NUM) is the largest union in the mining industry and the largest affiliate union of the Confederation of South African Trade Unions (COSATU). It was established on 5 December 1982 in Klerksdorp. The union initially served four regions the Free State, Klerksdorp, Westonaria and Carletonville, and had an initial membership of 14,000. As at July 2004, the latest data available, membership totalled 264,659 and according to COSATU, 80% of gold mine workers are members of NUM or other trade unions. The regional breakdown of NUM members is shown on the chart on the right: The union consists of the following structures: shaft stewards and shaft or workplace committees; branch committees; regional committees; the National Executive Committee (NEC); a central committee; and the national congress. The National Skills Fund (NSF) offers bursaries to students who are currently registered at a university or university of technology...

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The objectives of the union are to: recruit and unite into a single labour organisation all workers employed in the mining and energy industries in order to enhance their economic and social welfare; improve the wages and terms and conditions of employment of members through collective bargaining; protect job security of members; improve the political, social, economic interests and material welfare of former, current and prospective members of NUM and that of workers and labour organisations in general; foster co-operation among all workers in the mining and energy industries and other industries; establish contacts and relationships with other trade unions, trade union federations and labour organisations nationally and internationally for the benefit of the members; and embark on other lawful activities which are in the interests of the NUM and its members and which are consistent with its constitution. NUM remains the largest recognised collective bargaining agent in South Africa... NUM remains the largest recognised collective bargaining agent in South Africa, representing the mining, construction and electrical energy sectors and is the largest affiliate of COSATU. The NUM is funded by individual member subscriptions, which its constitution states must not be greater than 1% of the individual members monthly basic pay. Collective bargaining with employers remains the unions primary function, although the organisation involves itself in job upgrading and re-skilling, education and training, social security, housing and providing legal services to its members. It also makes representations to government on issues of industrial and political relevance to its members. UASA UASAs roots date back to the beginning of the century, but it came into being in its current form only on 1 April 1998, with the amalgamation of the Administrative, Technical and Electronic Association of SA (ATEASA) and the Officials Association of SA (OASA). It is the second largest union representing workers in the mining industry, and its membership is primarily composed of white-collar workers in clerical and technical job categories. Current membership, excluding pensioners, is 98,000, of which approximately 53% are black, coloured and Indian and 47% white. UASA aims to provide the following benefits to members: advice and assistance on all matters pertaining to the members conditions of employment, including pension funds, medical benefits, labour legislation, etc; free participation in a funeral benefit scheme covering the members family; maternity benefits; unfair Dismissal Assistance Fund, which could assist members to tie over between an unfair dismissal and the final outcome of any court action; training of Branch Committee members by means of the Associations recommended Industrial Relations Course, which is accredited by the South African Labour Development Trust (SALDT); representation of members during disciplinary and grievance procedures and assistance and legal advice in respect of any work-related accident and/or employment problem; assistance to the dependants of a deceased member to ensure that they receive all the benefits they are entitled to; and assistance by a registered psychologist in the event of members losing their employment by no means of their own doing.

UASA came into being in its current form on 1 April 1998...

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Solidarity Solidarity was established in 2001 with the incorporation of the South African Workers Union, (SAWU), Denel Union, Transporters Union and the Forestry and Plantation Management Union into the original Mineworkers Union. In 2002 the Association of Meteorological and Allied Workers joined Solidarity. The original Mineworkers Union was established in 1913 and it expanded in the 1980s to include the chemical, electrical, telecommunications and steel industries. Membership comes predominantly from those industries skilled white production employees, usually blue-collar workers such as miners and artisans. Membership totals 130,000 including employees from the mining, steel, telecommunications, engineering, chemical, motor, rubber and general industries. The main objectives of Solidarity are to: offer traditional trade union services; offer financial and insurance services to its members; and address training and re-skilling needs. SAEWA The South African Equity Workers Association (SAEWA) was established in 1937 and in its early days membership was primarily drawn from the electricity industry. It later expanded to include members in the food and beverage and mining sector. In 2001 it merged with the South African Allied Workers Union (SAAWU) and in 2003 with the United Metal Industries and Allied Workers Union of South African (UMIAWUSA). SAEWA has in the region of 30,000 members, drawn from a range of industries. In the mining industry its membership is drawn largely from electricity workers. SAEWA's objectives include: protecting and furthering the interests of members in relation to their employment; providing legal assistance to members in connection with their employment; encouraging the settlement of disputes through conciliation; assisting members to obtain employment; encouraging a higher degree of skill among members; and promoting, supporting or opposing, as deemed expedient, any proposed legislation which might affect the interests of members. The South African Equity Workers Association (SAEWA) was established in 1937...

Solidarity was established in 2001...

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CHAPTER 3 CHAPTER 3
Photograph courtesy: Rand Refinery Limited

Contents: 3.1 3.2 3.3 INTRODUCTION SUMMARY OF THE SOUTH AFRICAN GOLD REFINING INDUSTRY SOUTH AFRICAN REFINING IN AN INTERNATIONAL CONTEXT 3.3.1 3.3.2 3.3.3 3.4 3.4.1 3.4.2 3.5 3.6 The LBMA Placing South Africa in a global context Capacity and capacity utilisation Primary refiners Recyclers 48 48 49 49 49 50 51 51 53 54 55 56 58 58 58 58 59 59 60 61 61 62 62 63 63 63 64 65

OVERVIEW OF THE LOCAL REFINING INDUSTRY

EMPLOYMENT PROFILES PRODUCT RANGE 3.6.1 3.6.2 3.6.3 3.6.4 Bars Jewellery products Coin blanks Dental alloys Ownership of gold during the refining process Operating costs Treatment terms The Rand Refinery price of gold Mark-ups

3.7

FINANCIAL PERFORMANCE 3.7.1 3.7.2 3.7.3 3.7.4 3.7.5

3.8 3.9

RECYCLING FEED ASSAYING

3.10 BARRIERS TO MARKET ENTRY 3.11 REFINING TECHNOLOGY 3.11.1 3.11.2 The Miller Chlorination Process and Wohlwill Electrolysis The Minataur Process 3.12 ENVIRONMENTAL ISSUES

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3.1. INTRODUCTION In terms of both value and volume, gold refining in South Africa is concentrated in the hands of two primary participants: Rand Refinery Ltd and Musuku Beneficiation Systems1. Throughout this chapter, they are referred to as the primary refiners. There are a number of fundamental differences between the two refiners in terms of their history, ownership, feed, business structures, services and products, which are discussed in more detail. In addition to the primary refiners, there are at least another seven known, but very small2, refiners operating in the country. While three of these companies report that they refine output from the small-scale and informal mining sectors3 and material arising from dump treatment, all seven small refiners concentrate on the recycling of old gold jewellery scrap and process scrap generated during the jewellery manufacturing process, as well as medical and dental waste containing recoverable precious metals. Throughout this chapter the small refiners are referred to as recyclers. Interviews with industry sources revealed that there are a number of illegal smelters and refiners operating in and around the vicinity of the countrys gold mines. The activities of these illegal operations are not quantifiable and have not been accounted for in the statistics and analysis that follow. They do not form part of the formal value chain as described in this review. Detailed interviews were conducted with six of the sector participants, including the two primary refiners. The results indicate different business structures; the primary refiners being distinct from the recyclers in the volume of metal refined, as well as in terms of cost structures, material and feed sourcing, customer bases and end products.

Gold refining in South Africa is concentrated in the hands of two participants, Rand Refinery and Musuku Beneficiation Systems...

There are at least another seven known, but very small refiners in the country...

Illegal smelting houses and informal refiners operate in and around the vicinity of the countrys gold mines...

In 2004, the primary refiners and recyclers treated 445t of fine gold...

3.2. SUMMARY OF THE SOUTH AFRICAN GOLD REFINING INDUSTRY In 2004, the formal sector primary refiners and recyclers treated 445t of fine gold. The breakdown of the origins of this fine gold and what it was used for are shown in the following table. Flows of gold to and from the refiners and recyclers in South Africa in fine gold 2004 Gold to refining from: t % South African mine output 328.9 73.8 Other mine output (Non-RSA)1 100.5 22.6 Dump treatment (RSA)2 13.1 2.9 Secondary recycling3 2.8 0.7 Total 445.3 100.0 Gold from refining to: 400oz bars Kilobars and other bars Local jewellery manufacture Coins Dental alloys Electronics Total
Note: Totals are net of process scrap Data source: Virtual Metals.

198.2 234.5 9.6 2.9 0.05 0.01 445.3

44.5 52.7 2.2 0.7 0.0 0.0 100.0

Notes: 1. Other mine output originates from countries other than South Africa. See Chapter 2 for details of this gold production. 2. Dump re-treatment is the reprocessing of previously mined waste. 3. Recycling is the processing of gold-containing material such as electronic waste and old jewellery scrap but excludes fine gold contained in scrap generated during the process of jewellery manufacture, termed processing scrap. These sources of gold for refining are dealt with in more detail later in this chapter.

1 2 3

See individual company profiles in the Research Directory as well as the rest of this chapter for further details. Small in terms of refining capacity and output, measured in kilograms rather than tons. No details were given with respect to this specific source of gold. Chapter 2 deals with the small-scale gold miners operating in South Africa.

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By far the majority of refined gold output (97% in 2004) is made into bars of various specifications. The bars were all exported directly to customers (mainly in India and Dubai), and also to the international bullion banks (mainly in London and Europe). A further 9.6t of fine gold (or 2.2% of total gold refined) was fabricated into products for the jewellery sector, such as grain, plate and wire4 .This percentage refers to total gold refined in South Africa, which includes output from mines outside South Africa. Of mine output from South Africa only5, the percentage of gold fabricated into jewellery by local manufacturers in 2004 was 2.9%. In 2004, a further 2.93t (or 0.7% of total gold refined) was struck into coinage and the final 0.05t was applied to industrial and medical applications. Chapter 5 provides further details on gold coins and industrial applications. 3.3 SOUTH AFRICAN REFINING IN AN INTERNATIONAL CONTEXT 3.3.1 The LBMA The London Bullion Market Association (LBMA) represents the interests of those international gold dealers, traders and bullion banks operating through the London gold market6. It was established in 1987 and issues a list of accredited refiners of which there are currently 56 around the world. These are refineries that have met specific criteria with respect to their refining standards and the quality of their products, and have been awarded London Good Delivery status7, giving them international recognition for quality and purity. The main requirements for achieving London Good Delivery status are: a record of at least three years of producing refined metal; production of a minimum of 10t of gold and/or 30t of silver per annum; a net worth of at least 10 million; evidence of ownership and directors; a suitable endorsement from the central bank in the refiners country of operation; and proven and consistent quality and purity of product. Until recently, the Rand Refinery was the only South African operation with LBMA accreditation. Musuku Beneficiation Systems was awarded LBMA accreditation in September 2005. Rand Refinery is also one of only five refineries in the world to have been appointed by the LBMA as a Good Delivery Referee, responsible for the testing of samples from Good Delivery refiners in support of the LBMAs Good Delivery system. In March 2005, Rand Refinery received Dubai Good Delivery Status. 3.3.2 Placing South Africa in a global context Placing South African refining in a global context is not a simple task. Information on precious metals refining, market shares, installed capacity and capacity utilisation is considered proprietary and is difficult to obtain. An additional problem relates to identifying complete records of refining operations internationally. While it is possible to construct a database covering the known primary refiners and recyclers, there are literally hundreds of smaller operations whose business profiles cover a wide range of product lines, but which are essentially involved with the recycling of gold scrap8. This is particularly true of areas like the Indian subcontinent where such operations (dealing most commonly with less than 1kg of gold per annum) operate outside the formal sector.

In 2004, 97% of refined gold output was made into bars...

Only 2.2% of total gold refined was purchased by South African jewellery manufacturers...

Both Rand Refinery and Musuku Benificiation Systems have achieved LBMA accreditation...

Rand Refinery is one of only five refineries in the world to have been appointed by the LBMA as a Good Delivery Referee...

4 5 6 7 8

This tonnage is net of process scrap and Chapter 4 deals with the topic in more detail. Excluding secondary recycling and mine supply from other countries refined in South Africa but including local dump re-treatment. The LBMA publishes gold and silver turnover through the London market and these are charted Appendix 4. London Good Delivery status has become an international benchmark of quality and purity as it applies to refineries and their products. A class of operations in South Africa that this review defines as the recyclers.

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Review draws on global database comprising 162 known refineries...
This review draws on a global database consisting of 162 known refineries9 and recyclers. It analyses only commercial operations within the formal sector for which it is possible to obtain data. This global database also includes precious metals recovery associated with base metal refining, for example, gold and silver recovery from copper, lead and zinc refineries. The three tables that follow present the analysis on a broad regional basis, although it should be noted that in the figures quoted for Africa, South Africa predominates. Apart from the South African refineries, there is also limited refining capacity in Zimbabwe. The figures for Africa also include three South African refineries that process PGM concentrates containing gold as a by-product.

Africa accounts for 8% of the worlds gold refineries...

Regional comparisons show that an estimated 8% of the worlds gold refineries are found in Africa. Refining summary (number of refineries) Africa Asia and Indian sub-continent Australasia Eastern Europe Latin America Middle East North America Western Europe Total
Data source: Virtual Metals.

Number 13 36 7 12 13 4 29 48 162

% 8 22 4 7 8 3 18 30 100

... and 12% of global refining capacity...

3.3.3 Capacity and capacity utilisation The 162 global refining operations collectively have the capacity to treat 6,652t of fine gold per annum. The regional breakdown of this capacity is tabulated below: Refining summary (% global capacity) Africa Asia and Indian sub-continent Australasia Eastern Europe Latin America Middle East North America Western Europe Total
Data source: Virtual Metals.

t 772 1,027 341 662 207 775 778 2,091 6,652

% 12 15 5 10 3 12 12 31 100

Of this total, Africa represents 11.6% (or 772t) of which South African refining capacity represents 98% (or 757t).

In 2004, global gold refining capacity utilisation was estimated at 55%...

In 2004, global gold refining capacity utilisation was estimated at 55%10. This figure is somewhat higher than historical global capacity utilisation averages of 45%-52%. The reason for this increase is that, in 2004, larger than normal amounts of secondary material were returned for refining in direct response to higher Dollar gold prices, especially during the second half of the year.

9 10

Including the 56 operations that have LBMA London Good Delivery Status. Virtual Metals estimates global mine supply and secondary recycling at 3,657t in 2004.

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Refining capacity utilisation also shows some regional variances. Refining summary 2004 Africa Asia and Indian sub-continent Australasia Eastern Europe Latin America Middle East North America Western Europe Total
Data source: Virtual Metals.

Output (t) 475 454 928 185 105 155 436 920 3,657

Capital utilisation (%) 61 44 37 28 51 20 56 44 55

In this context, the following should be noted: Africas capacity utilisation is slightly higher than other regions. This is because Rand Refinery has in recent years won refining contracts with mines in Ghana, Mali and Tanzania, and in its financial year ending September 2004, processed 142t of fine gold from African countries outside South Africa11; although Eastern Europe (the former CIS) has substantial installed capacity, refineries based in these countries are forbidden by law to tender for international refining contracts and have to rely on local feed; Western European capacity utilisation has increased since the closure in 2004 of Johnson Mattheys Royston plant in the United Kingdom; and capacity utilisation in the Middle East is particularly low since this data includes three new refineries able to treat a total of 700t gold per annum recently commissioned in Dubai. Irrespective of variations in regional capacity utilisation, the global gold refining industry remains in a state of over-capacity and this has been the case for many years. Despite this, there have been newcomers to the industry, for example Musuku Beneficiation Systems in South Africa and the new refineries based in Dubai. Consequently, tenders for refining contracts are aggressive, with treatment terms12 offered by the refineries being particularly competitive. When tendering for international primary production, the refineries attempt to improve their tenders by offering attractive insurance and transport terms. 3.4 OVERVIEW OF THE LOCAL REFINING INDUSTRY Analysis of the known refineries in South Africa highlights two distinct market sectors, namely the two primary refiners and the recyclers. Fact sheets detailing the business profiles and product lines of the two primary refineries and four of the recyclers can be found in the Research Directory. 3.4.1 Primary refiners Rand Refinery has been in existence since 1921 and is the result of a collaborative effort by the major South African gold producers. Musuku Beneficiation Systems is a relative newcomer to the business having been established in 1997, when Harmony withdrew from Rand Refinery. Harmony collaborated with minerals technology service provider Mintek in 1997 to build a small-scale plant that was later expanded with funding from European defence contractor BAE Systems, which supported the project as part of its defence contract offset obligations as overseen by the Department of Trade and Industry. The rationale behind the decision to establish Musuku was based on two premises. Harmony believed that it was possible to differentiate Harmonys gold output from that of other gold producers and to brand its bar products, and that as a result the company could secure a premium for its products.

Africas capacity utilisation is slightly higher then other regions...

The global gold refining industry remains in a state of over-capacity, as has been the case for many years...

Rand Refinery has been in existence since 1921 and is the result of collaborative effort of major South African producers...

11

12

Data source: Rand Refinery 2004 Annual Report. It should be noted that figures cited in the review relate to calendar years, and thus this Rand Refinery figure is not directly comparable. See later in this chapter for further details on treatment terms.

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Rand Refinery is owned by AngloGold Ashanti (53%), Gold Fields (33%), DRDGOLD (10%), Avgold (2%) and Western Areas (2%)...
Harmony believed that it would be cost-effective to refine its own output. Rand Refinery still treats Harmonys silver production and has assisted Harmony with its gold refining throughput when process problems at Musuku have required Harmony to process gold at Rand Refinery.

While Musuku Beneficiation Systems is 100% owned by Harmony Gold Mining, the ownership structure of Rand Refinery is as follows: Rand Refinery ownership (September 2004) AngloGold Ashanti Gold Fields DRDGOLD Avgold Western Areas
Data source: Rand Refinery Ltd.

% 53 33 10 2 2

The table below summarises the differences in technology usage, funding, products and client base between the two. Musuku Beneficiation Systems Date established 1921 1997, expanded in 2000 Funding Shareholders Harmony Gold, Mintek and BAE Systems (latter funded expansion only) LBMA London Good Delivery Status Yes Yes 2005 LBMA Good Delivery Referee Status Yes No Refining Process Miller Chlorination Minataur Smelting Yes No Carbon Incineration Yes No Silver Electro-refining Yes No Gold Electro-refining Pending No Refinery Feed Dor Cathode Slime Feed Source Shareholders production South Africa plus competes (Harmony internationally for dor operations only) and other material Product Range: 400oz Good Delivery Bars Yes Not originally - only recently awarded LBMA status Kilobars Yes Yes Other bars Yes Yes Legal tender coins Yes No Coin blanks Yes No Jewellery alloys Yes Yes Dental alloys Yes Yes Assaying services Yes No Location Guateng, urban At Harmony mine in Free State
Data source: Interviews.

Differences between the two primary refiners Rand Refinery Limited

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98% of Musukus feed is in the form of cathode slime, a product of electrorefining13. Rand Refinerys feed is 90% dor14 and the balance primarily cathode slime. Rand Refinery also treats mine output from non-South African mines in Ghana, Mali, Tanzania and Argentina, and as such is an exporter of refinery services. Musukus feed is sourced only from Harmony group gold production in South Africa. The recycling of old jewellery scrap, jewellery sweepings, medical and dental waste and electronic scrap represents a small proportion of the feed taken by the primary refiners. In volume terms, this secondary feed accounts for 2% of the refineries throughput. Both refineries reported that increasing volumes of electronic scrap were becoming available in the local market. Currently only Rand Refinery has the ability to treat this material. For Rand Refinery, gold represents 96% of the companys turnover by value. The balance is made up from silver. For Musuku, in value terms, the gold to silver ratio is lower than that of Rand Refinery at 85% gold and 15% silver. The difference between the two is a reflection of the different primary feed the refineries receive from their mining clients. Kilobars that are exported directly into India make up in excess of 95% of Musukus final product. A further 1% is made up of bar products other than kilobars such as 100g bars. This output is also destined for export, to the Indian sub-continent, the Middle East or the Far East. The remaining 4% of Musukus output is destined for the local market in the form of jewellery alloys and a limited amount of dental alloys. Rand Refinery shows a similar high volume export business with 400oz bars for the London market, and kilobars and 100g bars, primarily for the Indian market, (either directly or indirectly via the major international bullion banks), as well as Switzerland, Italy, Turkey and Dubai. The small bars and 400oz bars make up some 97% of Rand Refinerys product line. The global destination of Rand Refinerys products is shown in the graph on the right. Rand Refinery and Musuku between them account for an estimated 65% of the kilobar and small-bar market in India with other international primary refiners, such as Pamp SA, Argor-Heraeus SA, Metalor Technologies International SA, Valcambi SA and Australian Gold Refineries (AGR) making up the balance. The profit margins achieved on kilobars and small bars15 are low, and in order to maintain overall profitability, the refiners need to sell and ship gold bar products in large volumes. 3.4.2 Recyclers There are seven known recyclers formally operating in the gold business in South Africa, as well as an unknown number of illegal operations in existence, largely in and around the vicinity of the mines, processing stolen gold, ore and gold concentrates. Only information relating to the seven known recyclers has been included in this discussion. Cumulatively, the seven recyclers have the capacity to treat and return to the local market just under 2t of fine gold per annum. In 2004, they supplied 1t of fine gold which was destined for the jewellery manufacturing industry.

98% of Musukus feed is in the form of cathode slime; 90% of Rand Refinerys feed is dor...

Recycling represents a small portion of feed by primary refiners...

Cumulatively, the recyclers have the capacity to treat and return to the local market just under 2t of fine gold per annum...

13

14 15

Electro-refining: the metal to be purified is made the anode in an electrolytic cell and it is dissolved by the application of a current into a usually acidic aqueous electrolyte or a molten salt. At the same time, the pure metal is deposited on the cathode. The process is carried out under conditions such that most impurities will either precipitate as sludge or remain dissolved in the electrolyte. The product of the smelting process sent for further refining the content of which varies but normally contains at least 85% gold. See the product list in the Rand Refinery fact sheet for details.

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Research showed a range of different business practices, customer bases and product lines, with each recycler operating in a different niche of the business. Examples include: recyclers whose core business is assaying but who will also treat precious metals scrap; recyclers who treat mainly medical waste to recover silver but who will also take jewellery sweepings and process scrap; recyclers who deal only with the jewellery industry and will not treat industrial waste; recyclers who operate out of one regional centre only, serving only local jewellery manufacturers; recyclers who have their main processing plant in one region, gather material from around the country and thus service a wide network of clients from the major jewellery manufacturing areas; and recyclers servicing only the very small jewellery manufacturers who use fine gold measured in grams.

Secondary recyclers are all family-owned businesses... In 2004, the refining and recycling sectors in South Africa directly employed 532 people...

These recyclers are all privately operated businesses that are family-owned. 3.5 EMPLOYMENT PROFILES The collective gold refining and recycling sectors in South Africa directly employed an estimated 532 people in 2004. Demographic profile of primary refiners and recyclers Primary 2004 refiners Recyclers Total Employees 323 209 Men (%) 83 64 Women (%) 17 36
Data Source: From interviews.

Total 532 76 24

On a weighted average basis, the gold refining and recycling industry is maledominated (76% of all employees are men). The gender ratio in the primary refineries is 83:17 (men to women) and in the recyclers this ratio is 2:1 in favour of men.

Primary refiners, on a weighted average basis, produce more than six times as much fine gold per staff member as the recyclers...

Primary refiners on a weighted average basis produce more than six times as much fine gold per staff member as the recyclers, at 38kg and 6kg respectively, indicating the economies of scale of operating a large refinery compared with the small recycling plants. Half the staff members working in the primary refineries are black. Racial profile (%) Primary refiners 43 50 5 2 100 Recyclers 43 31 26 0 100 Total 43 42 14 1 100

White Black Coloured Indian Total


Data source: Interviews.

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The educational profile of employees within the refiners and recyclers is shown below: Education (%) Primary refiners 26 22 52 100 Recyclers 30 32 38 100 Total 27 26 47 100

47% of employees in the refining and recycling business have a tertiary qualification...

No matric Matric Tertiary Total

Data source: Virtual Metals analysis of interviews

Tertiary education includes diplomas or non-university post-matric training from universities of technology (previously called technikons). The higher level of tertiary qualifications among employees within the primary refiners reflects the skills levels needed to ensure smooth production and fabrication as well as to run the laboratories and assaying facilities. While some of the recyclers may not offer assaying as a service to clients, they still complete assays for internal purposes and therefore employ a percentage of laboratory staff or technicians. Job descriptions (%) Primary refiners 16 3 22 17 42 100 Recyclers 20 25 22 14 19 100

Admin Sales Lab/Tech* Management Production Total

Data source: From interviews. * Technical refers to assaying staff, metallurgists and laboratory technicians.

The recyclers employ a high proportion of sales staff relative to their administrative staff. These figures include company representatives who spend much of their time on the road servicing a network of clients. Their primary role is the collection of jewellery scrap and the marketing of their recycled alloys. Since the primary refiners rely on large gold mining companies for the greatest part of their refining feed, they have less need for sales and marketing staff to service such business. 3.6. PRODUCT RANGE The primary refiners offer a range of semi-finished and finished fine gold products. These products include bars, coins, jewellery alloys and dental alloys. The recyclers focus mainly on the production of commonly used jewellery alloys.

Recyclers employ a high portion of sales staff relative to administrative staff...

Refiners offer a range of semi-finished and finished fine gold products, while recyclers focus mainly on the production of commonly used jewellery alloys...

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3.6.1 Bars Gold bars are either minted or cast: cast bars are manufactured by the casting of molten gold into a mould of specific dimensions. The identifying marks16 are then applied manually or by press; and minted bars are struck from blanks (templates) that are stamped out of specific dimensions from a flat strip of gold in the same way as coins are struck from blanks. Identifying marks are usually applied during the minting process. Like gold coins, the dimensions of minted bars are precise. In addition to these broad definitions, the international gold industry also classifies gold bars by weight with large bars weighing 1,000g (1kg) or more and small bars weighing less than 1,000g. The purity or gold content of the bars is usually marked on the bar in parts per 100, 1,000 or 10,000 as follows: 99.99 99.99 parts gold per 100; 999.9 999.9 parts gold per 1,000; or 9,999.9 9,999.9 part gold per 10,000. Cast bars include 400oz bars, kilobars, 100g bars, 10 and 5 tola bars and 10 and 5 tael bars17. Historically, the two primary refineries made significant sales of 10 tola bars and 5 tola bars. The 10 tola bar was widely traded in India, Pakistan and the Gulf. However in 2003, the Indian authorities changed the local tax regime which halted demand for the tola bars. Specifically, they centralised the VAT system in India which meant that the tola bar became subject to VAT. Indian consumers ceased buying the tola bar and switched to 100g bars and kilobars which were not subject to VAT. Both primary refiners in South Africa adjusted their manufacturing emphasis to meet this shift in Indian consumer preferences.

Gold bars are either minted or cast...

In 2004, sales of gold bars from South Africa were predominantly kilobars (51%)...

As a consequence, sales of gold bars from South Africa in 2004 were predominantly kilobars (51%) and 400oz bars (46%). In 2004, the two primary refiners reported no sales of tael bars or minted bars. Analysis of South African gold bar sales 2004 Cast bars 400oz bars: 99.9 London Good Delivery 99.5 London Good Delivery Sub-total Kilobars: 99.9 99.5 Sub-total 500g bars 99.5 100g bars 99.9 10 Tola bars Sub-total Total
Data Source: Rand Refinery Limited and Musuku Beneficiation Systems

t 4.5 193.7 198.2

% 1.05 44.77 45.81

83.6 138.0 221.6 0.3 12.0 0.5 12.8 432.7

19.32 31.90 51.22 0.08 2.77 0.12 2.97 100.00

Cast bars In South Africa, only Rand Refinery and Musuku cast gold bars and, of the two, Rand Refinery has the widest product range. The dimensions and specifications of Rand Refinerys cast bars are detailed in the table below and are typical of similar bars fabricated elsewhere by other international refiners. Musukus product line includes kilobars and 100g bars of the same dimensions and specifications as those cast by Rand Refinery.
16 17

Purity, weight, serial number and refiners mark; see later for further details. Tola is an Indian unit of weight: 1 tola = 0.375 oz or 11.664g. Tael is a Chinese unit of weight: 1 tael = 1,203oz or 37,429g.

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Five weights of cast bars, namely 400oz bars, kilobars, 100g bars, 500g bars and tola bars, are fabricated by the primary refiners. 400oz bars are cast and, to be accepted as London Good Delivery, they must conform to the following specifications:18 the fine gold content must fall within a range of 350oz and 430oz (10.9 to13.4 kg); bar purity must not be less than 995 parts gold per 1,000; bars must bear the marks of the refiner/assayer, the fineness of the gold content and a serial number unique to the bar; and bars must be smooth, free from surface cavities and bubbles. They must also have rounded edges and must be easy to stack and handle. The kilobar is the worlds most widely manufactured and traded gold bar, being globally the most widely recognised and accepted. They are cast in three purities 999.9, 999 and 995 parts gold per 1,000 purity. The Rand Refinery kilobar specifications are shown in the table below. Musuku also produce kilobars in 995, 999 and 999.9 parts gold per 1,000. The 100g bars and, to a lesser degree, 500g bars, have become increasingly popular in India, particularly since changes in VAT legislation. Musuku produces 100g bars in 995, 999 and 999.9 parts gold per 1,000. Tola bars are still fabricated by Rand Refinery in 10 and 5 tola weights, although following the changes in the Indian VAT structure, demand for these bars has declined. Rand Refinery cast bars Purity Dimensions (mm) Top Base Serial numbers 1st Year of current shape Purity Dimensions (mm) Serial numbers 1st Year of current shape Purity Dimensions (mm) Serial numbers Purity Dimensions (mm) Serial numbers Purity Dimensions (mm) Serial numbers Purity Dimensions (mm) Serial numbers Purity Dimensions (mm) Serial numbers 400oz min 995 or 999.9 260 X 80 X 40 240 X 60 X 40 2 letters, 4 numbers 1921 Kilobar min 995 or 999.9 116 X 51.5 X 9.5 2 letters, 4 numbers 1959 100g bar 999.0 45 X 27 X 4 As required 10 Tola bar 999.0 45 X 27 X 5 None 5 Tola bar 999.0 31 X 19 X 4 None 10 Tael bar 999.0 89 X 40 X 6 None 5 Tael bar 999.0 70 X 29 X 5 None Quotable quotes: There is no money to be made in small bars, so you have to go for volume. Your only chance to achieve a reasonable margin is in the semifabricated products, but here your market is limited to the local environs which we believe is capped by the prohibition on owning unwrought gold and the imposition of value added tax. Major refiner

The kilobar is the worlds most widely manufactured and traded gold bar...

Data source: Rand Refinery Limited and The Industry Catalogue of Gold Bars Worldwide, Grendon International Research, 1998.

18

LBMA good delivery specifications: http://www.lbma.org.uk.

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Minted Bars The three most common minted bars are 10, 50 and 100g bars. Rand Refinery first began minting these bars in 1999, in 999.9 parts gold per 1,000. While these bars are available, no sales were recorded in 2004.
3.6.2 Jewellery products The two primary refiners produce a range of gold products for jewellery manufacture. These products are in the form of grain, sheet, wire, foil, strip and plate of various alloys termed semi-finished products or semis. Jewellery manufacturers purchase these products depending on their manufacturing process.

The two primary refiners offer a wide range of gold products for jewellery manufacture...

The two primary refiners offer a wide range of these products in different caratages and colours. As an example, the range of grain offered by Rand Refinery is demonstrated in the table below: Rand Refinery jewellery alloy Alloy Code Colour Melting grain Range C 9 Carat 09DD Yellow 900 - 950 9 Carat 09J Yellow 880 - 960 9 Carat 090A5 Yellow 980 - 1,000 9 Carat 09CW Medium white 980 - 1,050 9 Carat 09LX White 950 - 1,000 9 Carat 09RJ Rose 960 - 1,000 14 Carat 14J Yellow 935 - 980 14 Carat 14LX White 980 - 1,020 14 Carat 14RJ Rose 960 - 1,000 18 Carat 18J Yellow 930 - 980 18 Carat 18D Yellow 970 - 1,000 18 Carat 18SW Soft white 1,100 - 1,250 22 Carat 22J Yellow 950 - 980
Data source: Rand Refinery Limited.

Hardness Applications Semi-Soft Casting Medium General purpose Medium Casting Medium Casting, 2% Nickel Semi-Soft Casting Medium General Medium General purpose Semi-Soft Casting Medium General Medium General purpose Semi-Soft Casting Soft Casting, 17% Pd Medium General purpose

Grain is widely used by jewellery manufacturers since it can be bought in small quantities and is applied to casting techniques. Strip and sheet is applied to stamping, and wire for chain-making. 3.6.3 Coin blanks Coin blanks are manufactured solely by Rand Refinery for the striking of Krugerrands. (See Chapter 5 for further information). 3.6.4 Dental alloys The primary refiners also produce a range of dental alloys. (See Chapter 5 for further information). 3.7 FINANCIAL PERFORMANCE The financial performance of both the local and international refining industries is not made public and information is difficult to obtain. This section attempts to shed light on the operating cost structure of the two primary refiners and the recyclers, on the refining terms quoted to clients and on mark-ups applied to their respective products.

Rand Refinery manufactures coin blanks for the striking of Krugerrands...

The financial aspects of the local and international refining industries have always been confidential...

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3.7.1 Ownership of gold during the refining process Ownership of gold in the refining pipeline is typically as follows: refining contracts are entered into between refineries and mining clients in which treatment terms are agreed; dor is weighed and assayed at the mine, and the refinery is notified of the quantity of dor to be delivered and its estimated fine gold content; the mining clients account is credited with the value of the anticipated volume of metal contained. Payment terms vary but payment to the mining customer is generally not cleared until dor has physically been delivered to the refinery; the refinery concludes sales to buyers on the basis of the anticipated volume of gold to be delivered; the gold price applied to the refinerys sales of gold to end users is the same as that used to pay the mining client so that the refinery takes no exposure to the gold price. Usually the fix on the day of delivery of gold to the refinery is used as a basis for pricing; the gold is again assayed by the refinery, and any differential between the original anticipated metal content and the final assay is settled in value terms between the refiner and the mining client; and the refined gold is then sent to buyers directly from the refinery or according to the buyers specific instructions. At no stage during this process does the refinery take ownership of the gold being refined. 3.7.2 Operating costs The research was able to highlight certain similarities in the cost structures of Rand Refinery and Musuku, as follows: labour costs for both companies are approximately 42% of total operating costs; raw materials (for example chemicals), represent the second largest cost at 24% of the total; and energy and marketing account for approximately another 5% and 4% respectively. The remaining components of total operating costs include waste disposal, security and other overheads. For the recyclers, the weighted average cost breakdown varies as follows: Typical cost profile: recyclers Raw materials Waste disposal Insurance Labour Rent Energy Marketing Other overheads Total
Data source: Interviews.

At no stage during the process does the refinery take ownership of the gold being refined...

Labour costs for both companies are similar, representing 42% of total operating costs...

% 7.5 2.5 2.5 42.4 10.4 10.8 15.9 8.0 100.0

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With respect to these costs, it is worth noting the following: labour at 42% of the total remains the major cost for both the primary refiners and the recyclers; for the recyclers, marketing is a relatively high cost (at almost 16% of the total) but this includes the cost of sales representatives servicing the regional manufacturing and retail jewellers; energy (both gas and electricity) makes up just over 10% of costs for the recyclers while for the primary refiners it represents a smaller 5%; and waste disposal is a fixed cost imposed by environmental legislation. It involves gaseous emission controls from the refinery and safe disposal of chemical waste generated in the refining process. 3.7.3 Treatment terms The cost and conditions of refining gold quoted by the refiners are referred to as the treatment terms. In an international industry with surplus capacity, primary gold refiners and secondary recyclers will vary their treatment terms in order to gain an advantage. There is therefore no strict formula to which a refiner or recycler will conform when drawing up refining terms. This section describes industry norms in principle, but highlights where treatment terms can vary between the refiners and recyclers. Depending on the circumstances described below, international gold refining treatment charges applied to kilobars and other small bars range between 30-45 US cents per ounce with 100% metal returned. Within this range, treatment terms are around 0.1% over the spot price of gold. The terms described above are general and individual agreements will vary depending on: costs incurred as a result of currency fluctuations should the physical location of the refinery and the customer be in different currency areas; the particular content of the feed and the ratio of gold to other precious metals in the feed. Other precious metals such as silver and PGMs in the feed will be recovered and the customer is paid for these metals, termed by-product credits; the existence of deleterious elements such as mercury, lead and beryllium in the feed. These elements have to be removed during the refining process and the refiner will charge to do this; the existing relationship with the customer; the volume of feed; the regularity of feed; and transportation distances and methods of transport between the client and the refinery.

Labour remains the major cost for both primary refiners and recyclers...

Primary refiners and secondary recyclers will vary treatment terms to gain or maintain a competitive advantage...

Treatment terms are highly confidential...

Treatment terms quoted by primary refiners in South Africa to customers are considered highly confidential. In general, however, terms are broadly in line with those cited as average for the international refining industry. In South Africa, the treatment terms for scrap vary considerably between the recyclers and their customers, and the various categories of scrap19. Research shows that: for high grade scrap (old jewellery in any caratage), customers receive 95% of fine gold recycled in volume terms, or a simple payout on the assay and calculated fine gold content based on Rand Refinery prices of the day20; for jewellery sweepings, the refinery will return 85-92% of fine gold content in either metal or value at the Rand Refinery price of the day, subject to a minimum refining charge of R900 per job lot irrespective of the size of the job; and for washings21, the refiner will return 85%-90% of fine gold content, or the value of that amount of fine gold based on the Rand Refinery prices of the day.

19 20 21

These are defined in more detail in the next section. The Rand Refinery price is discussed in more detail later in this chapter. Washings are the liquid waste resulting from the cleaning of jewellery during fabrication. This waste contains flecks of gold and is routinely recycled.

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Where a recycler is aggressively bidding for scrap, the recycler will discount the treatment charges for targeted customers, returning anything from 97-99.5% of the contained fine gold or the value of that gold (in Rands). In these instances, the companies interviewed acknowledged that this business practice was a loss leader for the company but was implemented where the operation needed feed material. 3.7.4 The Rand Refinery price of gold The Rand Refinery quotes Rand-denominated prices for its gold products to its local customers. This price is set twice-daily and is available on request. Given that the price is used widely by recyclers as a benchmark by which they calculate their own prices to customers, a description of the price mechanism is included: on any business day until noon local time, Rand Refinery will use the afternoon London gold price fix of the previous day and the Rand/Dollar exchange rate at the closing of the previous day; after midday on any business day, Rand Refinery will use the morning London gold price fix of that day and the noon Rand/Dollar exchange rate of the same day; and if, for whatever reason, there is no London morning or afternoon price fix, (usually in the case of bank holidays in the United Kingdom), the Rand Refinery will use the most recent London price fix. 3.7.5 Mark-ups Mark-ups over the gold price achieved by the primary refiners in South Africa for kilobars and other small bars are low, in keeping with premia achieved for small bars internationally. 30 to 45 US cents per ounce is standard for kilobars. 100g bars and other smaller bars may command slightly higher mark-upss. Mark-ups achieved will vary according to international demand for small bars, but not necessarily according to the gold price. With respect to other gold products associated with the jewellery manufacturing industry, mark-ups are higher, but vary depending on: the size of a purchase: the smaller the order, the higher the mark-up; the content of the alloy: alloys containing palladium and platinum command higher mark-ups than those containing copper and silver; the relationship between the customer and the refiner: the longer and more trusted the business relationship, the greater the possibility of discounts; and the frequency of purchase. Research among recyclers indicated the following as examples of mark-ups (over fine gold content) on different products for the jewellery manufacturing sector. It should be noted that these mark-ups are benchmarked to the daily quoted Rand Refinery price for fine gold: 6% and up for low carat (9 carats to 14 carats) solders and findings such as earrings, wings and clasps; 4% and up for high carat solders and findings (18 carats and above); and 36% and up for dental alloy depending on the PGM content. The range of mark-ups over the fine gold content is presented in the following table: Typical price mark-ups for gold alloys by recyclers 22 carat yellow and red 18 carat yellow, red and white 18 carat with palladium 18 carat with platinum and palladium 14 carat red and yellow 14 carat white 9 carat yellow and red 9 carat white
Data source: Interviews.

Rand Refinery sets the price twice-daily for its gold products... Secondary recyclers use the Rand Refinery price of gold as a benchmark...

Mark-ups achieved by primary refiners for kilobars are low, at between 30 and 45 US cents per ounce of gold...

% 4 6 16 36 6 25 6 38

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Quotable quotes: Jewellery sweepings are disgusting. We get these dustbin bags bursting at the seams with anything from six-month old sandwiches to cold drink cans. With all this rubbish, jewellery manufacturers then complain that the recovery grade is so low. Occasionally I refuse to handle the stuff and have sent it back. Recycler 3.8 RECYCLING FEED Those businesses involved in the treatment of recycled gold, including the primary refiners, take secondary feed for recycling from a number of sources. These sources include: old jewellery traded in for upgrading or refashioning from the private sector, or job lots of unsold jewellery from major retailers after a stock clear-out22. In line with the predominant gold caratage of finished jewellery product in South Africa, 95% of this material is 9 carat; jewellery fabricating or process scrap generated during the manufacture of gold jewellery, including filings and polishings, offcuts and rejects. While 95% of this scrap is 9 carat, it can also contain 14 carat and 18 carat scrap. Jewellers process scrap is usually returned by the jewellery manufacturers to the refiners on a monthly basis to assist the manufacturers in managing cash flows. The level of process scrap is relatively large, up to 40% of the volume of gold used by jewellery manufacturers; jewellery sweepings, literally the floor sweepings of jewellery workshops collected and sent in, usually bi-annually, for recycling include material other than precious metals, and the gold content is low (varying between 0.5% to 2% in weight). Under exceptional circumstances, a good sweep can contain 30g of fine gold per kilogram of sweeping, but these instances are rare; wash waters from the jewellery manufacturing process which can contain 4% to 5% gold (in weight); medical waste, primarily from x-ray films which contain silver; dental alloy, which is regularly returned for recycling. This is because there is a high degree of wastage in this application23. To apply a gold filling, a dentist only uses up to 25% of the metal he needs to work with; the balance is immediately recycled; and electronic waste which has been increasing in recent years and which includes not only gold but also palladium and silver. Not all the refiners and secondary recyclers can process electronic scrap. According to interviews, Rand Refinery, treats between 6t and 10t of electronic scrap annually. The precious metals content of this feed can vary, but on average the material currently being returned for recycling can typically contain 200g/t of gold. There is some seasonality in the rate at which jewellery scrap and waste is returned for recycling which is not sensitive to international or local gold prices. This waste is returned with the greatest frequency and in the largest volume during the period just before Christmas. There are two reasons for this: this is when manufacturers are busiest and are generating the maximum in process scrap; and it is during this period that financial pressures on manufacturers are greatest due to demand for working capital. 3.9 ASSAYING There is no formal hallmarking system in place in South Africa and this has been cited as a deterrent to locally made gold jewellery gaining international recognition and acceptance. However, a number of jewellery manufacturers do mark their jewellery with either a caratage stamp or a manufacturers insignia. Furthermore, recyclers such as First Assay offer assaying facilities in addition to those offered by Rand Refinery. Interviews with those companies offering assay services revealed the following costs and associated terms: six hours for results of an assay. If urgently required, an assay can be done in 21/2 hours at an additional cost to the client; typically R65 per assay to yield gold and silver results; certificates are issued on all assays; and dor assays, mainly on behalf of smaller mining companies, are included in the treatment terms ranging from 2% to 5% of the fine gold content.

Some seasonality exists in the rate at which jewellery scrap and waste is returned for recycling...

There is no formal hallmarking system in place in South Africa... A number of jewellery manufacturers mark their jewellery...

22 23

Retailers policies on sending unsold finished jewellery back to the refiners is discussed in more detail in Chapter 4. See Chapter 5 for details.

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Discussions with those regularly involved with assaying indicate that there is undercarating in the South African gold jewellery industry. It was claimed that this was often unintentional with inexperienced jewellers producing their own alloys. At other times, however, this under-carating appears to be deliberate and the large retailers make a practice of having all their stock assayed prior to it going into shop windows. 3.10 BARRIERS TO MARKET ENTRY The continuing global state of over-capacity in gold refining represents the foremost barrier to market entry for potential newcomers to the refining industry, with current capacity utilisation at 55% (although this varies on a regional basis). The decision to commission the Musuku refinery in 1997 was not based on the need for further refining capacity in South Africa or indeed globally, but on Harmonys own marketing and process imperatives. The newly-commissioned refineries in Dubai, with the latest technology24, have added to global refining overcapacity and placed additional pressure on the industry. To win refining contracts, individual operations not only have to be very competitive, but also concentrate on additional logistical options. These include offering potential clients a one-stop service from the mine gate including airfreight and insurance. 3.11 REFINING TECHNOLOGY Two refining processes are currently in use in South Africa. Rand Refinery makes use of the Miller Chlorination Process and Wohlwill electrolysis. Musuku Beneficiation Systems makes use of the Minataur Process. Both these processes are described very briefly below and flow charts of both processes are included. 3.11.1 The Miller Chlorination Process and Wohlwill Electrolysis The Miller Chlorination Process was first developed by Dr F. B. Miller at the Sydney Mint and is widely used internationally in the large-scale refining of gold. It is a pyrometallurgical process whereby gold dor is heated in furnace crucibles. The process is able to separate gold from impurities by using chlorine gas, which is added to the crucibles once the gold is molten. Chlorine gas does not react with gold, but will combine with silver and base metals to form chlorides. Once the chlorides have formed, they float to the surface as slag or escape as volatile gases. The surface melt and the fumes containing impurities are collected and further refined to extract the gold and silver.

Indications are that there is under-carating in the South African gold jewellery industry...

The continuing over-capacity represents the foremost barrier to market entry for potential newcomers...

To win refining contracts, refineries now look at logistics...

Two refining processes currently used in South Africa...

24

See earlier in the chapter for details.

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The Miller Chlorination Process, which can take up to 90 minutes, produces gold that is at least 99.5% pure, with silver being the main remaining component. This gold can be cast into bars, as 99.5% gold purity meets the minimum London Good Delivery requirements of the London bullion markets. However, some customers such as jewellers and other industrial end users require gold that is almost 100% pure, so further refining is necessary. In this case, gold using the Miller process is cast into anodes, which are then sent to an electrolytic plant. The final product is a 99.99% pure gold sponge that can then be melted to produce various end products suited to the needs of customers. The electrolytic method of gold refining was first developed by Dr. Emil Wohlwill in 1874. Wohlwill's process is widely used in major gold refineries and in conjunction with the Miller Chlorination process. The Wohlwill process is based on the solubility of gold and insolubility of silver in an electrolyte solution of gold chloride in hydrochloric acid.

The impure gold is cast into anodes which are suspended in cells, while the cathodes are thin strips of pure gold. By passing an electric current from anode to cathode through the electrolyte solution, the anodes are gradually dissolved and the gold is deposited on the cathodes; any silver, which is insoluble in the electrolyte, and any platinum group metals are precipitated to the bottom of the cells. The sequence takes about two days, following which the gold-coated cathodes are removed, melted and cast into bars. The initial process can produce gold up to 999.5 parts per thousand fine, with further treatment bringing it up to 999.9 parts per thousand. The disadvantage of the Wohlwill process is that it is time consuming. Consequently, most gold is refined using the quicker Miller Chlorination Process, which can take gold to 995 parts per thousand fineness. Where gold of 999 or 999.9 parts per thousand is required, electrolytic facilities at many refineries have been added. 3.11.2 The Minataur Process The Minataur Process was developed by Mintek. In this process the gold-bearing feed is leached in a chloride solution. The resultant material is then subjected to selective solvent extraction to reject impurities and then stripped to produce a purified, concentrated gold solution, from which high-purity gold powder is precipitated by reduction.

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Source: http://www.musuku.com/minataur/flow2.htm

The gold content of the feed can range from about 20% to 90%. Suitable feeds include silver-refining anode slimes, gold-electrowinning cathode sludge, zinc precipitation filtrates, dor bullion and jewellery scrap. Materials with variable gold content can be handled. The Minataur Process allows miners to refine their own high-purity gold on site. The refined product is formed into 99.99 percent or higher purity gold granules. The first Minataur plant was constructed in 1997 for Harmony in Virginia, in the Free State. This plant has been expanded, and now processes all of Harmonys gold output from its South African operations. Subsequently, turnkey plants have been built and supplied to customers in Mexico, the United Arab Emirates and Algeria. The plant in the United Arab Emirates is the largest of these with capacity up to 150t per annum. Plants in Algeria and Mexico are small, with a capacity of 1t to 3t per annum. 3.12 ENVIRONMENTAL ISSUES The refining and recycling industries have two areas of environmental control that apply specifically to their operations. The first is the appropriate disposal of waste products (for example chemical residues) generated during the refining process and the second is atmospheric emission and air quality control. These environmental regulations apply to all the refining and recycling operations in South Africa irrespective of their locations. International environmental management standards under the International Standards Organisation (ISO) can also be applied to the gold refining industry. The ISO is a network of national standards institutes in 153 countries on the basis of one member per country. The Central Secretariat is based in Geneva and the South African member of the ISO is the South African Bureau of Standards (SABS). The ISO standard relating to the environment is ISO 14001. Rand Refinery achieved ISO 14001 certification in April 2001.

The first Minataur plant was constructed for Harmony in Virginia, in 1997...

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Contents: 4.1 INTRODUCTION 4.2 JEWELLERY MANUFACTURING 4.2.1 Size, structure and ownership 4.2.2 Capacity and capacity utilisation 4.2.3 Employment profiles, education and skills 4.2.4 Means of financing 4.2.5 Fabrication costs 4.2.6 Price mark-ups 4.2.7 Exposure to financial variables and access to financial protection 4.2.8 Design considerations and product ranges 4.2.9 Trade bodies, initiatives and publications 4.3 JEWELLERY RETAILING 4.3.1 Size, structure, ownership and vertical integration 4.3.2 Distribution networks 4.3.3 Employment profiles, education and skills 4.3.4 Jewellery retail business profiles and retail strategies (including marketing) 4.3.5 Relationships with suppliers 4.3.6 Imports 4.3.7 Price exposure and financial risk

Photograph courtesy: Harmony Gold Mining Limited

CHAPTER 4 CHAPTER 4

68 69 69 74 76 78 79 80 82 82 84 87 87 89 92 92 97 97 99

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4.1 INTRODUCTION During 2004, primary refiners and recyclers in the formal sector supplied 12.6t of fine gold to the local gold fabricating industry... During 2004, the primary refiners and secondary recyclers in the formal sector supplied 12.6t of fine gold to the local gold fabricating industry. The details are shown in the table below. Gold usage in fabrication Jewellery fabrication Coin fabrication Other fabrication Total Jewellery imports Jewellery exports Domestic sales (including imports) Domestic sales (locally manufactured) * All figures net of process scrap t 9.64 2.90 0.05 12.59 1.28 5.07 5.85 4.57 % 76.6 23.0 0.4 100.0

Data source : Virtual Metals. Note 1: Other fabrication includes dentistry and electronics, both of which are discussed in Chapter 5. Note 2: This jewellery fabrication figure is net of processing scrap gold returned by the manufacturer to the refiner during the fabricating process.

Most of this supply (76.6%) was destined for the manufacturing of jewellery. Official imports of fine gold in the form of finished jewellery products amounted to 1.28t and official exports of fine gold in jewellery products totalled 5.07t. This implies that South African jewellery sales, including imports, amounted to 5.85t of which 4.57t was fabricated locally1. The research method used in preparing this chapter on jewellery fabrication and recycling involved a combination of face-to-face interviews and the analysis of resultant data. Appendix 1 lists those interviewees whose data was used in constructing sectoral databases. The scope of the research undertaken to compile this chapter is detailed below. Manufacturing: Members of the Jewellery Council of South Africa (JCSA) as well as the Council itself and its manufacturing affiliates, the Jewellery Manufacturers Association of South Africa (JMA) and the Cape Jewellery Manufacturers Association (CJMA), were interviewed. The annual volumes of fine gold used by the 34 jewellery manufacturers were collated into a database. Collectively, the 34 companies accounted for 7t of fine gold consumption in 2004. Of these, 20 were interviewed in depth and data was obtained for the remaining 14. Manufacturers known to use the largest volumes of fine gold were selected for interview, giving a representative sample of gold usage of 73% of the fine gold supplied to local jewellery manufacturers by the refiners and recyclers. The interviews also included a number of manufacturers who use relatively small amounts of fine gold in order to contrast the varied business models, market niches, client bases and products of different local manufacturers.

1 Many retail stores in South Africa refer to fine gold jewellery as they differentiate between carat jewellery of a minimum of 9 carat and costume jewellery (less than 9 carat). This review avoids using the term fine gold jewellery as we define fine gold as pure gold of 4 9s fineness (999.9 parts per 1,000 pure gold or 24 carat gold). When referring to jewellery, we use the terms gold jewellery or carat jewellery implying a minimum of 9 carat.

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Retailing: The analysis of the retail sector of the South African gold jewellery industry included the following: compilation into a database of the regional distribution networks of the 13 companies that dominate retail jewellery sales and an analysis of their 951 stores located around the country, which represent just under 77% of the total value of South African jewellery retail sales; interviews with buyers representing 10 of these retail companies, accounting for 73% of total retail sales, and the collation of the data collected into a database; and the analysis of qualitative information gained from these interviews in the discussion. 4.2 JEWELLERY MANUFACTURING 4.2.1 Size, structure and ownership In 2004, South African gold jewellery fabrication at 9.64t accounted for 2.8% of local mine production. According to Virtual Metals global supply/demand balance, with consumption of 9.64t of fine gold in 2004, local fabricators represent 0.35% of total gold consumed in jewellery manufacture globally (2,795t2). Gold jewellery purchased locally is predominantly (95%) 9 carat. The balance is made up of 18 carat gold associated with gem-set items, especially diamonds and tanzanite. The presence of 14 carat gold is associated with tourist sales. Gold jewellery manufactured locally specifically for export to the USA is either 14 carat (50% by weight) or 10 carat (40% by weight) with the balance being 18 carat. Different types of businesses fall under the blanket description of jewellery manufacturer. These manufacturers demonstrate a spectrum of business models, product ranges, customer bases and operational parameters. This review segments the jewellery manufacturing sector into four categories according to their annual fine gold usage. Micro Small Medium Large Manufacturers using 20kg or less per annum Manufacturers using more than 20kg but less than 50kg per annum Manufacturers using more than 50kg but less than 750kg per annum Manufacturers using more than 750kg per annum

In 2004, South African gold jewellery fabrication at 9.64t accounted for 2.8% of local mine production...

Gold jewellery purchased locally is predominantly (95%) 9 carat...

Details of the data sample (34 manufacturers) are tabulated as follows: Size of company Micro (<20 kg) Small (20kg to 50kg) 3 7 10 390 Medium (50kg to 750kg) 5 2 7 1,530 Large (>750kg) Total

Number of companies interviewed 9 Number of companies added data 5 Total companies 14 Total fine gold usage (kg) 98
Data source: Virtual Metals.

3 0 3 5,010

20 14 34 7,028

Virtual Metals estimates for 2004.

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Hobbyists are defined as individuals who practise jewellery fabrication but for whom gold jewellery manufacturing does not represent a primary source of income... Hobbyists, who were included in our research, are incorporated in the micro manufacturers category. Hobbyists are defined as individuals who practise jewellery fabrication but for whom gold jewellery manufacturing does not represent a primary source of income. It is not known exactly how many hobbyists there are in South Africa. However, by law they have to hold valid jewellers permits if they are working in precious metals and thus are accounted for in these statistics.

There were 2,456 valid jewellery permits in issue in South Africa in 2004...

Size of the industry and number employed According to the Gold and Diamond Branch of the South African Police Service, there were 2,456 valid jewellery permits in issue in South Africa in 2004. In order to practise as a fabricator of precious metals jewellery, individuals must, by law, hold a valid jewellery permit. Of this total, 241 licences were newly-issued, an increase of 10.9% in the number of manufacturers over the previous year.
The legislation pertaining to these jewellery permits is discussed in Chapter 6 under the Mining Rights Act of 1967 and its amendments.

Between them, the Cape Jewellery Manufacturers Association (CJMA) and the Jewellery Manufacturers Association (JMA) had 99 members in 2004...

Between them, the Cape Jewellery Manufacturers Association (CJMA) and the Jewellery Manufacturers Association (JMA) had 99 members in 2004.3 Analysis of these membership lists indicates that there were some members of these associations who were not directly involved in gold manufacturing (being exclusively recyclers, or diamond or platinum manufacturers), and some areas of overlap. It was possible to conlude that the CJMA and the JMA between them have 86 gold jewellery manufacturing members. A comparison of the combined memberships and the number of valid jewellers permits currently in issue therefore indicates that, by number, only 3.5% of jewellery permit holders are members of these trade bodies although, by volume of gold usage, the organisations include the three largest manufacturers as members. The gold jewellery manufacturing sector in South Africa has the following characteristics. In terms of volume of fine gold usage, the industry is consolidated. The top 10 manufacturers (medium and large entities) account for 6.5t of fine gold usage annually, or 67% of the 9.6t identified as being consumed by the industry. Of these 10 companies, three account for 5t (52% of total fine gold usage4) and are defined in this review as large manufacturers. In terms of the number of manufacturers, however, the industry is fragmented: the 2,456 valid jewellery permits in issue in 2004 bear testimony to this. It is not clear how many holders of these jewellery permits are manufacturers in that they run workbenches and design and fabricate jewellery, as opposed to jewellers who might undertake jewellery repairs but are neither designers nor manufacturers of jewellery. Goldsmiths who might have a small retail shop with a workbench to handle repairs are still required to hold a valid jewellery permit. Discussions with the recyclers who specialise in supplying fine gold to the micro manufacturers confirmed that they have client bases in excess of 400 entities.

These recyclers acknowledged two factors in this regard: customers buy their fine gold from more than one recycler. There is, therefore an element of overlapping and potential double counting; and there are jewellery manufacturers who source gold from the primary refiners and not the recyclers and, therefore, the recyclers customer bases were not necessarily a true reflection of the total number of jewellery manufacturers.

With respect to the numbers of people employed in the gold jewellery manufacturing industry, the 34 companies for which there is data employed 1,297 permanent employees.

3 4

At the time of writing this report the two Associations were in discussions with respect to amalgamating. The three are: Alan Mair Manufacturing Jewellers, Silmar Marketing SA (Pty) Ltd and OroAfrica (Pty) Ltd.

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Without conducting an exhaustive survey of all gold jewellery manufacturers in South Africa, an exercise which is outside the scope of this study, it is only possible to give an estimate of the total numbers employed in the jewellery industry. This estimate is based on the following assumptions. The sample researched in this review gives wide coverage of the large- and medium-sized manufacturers, as defined in this chapter. Therefore, it is assumed that those jewellery manufacturers for which there is no confirmed data are, by definition, the small and micro manufacturers. These manufacturers are known to be either one-man operations or to have only one or two staff members on the payroll. It is not possible to verify how many of the valid jewellery permits are held by hobbyists who, by definition, would not employ staff since their goldsmithing would not be a primary source of income. Discussions with the jewellery manufacturers and the trade associations, however, suggest that there are between 1,200 and 1,500 gold jewellery hobbyists. Taking the above into account it is estimated that 2,680 people are employed by the countrys gold jewellery manufacturing sector. It is estimated that 2,680 people are employed by the countrys gold jewellery manufacturing sector...

Geographic distribution and ownership Gold jewellery manufacturing is concentrated in and around Johannesburg and Cape Town and their close environs. Gauteng and the Western Cape are home to just under 70% of South Africas gold jewellery manufacturers. If KwaZulu-Natal is included, the total rises to just over 85%.
A regional analysis of valid jewellers licences for 2003 and 2004 gives the following distribution of jewellery manufacturers across the country: Number of valid jewellery permits Gauteng Western Cape KwaZulu-Natal Eastern Cape Free State Northern Cape Mpumalanga Limpopo North West Total 2003 838 710 351 76 71 59 50 33 27 2,215 2004 982 733 385 95 84 63 52 34 28 2,456 Region as % of 2004 total 40.0 29.8 15.7 3.9 3.4 2.6 2.1 1.4 1.1 100

Data source: Virtual Metals analysis of South African Police Service data.

The following table shows, on a regional basis, where the increase in number of jewellery permits occurred in 2004, compared with previous years. According to the data the increase was mostly in the Eastern Cape (25%), the Free State (18.3%) and Gauteng (17.2%). Growth in jewellery permits between 2003 and 2004 Eastern Cape Free State Gauteng KwaZulu-Natal Northern Cape Mpumalanga North West Western Cape Limpopo Country average
Data source: Virtual Metals analysis of South African Police Services data.

Gauteng and the Western Cape are home to just under 70% of South Africas gold jewellery manufacturers...

% 25.0 18.3 17.2 9.7 6.8 4.0 3.7 3.2 3.0 10.9

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There are two reasons for the 25% increase in the number of jewellery permits held in the Eastern Cape in 2004: increased tourism in the province; and the perception by newly qualified jewellery manufacturers that the area offers better market opportunities compared to the already well-serviced Western Cape. In terms of the volume of fine gold usage, manufacturing is concentrated in the Johannesburg and Cape Town areas... The industry is still family-based in terms of ownership, sometimes with third or fourth generation owners... In terms of the volume of fine gold usage, manufacturing is concentrated in the Johannesburg and Cape Town areas. Two of the three big manufacturers are based in Johannesburg and the third in Cape Town. With respect to the number of manufacturing entities, the industry is still familybased in terms of ownership, sometimes with third or fourth generation owners. Of those interviewed, more than 90% of the businesses were either family concerns or partnerships whose origins were in family businesses. The remaining 10% of businesses were partnerships which did not involve family members. This is particularly true where the manufacturer also specialises in diamonds and fancy stones. The implications of small family-owned businesses are discussed in more detail in Appendix 3 which deals with training and skills transfer.

Market niches and business models The umbrella definition of gold jewellery manufacturers covers a variety of fabricators exhibiting diverse business models. Manufacturers have structured their businesses to service sub-sectors to which they deliver their final product. The identification of niche markets on the part of a manufacturer influences that fabricators product line, design work, staffing needs, customer base and marketing. These factors have a bearing on the cost profile of the company.
Within the jewellery fabricating sector in South Africa are manufacturers who demonstrate the following distribution, product and manufacturing process characteristics: Distribution channels: supply only one retail franchise consisting of multiple retail stores around the country; supply various different retail outlets simultaneously; supply a combination of retail outlets and private clients; supply a private client base exclusively and directly; supply local purchasers only, target the export market only, or have a client base of both local and export consumers; specialise in the domestic market only or target the tourist market; and combine manufacturing with retail, supplying their own outlets or those of other retailers or wholesalers. Product niches: specialise in gem setting, especially diamonds and fancy stones set in a minimum of 18 carat or platinum; specialise in cubic zirconia and semi-precious stones set in 9 carat; specialise in mass-produced product only; specialise in hand-made items; and manufacture both mass-produced and hand-made items.

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Manufacturing process: specialise in machine-made, mass-produced chain; specialise in stamped or cast jewellery; and specialise in hand-made goods in the absence of machine-made items. In terms of volumes of fine gold, the majority of gold is consumed by manufacturers of mass-produced chain and cast or stamped jewellery for both the local market and direct export. Mass produced jewellery represents approximately 80% of fine gold jewellery fabricated in South Africa each year. In terms of the numbers of businesses, however, the dominant business model is the small enterprise focusing on cast or hand-made jewellery sold into the local market. The following table highlights these findings. Among the micro and small manufacturers interviewed, cast and hand-made jewellery accounts for over 90% of manufacturers in volume terms. Manufacturing process (%) Cast Machine-made5 Hand-made
Data source: Interviews.

In terms of volumes of fine gold, the majority of gold is consumed by manufacturers of massproduced chain and cast or stamped jewellery for both the local market and direct export... The dominant business model is the small enterprise focusing on cast or hand-made jewellery sold into the local market...

Micro 55 9 36

Small 45 1 54

Medium 69 25 6

Large 19 81 0

Medium-sized manufacturers produce mainly cast jewellery (67%), although they also produce more machine-made jewellery (27%) than the micro and small fabricators. Very little of the medium-sized and none of the large manufacturers jewellery is hand-made. The three large manufacturers are almost exclusively mechanised. Silmar focuses on chain-making and Alan Mair Manufacturing Jewellers focuses on casting. OroAfrica focuses on machine-made chain, but has some casting and speciality chain manufacturing capability. The dominance of these three manufacturers in volume terms skews the weighted average for the collective industry, as the pie chart on the right shows. Interviews with retailers highlighted two concerns about the manufacturing processes carried out in South Africa: First, retailers felt that although the quality of the final product was good, outdated and aged machinery was being used which was not capable of producing the latest designs. This problem of old machinery also raised concerns about operating efficiencies. Manufacturers responded to these claims with concerns about the cost of new machinery, which, together with the necessary spares, had to be imported. However, capital expenditure on the upgrading of machinery was ongoing in at least two of the large manufacturers interviewed. The three large manufacturers are almost exclusively mechanised...

Machining includes stamping.

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Second, retailers felt that South African manufacturers were being left behind in areas such as electro-forming, various methods of gem-setting (such as invisible setting) and the manufacture of intricate hollow jewellery. They highlighted these issues as detracting from the ability of local manufacturers to compete effectively on an international level. Nevertheless, local manufacturers maintained that their product could compete internationally in terms of manufacturing processes and finish.

4.2.2. Capacity and capacity utilisation

Overview Interviews indicated the following regarding capacity and capacity utilisation:
For the large manufacturers, labour is a relatively small component of total costs...

Quotable quotes: We load up the machines with wire and leave them running overnight. They stop running when they run out of wire. Chain-maker

Large manufacturers For the large manufacturers, labour is a relatively small component of total costs. With capital already invested in their machinery, there are strong incentives to boost productivity through higher levels of capacity utilisation. In these instances, capacity is limited only by the number of machines and their ability to operate around the clock. In general, these manufacturers are somewhat less subject to seasonality and tend to supply customers throughout the year, although the period between September and November was still noted as a particularly busy time with a marked slow-down in January.
At the time of interviewing, the strong Rand was having a dramatic effect on manufacturers. With export levels down as a result of the robust currency, capacity utilisation was down to 65% of potential6. The large manufacturers were actively addressing this problem by refocusing on their local customer base.

Small and medium manufacturers are highly susceptible to the capacity constraints associated with seasonality...

Small and medium manufacturers Small and medium manufacturers are highly susceptible to the capacity constraints associated with seasonality. Like many of the micro operations, they are reluctant to expand capacity permanently because of the associated increase in overheads. For many, labour costs represent the largest expense and this dictates capacity decisions.
During the busy period in the months prior to the delivery of Christmas orders, they will either take on temporary staff or, more commonly, will outsource basic work such as repairs to micro jewellers. Factors influencing the decision to outsource are discussed in more detail later.

Micro manufacturers Micro entities fall into two categories (excluding the hobbyists). There are those manufacturers using less than 1kg of fine gold per annum who tend to deliver product as and when they can. They can often be stretched with respect to being able to fill orders but have little financial latitude to increase capacity and are unwilling, or unable, to increase overheads accordingly. The second group use greater volumes of metal (but still less than 20kg) and are subject to the seasonality of the Christmas cycle and, in many cases, will take on temporary staff to overcome capacity constraints.
Jewellery manufacturing shows distinct seasonality that affects capacity utilisation...

The manufacturers year Apart from high-volume, machine-made items, jewellery manufacturing shows distinct seasonality that affects capacity utilisation. In general the year is structured as follows:
Mid-January through to mid-April The early months of the year through to mid-April tend to be quiet, with capacity utilisation at its lowest (estimated at 60%). Permanent core staff members continue with ongoing work. Many manufacturers use this time to complete design work. Those wishing to participate in the Vicenza Jewellery Fair in Italy travel to Europe in January.

During periods of a weaker Rand against the Dollar and stronger export potential, the capacity utilisation of these large jewellery manufacturers is closer to 80%.

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May and June Manufacturers will begin recruiting part-time staff in June, if required, in preparation for incoming Christmas orders. Depending on their job description and existing skills, these part-time staff members would be given at least two months to familiarise themselves with the jewellery range to be manufactured in order to meet the Christmas demand. Relative to permanent staff, the parttimers can be substantial in number, in some instances doubling the payroll and head count for the associated months. Discussions with the industry revealed that there is a relatively large pool of qualified goldsmiths from which manufacturers can draw during these periods. These people would come from the micro sector of the industry, as defined earlier in this chapter, and appear to be independent goldsmiths, amenable to periodic high season work, and to whom the larger manufacturers can also outsource overflow work. If they do not take on temporary staff, many manufacturers will outsource overflow work to these micro entities. Two factors influence the decision as to whether to outsource or to employ temporary staff: the size of the premises on which a manufacturer operates. Space constraints, especially jewellery workbenches, will influence the decision to outsource; and some manufacturers indicated they felt more comfortable with temporary staff working on their premises where the manufacturer could control inventory, equipment and raw materials more closely than when outsourcing work. Those attending the second Vicenza Jewellery Fair of the calendar year travel to Italy in June7 or they might attend the JCK Jewellery Fair in Las Vegas. July and August By the end of this period, the years designs and the product range for the year are tabled and portfolios are complete. The development of the years product range is a combination of a number of processes. Manufacturers generally attend the Jewellex Jewellery Fair in July. If they do not attend a trade show early in the year, manufacturers will at least have the most recent trade magazines which would give a good indication of the latest designs and fashions. They will then consult with their major retail customers on the design range the retailer is most likely to order. Samples will be made up and marketed. Orders will then be placed and this process is usually completed by early September. If manufacturers also participate in the jewellery industry as retailers, they will do their own marketing in the form of brochures, newspaper inserts and magazine advertisements. On the basis of our interviews, this work appears to be completed in-house, usually by the owner or manager of the company. Throughout this period (January to August) the industry operates at below capacity. September through to mid-December The industry then goes into a period of intense production. The rate at which the manufacturers deliver final product will vary, depending on the product range. Four to eight weeks is the norm for the time required for delivery of the final product. From mid-October onwards, orders are delivered. Christmas catalogues are distributed, advertising in magazines and newspapers is filled and shops stocked. By mid-December, the process is normally complete and the manufacturers close until mid-January. September through to the end of the year is the time of maximum capacity utilisation.
7

There is a relatively large pool of qualified goldsmiths from which manufacturers can draw during these periods...

Quotable quotes: We essentially run a six-month business but have 12 months of fixed costs. Small-sized manufacturer

From 2006, the second Vicenza Jewellery Fair of the calendar year will be held in May.

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4.2.3 Employment profiles, education and skills The following section analyses the employment profile of the manufacturing jewellery sector. It acknowledges the presence of the three largest manufacturers and their ability to affect the results of the analysis, particularly when considering the sector in terms of volumes of fine gold usage, as opposed to numbers of operating entities. Unless otherwise stated, the weighted average of the manufacturers (in terms of fine gold usage) has been used. In each case, however, data is also presented for each of the four categories of manufacturers in a form that is directly comparable. Within the four defined categories of manufacturers, a number of employment profiles are identified. The weighted average shows that the ratio of men to women employed in the jewellery manufacturing sector is 57:43. The results are influenced by the gender profile of the three large manufacturers of 52% women to 48% men as, in the other three categories, a far greater percentage of jobs is held by men. Men are most commonly found at the workbenches (participating in the production of jewellery product as opposed to other support functions in the company) with women filling administrative, accounting and marketing roles. Women are also employed to do work in polishing, filing, washing and finishing. The sales role of women was particularly apparent when the manufacturers maintain retail outlets as well and require a shop front sales force. Manufacturers who combine diamond jewellery manufacture (or gem-setting in general) with the fabrication of gold-only jewellery, had a higher average number of employees. The labour intensity of gem-setting and its associated manufacturing processes clearly inflated employment levels in these companies. This was particularly true of the micro category, where employment rose to seven staff members per company. The age profile of the workforce showed a standard distribution and this was true of the weighted averages for both the industry and individual categories: 95% of those working in the jewellery manufacturing sector are South African, either by birth or by naturalisation. In terms of racial groups, the ratios are as follows on a weighted average basis: By industry segment, the racial profile is as follows: Racial profile % White Black Indian Coloured
Data source: Interviews.

Micro 40 52 6 2

Small 22 64 3 11

Medium 26 18 0 57

Large 27 55 10 8

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The high proportion of whites in the micro manufacturers reflects the historical structure and family-owned nature of these companies. In the medium category, many companies are located in the Western Cape. Turning to levels of education and skills within the jewellery manufacturing sector, the research showed that, on a weighted average basis for those companies where information is available, almost 42% of those on the payrolls of the jewellery manufacturers have a matriculation qualification. Nearly as many (41%) do not, and the remaining 17% have secondary or tertiary education. By market segment, the educational profile is as follows: Education (%) No matric Matric Tertiary
Data source: Interviews.

The high proportion of whites in the micro manufacturers reflects the historical structure and family-owned nature of these companies...

Micro 57 32 10

Small 52 30 18

Medium 12 73 15

Large 48 31 20

An analysis of job descriptions shows that, on a weighted average basis, 67% of those employed in gold jewellery manufacturing work on the jewellery benches.8 By market segment, the analysis showed that the large manufacturers have the highest percentage of their staff on the jewellery benches (74%). Job description (%) Admin Benches Management Other Micro 11 61 17 11 Small 15 70 10 4 Medium 15 59 4 22 Large 16 74 5 5

Data source: Virtual Metals analysis of detailed interviews.

Quotable quotes: The ability to make a good piece of jewellery is an art form a highly skilled task which is not determined by a matriculation certificate or Technikon diploma. The art is learnt on the job at the bench and there is no substitute for experience. Micro manufacturing jeweller

A high proportion of those employed do not have a matriculation certificate. It should be noted that a majority are employed on the jewellery bench where they are called apprentices by jewellery manufacturers. Goldsmithing is then learnt on the job where specialist skills such as alloying, all the stages of casting, machining and stamping, gem setting, polishing and finishing are gained from practical experience. Apprenticeship training received from a manufacturer is not formally structured in the way a diploma course or a degree might be at a university of technology or university and therefore it would probably be more accurate to term the training received as a mentorship rather than an apprenticeship.9 This situation is not unique to South Africa, nor the jewellery manufacturing sector. Discussions with manufacturers in Europe revealed similar profiles. The implications of these observations are discussed in more detail in Appendix 3, in the context of the universities of technology (formerly known as technikons) and their actual and perceived roles in offering formal goldsmithing qualifications.

8 9

In the case of the large manufacturers benches also refers to machine operators. This is discussed in more detail in Appendix 3 which discusses training and skills transfer.

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Jewellery manufacturers train staff in-house, on the job, in the form of apprenticeships... There was very little evidence of manufacturers approaching the Mining Qualifications Authority (see Chapter 6) for financial assistance with in-house training programmes... In terms of training, the jewellery manufacturers train staff in-house, on the job, in the form of apprenticeships. Only one manufacturer interviewed expressed the opinion that training in-house was not desirable or indeed necessary. This fabricator argued that in-house training only left the company vulnerable to having their newly-trained staff either poached by competitors or setting themselves up in competition. This attitude was by far the exception and other manufacturers agreed with the need to train the next generation of goldsmiths. Readers are referred to Appendix 3 for a more detailed analysis of training and skills development. There was very little evidence of manufacturers approaching the Mining Qualifications Authority (see Chapter 6) for financial assistance with in-house training programmes. Two reasons for this were given: there appeared to be a lack of awareness of the financial assistance available to encourage training; and there was some distrust on the part of manufacturers who perceived government involvement in their businesses as a threat. In discussing current training programmes offered by universities of technology (as opposed to in-house training), manufacturers expressed the view that existing courses were too theoretical and did not prepare trainees fully for life at the jewellery bench. They argued that the skill of goldsmithing is largely acquired through experience, and universities of technology training programmes need to give students more practical knowledge. Discussions with the universities of technology revealed a different perspective. They maintained that it is common for manufacturers not to recognise qualifications obtained through universities of technology because the lower the level of education recognised, the lower the wage to be paid by the manufacturers. 4.2.4 Means of financing The rate of growth of the South African gold jewellery manufacturing industry has historically been constrained by the absence of cost-competitive financing facilities of precious metals in the jewellery fabrication pipeline. The problem is attributable largely to the proportionately high value of raw material in relation to the final product. Unlike other manufacturing industries (such as textiles for example), gold jewellery manufacturers have to deal with the very high cost of working capital for their raw material, over and above the financial outlays necessary to establish and run a business. The high cost of gold, and the volatile nature of the gold price, renders it particularly expensive for a manufacturer to own the metal tied up in the manufacturing process or locked up in the finished product. The issue of funding the manufacture of gold is considered in more detail in Chapter 6, but some comments are warranted here. In other parts of the world (especially in major jewellery fabricating centres such as Italy), manufacturing jewellers can borrow fixed quantities of metal from financial institutions at an internationally-related gold lease rate (see chart) plus a pre-agreed risk premium. The company is assessed on capitalisation and turnover and, depending on the companys financial track record, guarantees (save for insurance) will be tailored appropriately. In these instances there is a long financial track record, management expertise and proven experience in the industry which, in the case of the small and micro jewellery manufacturers in South Africa, is not the case. South African gold manufacturers do not have access to similar financing structures. Currently they have to buy raw material outright through working capital, or they have to finance it at the local prime lending rate (plus a risk premium which, depending on the jeweller, can be some basis points above prime). In addition to this, they have to provide collateral as loan security which may be up to 120% of the value of the loan.

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In the high interest rate environment of South Africa (see chart on previous page), finance is most often cited as either a barrier to market entry or the major constraining factor to growth in jewellery production. This places the local industry at a competitive disadvantage internationally and has been cited as a primary reason for business failures or discouraging new entrants to the market. In limited instances and specific to the large manufacturers, some more favourable form of financing is in place. The details are confidential to those manufacturing jewellers but it is believed that gold can be borrowed (against a guarantee of up to 120%) for between 2% and 7% with an additional 1.5-2% fee to the lending financial institution to cover the guarantee provided. Access to this sort of finance is by far the exception, applying only to the large manufacturers and to a limited number of medium-sized manufacturers. It does not apply to the small and micro manufacturers. But manufacturers are faced with another problem. Those interviewed noted that while they had insurance cover for third party liability and stock in transit, the premiums associated with insuring jewellery inventories and metal in the manufacturing pipe-line are prohibitive. The absence of insurance has implications for the jewellery fabricators ability to participate in gold financing schemes, since sufficient insurance coverage is a stated pre-requisite. Chapter 6 deals in more detail with the specifics of the financing mechanisms that are in place, including those offered by Rand Refinery and most recently by a gold advance scheme to be underwritten by BAE Systems/Saab, AngloGold Ashanti and Gold Fields. 4.2.5 Fabrication costs Given the different customers and product ranges around which the South African jewellery manufacturers have built their business models, the cost of fabricating gold jewellery can vary widely. The size of the business, manufactured volumes, the type of final product and the raw materials required influence the cost structure of the company. Analysis showed two distinct cost profiles, depending on the size of the operation and on the method of manufacture. Given these differences, it would be inappropriate to calculate a single weighted average for the industry and thus cost profiles are discussed separately. The average cost profiles of the micro, small and medium fabricators are tabulated below, although these figures should be considered in the context of the notes that follow: Typical cost profile of micro, small and medium gold jewellery manufacturers % Raw materials 30 Financing 12 R&D/training 5 Labour 30 Rent/overheads 20 Marketing 3 Total 100
Data Source: Interviews.

In the high interest rate environment of South Africa, finance is most often cited as either a barrier to market entry or the major constraining factor to growth in jewellery production...

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Notes These estimates cover the manufacture of gold items only. If a company also makes use of diamonds, fancy stones and platinum, the cost of raw materials increases by up to 50%. Conversely, where a company makes extensive use of silver in addition to gold, the raw materials represent less in the way of costs. Rentals are substantially higher for those manufacturers who also run retail outlets, especially in shopping malls. In these instances, combined insurance, floor rental and other administrative overheads can represent as much as 50% of total costs. Of significance is that these estimates exclude insurance on loss of stock. The manufacturers interviewed were covered for third party liability and accident as well as loss of stock in transit, but not for their finished jewellery inventories or pipeline stocks. The majority of those interviewed considered labour as a variable cost, particularly with respect to overtime when filling Christmas orders. Thus, over the period from July to mid-December, overtime paid to permanent staff and in many cases the presence of part-time staff members can greatly increase the ratio of labour costs to other costs. Financing in general represents overdraft facilities to ensure cash flow on a monthly basis and to fund the purchase of raw materials. As interest rates have decreased since 2003, financing as a percentage of total costs has declined. Gold is purchased and paid for in cash on delivery, inclusive of VAT. The VAT is returned on a rolling two-month basis. Depending on the items being fabricated, work in progress can be anything from two to three weeks for simple, mass-produced items and up to six to eight weeks for more intricate goods.
In the case of very high value jewellery, with a greater design content and gem setting, a piece can be in the production pipeline for more than eight weeks... In the case of very high value jewellery, with a greater design content and gem setting, a piece can be in the production pipeline for more than eight weeks. Where manufacturers are supplying retail clients, the terms for payment can range from 60 and 90 days and even 120 days. This term can be longer if the goods are exported and therefore the period of exposure by the manufacturer to the gold content is extended. Very little appears to be sold on consignment. The cost profiles of the large category manufacturers are different. Because they are primarily mechanised, the labour component of total costs is lower. Furthermore, because of their size and turnover, they tend to have access to more cost-effective financing which reduces this item of expense compared with the other three categories of manufacturers. Their higher rate of production turnover also means that their raw material costs are a much larger percentage of total costs and the profile is estimated as follows:

The cost profiles of the large category manufacturers are different from those of micro, small and medium manufacturers...

Cost profile of the large gold jewellery manufacturers Raw materials Financing R&D/training Labour Rent/overheads Marketing Other Total
Data source: Interviews.

% 85 2 2 5 2 1 3 100

4.2.6 Price mark-ups Given the diversity of business practices, client bases and product lines, the manufacturing sector includes a spectrum of mark-ups and measures of profitability.

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All mark-ups cited in this sector are in addition to those achieved by the refiners or suppliers of metal to the jewellery manufacturers. In other words, the mark-ups are compounded they are added to the price at which the manufacturer buys his fine gold and not to the spot price or international gold price quoted on a daily basis. Analysed in terms of the number of jewellery manufacturers (as opposed to the volume of gold used), the mark-up for cast jewellery most frequently cited was between 15% and 20%. This mark-up range applies to 9 carat gold only. In comparison, discussions with European manufacturers noted that basic nonchain, gold-only jewellery achieved average mark-ups in the range of 8% to 21%. While the comparison is useful, readers should bear in mind that the European industry deals with larger orders than the South African industry and uses a higher caratage of gold. Both economies of scale and jewellery alloy would affect the achieved mark-ups. For items of a higher caratage, hand-made items or gem-set items, higher mark-ups can be applied and up to 40% can be achieved. In the case of individually commissioned items of jewellery, designed to a clients exact requirements, even higher mark-ups can be levied. In these instances, where a piece of jewellery requires a good deal of design time and craftsmanship, mark-ups of 100% were cited. Since these items are commissioned by individual clients and are destined for those clients, the associated mark-ups should actually be compared with the markups achieved by retailers and not with the mark-ups of manufacturers who are filling mass orders. In terms of the volume of fine gold usage, the mark-up profile is very different and ranges of 5% to 10% were cited as the norm for the majority of 9 carat, gold-only items. This applies particularly to fully mechanised manufacturers and their machine-made product range. There are of course variations around this average and the following is worth noting: manufacturers will adjust their mark-up relative to the size of an order. The larger the order the more the manufacturer will be prepared to discount margins; manufacturers will adjust margins in favour of regular customers placing ongoing orders, as opposed to a customer who might only place sporadic orders; and manufacturers will adjust margins in line with other terms agreed between the customer and fabricator. In general, the longer the time to payment, the higher the mark-up. These three variations are not unique to the jewellery industry and apply to the manufacture of other goods such as clothing. Discussions with market participants in South Africa yielded the following averages: Summary of average jewellery manufacturing mark-ups in South Africa process mark-up % Machine-chain 5 Other mechanised 5-10 Cast 15-20 Hand-made 40 Gem-set 40 One-off custom designed Up to 100
Data source: Interviews.

All mark-ups cited in this sector are in addition to those achieved by the refiners or suppliers of metal to the jewellery manufacturers... The most common belief among those interviewed was that they can achieve a mark-up of between 15% and 20% for cast jewellery...

For items of a higher caratage, hand-made items or gem-set items, higher mark-ups could be applied and up to 40% can be achieved...

For machine-made chains, interviewees indicated an average mark-up of 5%...

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For machine-made chain (the largest category of gold products), interviewees indicated an average mark-up of 5%. This appeared to be in line with those markups achieved by European jewellery fabricators, especially in Italy. The mark-ups associated with the South African chain manufacturers remained at these levels irrespective of whether the final product was for local consumption or for export. 4.2.7 Exposure to financial variables and access to financial protection The manufacturers interviewed were unanimous in their response with respect to their exposure to three financial parameters. These are: The Dollar spot price of gold; The value of the Rand relative to the Dollar (or the currency of the country to which they may be exporting their final product, for example the British Pound); and Local interest rates, in instances where they borrow funds to finance metal in working progress. To the extent that there is no industry-wide access to leased metal, the manufacturers exposure to the international gold lease rate is not of significance. With the exception of the large manufacturers, local jewellery fabricators have to buy their metal outright and they calculate their margins on the basis of the price paid for the gold from their suppliers. Any sharp changes in international or local gold prices while the gold is in the production pipeline or in inventory do not affect the selling price of those goods. These manufacturers either borrow to fund working capital or finance the purchase of their gold out of working capital. Manufacturers could buy forward cover for currency from local banks and protect themselves from adverse movements in the currency but, in practice, they do not make use of the local currency forward market... Manufacturers could buy forward cover for currency from local banks and protect themselves from adverse movements in the currency but, in practice, they do not make use of the local currency forward market. During interviews, some said the cost of forward cover was too expensive, while others maintained that their pipeline times do not justify buying currency protection. Others indicated that their businesses were simply not sophisticated enough to warrant the use of financial mechanisms. With respect to the gold price, there is currently no local futures contract to protect them from price movements. There is, however, a local contract based on the Krugerrand (see Chapter 5). When asked if they would consider making use of a dollar-denominated exchange futures contract if it were offered locally, many noted that the amount of gold they used on a daily basis was too small to warrant this form of hedging. Only the large manufacturers indicated that they might investigate the possibility of using this hedging mechanism, but the cost of such cover would be a critical factor. 4.2.8 Design considerations and product ranges Design is a function of the type of jewellery being produced and the market sector into which the jewellery is to be sold. With respect to the mass-produced product lines (chain as well as cast product), international jewellery trends drive the product ranges. Decisions with respect to a seasons or years product line are an interactive process between the manufacturer and the retailer customer.

Financial parameters affecting gold manufacturers are the Dollar spot price of gold, the value of the Rand relative to the Dollar and local interest rates...

Design is a function of the type of jewellery being produced and the market sector into which the jewellery is to be sold...

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Jewellery manufacturers attend major international jewellery fairs as well as the local Jewellex Jewellery Fair, or access international trade magazines for the latest designs and ideas. The manufacturers compile a range of product designs and their retailer clients then select the range that they believe is most likely to appeal to the market niche that they serve. Large retailers also travel to jewellery fairs with their main manufacturing suppliers to identify product ranges. It is common for South African consumers to buy locally fabricated jewellery that is indistinguishable (in design) from product sold in Western markets elsewhere. In both design and caratage, the South African mass market is similar to that of the United Kingdom. This is particularly true of mass-produced chain, bangles, bracelets and earrings. In other instances however, distinctly South African preferences are apparent. Examples of this exist in the product category of zirconia combined with semiprecious stone dress rings set in 9 carat yellow gold, which are popular throughout the country. Although they do not have a particularly ethnic design to them, they are distinctive enough to be recognisable as typically bought and preferred by South Africans. According to our categories of manufacturers, the breakdown by type of product sold is shown in the following table. Product lines (%) Rings Solid bangles Chain (neck and bracelets) Other, including earrings and pendants Micro 46 20 8 26 Small 40 22 6 32 Medium 33 20 14 34 Large 3 14 74 9 The manufacturers compile a range of product designs and their retailer clients then select the range that they believe is most likely to appeal to the market niche that they serve...

Data source: Interviews. Note: Solid bangles referred to here are non-chain or non-linked bracelets.

The micro and small manufacturers specialise in rings, earrings, pendants and nonchain bangles. These product ranges contain very little chain and any linked necklaces and bracelets are hand made. The medium-sized manufacturers interviewed noted that rings dominated their product line (33%) with other non-chain items (earrings, pendants and bangles) representing another 54%. Again, linked chain represents a relatively small proportion of their product line and is hand-made. On a weighted average basis by mass, mechanised chain manufacture represents 74% of the output of the three large companies. On a weighted average basis for the entire industry, the predominance of chain by mass falls to 56% as shown in the chart overleaf. On a weighted average basis by mass, mechanised chain manufacture represents 74% of the output of the three large companies...

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Overall, South African consumer preferences exhibit the following characteristics. South Africans still prefer yellow gold to white gold. This is even true of the diamond engagement ring sector, although according to the manufacturers, white metals are beginning to gain market share. The market remains predominantly 9 carat (95% of volume), usually with a high gloss as opposed to matt finish. Chain in styles similar to those seen in Europe is very popular. Dress rings are particularly popular, and are marketed successfully not only in large retail stores but also in pharmacies across the country. Stud and sleeper earrings remain popular but more flamboyant hoops are gaining ground. Creole earrings are a firm favourite. For hand-made items, and items with a high stone content, manufacturers are less likely to be influenced by international product ranges. In these instances, the design is geared more to the preferences of the client. Thus the retailer, or the ultimate customer, is likely to have considerable input especially where a product range, or more particularly an individual item, is commissioned. For hand-made items, and items with a high stone content, manufacturers are less likely to be influenced by international product ranges... For jewellery destined for export, design falls into two categories, either jewellery for direct export or jewellery destined for indirect export via the tourist. The export market is dominated by mass-produced, lighter ranges of jewellery where price is the decisive factor for the retailer. The output is very similar, if not identical, to those ranges produced by competing international fabricators. In these instances, international jewellery trends dictate design. In this category, the research did not reveal a uniquely South African product range. Where product is geared to the tourist, two distinct product ranges were detected: the first, up-market 14 carat to 18 carat gem-set jewellery, is discussed in more detail in the retail section of this chapter; and the second, serving tourists with lower budgets, focuses on designs that have a distinct African bias, and are very often complemented with materials associated with Africa such as local stones, beads, bone or elephant hair. The big five and the outline of the African continent are examples of motifs that often feature in this product range. 4.2.9 Trade bodies, initiatives and publications The Diamond and Jewellery Federation The Jewellery Council of South Africa (JCSA) has recently been restructured and incorporated under a new umbrella organisation, the Diamond and Jewellery Federation.10 The Jewellery Council will represent the following jewellery associations: The Jewellery Association of South Africa (JASA) which represents jewellery retailers; Jewellery Manufacturers Association (JMA); The Jewellery Council members; and The Cape Jewellery Manufacturers Association (CMJA)11. Another affiliate, the Jewellery and Watch Distributors Association (JAWDA) was recently merged into the main membership of the Council. The subscription rates for the JCSA and its affiliates are as follows: jewellery wholesalers pay a once-off entrance fee of R410 to the Council and an annual subscription of R660; retail jewellers pay a once-off fee of R760. They then pay an annual membership subscription fee of R840 for their main retail store and R600 for any other store they wish to link to the membership (R1,490 per annum for main retail store and one linked store); and jewellery manufacturers who have 10 or more employees pay R400 as a once-off fee and R1,600 subscription membership per annum. Jewellery manufacturers with between five and nine employees pay R900 membership per annum and those with fewer than five employees pay R700 per annum.

Where product is geared to the tourist, two distinct product ranges were detected...

10

11

There are also three affiliate associations which serve specifically the diamond industry namely the Rough Diamond Dealers Association (RDDA), Master Diamond Cutters Association (MDCA) and Diamond Dealers Club of South Africa (DDCSA). At the time of writing, the CJMA and JMA were in discussions regarding a possible merger.

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The JCSA currently has 170 direct members, representing companies that are not members of any of the JCSA affiliated organisations. These include watch makers, diamond dealers, jewellery retailers and secondary refiners. The Jewellery Manufacturers Association has 74 members and the Cape Jewellery Manufacturers Association has 25 members. The Jewellery Association of South Africa, which represents the retailers, has 245 members including the head offices of the major chain stores and 618 individual branches of the large retail stores. When compared with the number of valid jewellery permits held by manufacturers in 2004, only 3.5% of jewellery fabricators are members of the JCSA and its affiliates. However, in terms of the volume of gold usage, the JCSA is well represented by the large and medium-sized manufacturers. Of the 18 manufacturers interviewed, 17 were either direct members of the JCSA or members of the Councils affiliates. In addition to representatives from the various constituent bodies, six major entities serve on the Council executive. These are AngloGold Ashanti, Anglo Platinum, the Chamber of Mines, De Beers, Harmony and Mintek. The primary objectives of the JCSA are to: promote and protect the interests of itself and its members; encourage co-operation between members; promote or react appropriately to any legislative measures that might affect the industry; promote high business standards in the industry; protect the jewellery consumer; encourage fair trade; disseminate information to members; act as a mediator and arbitrator; and market itself, its members and the industry, especially South African branded jewellery. On an international level, the JCSA is a member of the International Confederation of Jewellery, Silverware, Diamonds, Pearls and Stones (CIBJO) which automatically allows members to participate in the promotional activities of associated international organisations presented by 35 countries. Interviews with JCSA office bearers indicated that the secretarial and administrative functions needed to meet the Councils primary objectives, and undertaking programmed objectives, took up at least 80% of the staffs time. Membership issues and marketing together account for 10-20% of the JCSAs time. Arbitration, while an important service offered by the JCSA, does not consume much of the office bearers time. On average they are called on to mediate about five to six times annually, with cases dealing with issues of payment being more common than those related to quality concerns. The arbitration rate is low as the JCSA will only moderate in cases where members are involved. Where cases arise involving members of the public against non-JCSA members, the JCSA will not arbitrate. Jewellex, the annual local trade fair, dominates the JCSAs annual promotional efforts. Held in July each year, usually at the Sandton Convention Centre, the fair is open to jewellery manufacturers as well as to watch and clock makers, and wholesalers of jewellery equipment and accessories. Although open to international trade, Jewellex exhibitors are mainly from South Africa and other SADC countries. Membership subscriptions cover the costs of running the JCSA. Any profit derived from other areas of business, such as the Jewellex trade fair or the diamond laboratories, is applied to marketing drives and other activities designed to meet the organisations objectives.

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In response to recommendations made by the consultancy group Kaiser Associates, in their report to the Jewellery Sector Counterpart Group dated 26 June 200112 the JCSA initiated the Support Services Group (SSG). It was launched in September 2002 after the JCSA secured special funding from the Fund for Research into Industrial Development Growth and Equity.13 The SSG initially considered the Kaiser Associates recommendation which included the provision of a centralised service to the jewellery industry, addressing, among other issues, materials financing, VAT and dollar-denominated accounts, small business support, branding and training. After two years in operation, the SSG was renamed the Jewellery Development Group, concentrating on facilitating South African jewellery exports and on securing and expanding export markets for local jewellery product. At the time of writing, it had been merged into the Jewellery Manufacturing Association, which is continuing with these activities. There were divergent views with respect to the effectiveness of the JCSA... There were divergent views with respect to the effectiveness of the JCSA. Some manufacturers claim that it has failed to deliver results that are meaningful, particularly to their sector. Others maintain that it is doing the best job possible within the constraints of its budget. There was also the concern that the majority of the manufacturing sector, through non-membership, was failing to support the JCSA and were criticising it in the absence of participation and constructive recommendations or proactive suggestions. Office bearers and several active members noted that there is a core of jewellery manufacturers and retailers who are actively involved in the JCSA and its activities, and that industry support for a trade body of this nature was always left to a willing few who then came in for criticism from those unwilling to make the effort to participate.

The Gold Zone is an initiative aimed at encouraging gold beneficiation in South Africa through a secure and appropriately serviced site for modern industrialised jewellery manufacturing...

The Gold Zone The Gold Zone is an initiative aimed at encouraging gold beneficiation in South Africa through a secure and appropriately serviced site for modern industrialised jewellery manufacturing. Rand Refinery and a property developer appointed by Rand Refinery, Keenland Properties 125 (Pty) Ltd, established the Gold Zone.
Rand Refinery donated land (3.3 hectares) adjacent to its premises for the development of the Gold Zone, which was officially opened on 6 October 2000 by the then Minister of Trade and Industry, Alec Erwin. The objectives of the Gold Zone are to: create and develop a cost-competitive gold jewellery manufacturing zone where South African gold can be beneficiated on an internationally competitive basis for export; provide skills development and training in manufacturing and design, and to provide a direct interface with the jewellery manufacturers based at the Gold Zone; establish the Gold Zone as a recognised entity through which international marketing campaigns can be implemented; and facilitate the direct marketing of locally manufactured gold jewellery by creating a gold tourism and retail jewellery destination at Rand Refinery. The Gold Zone is intended to provide: direct and secure access to gold in the various forms required by manufacturing jewellers via Rand Refinery; low rentals and service costs; joint marketing; and financing and export facilities.

The Gold Zone is situated immediately adjacent to the Rand Refinery with direct access to export facilities associated with Johannesburg International Airport...

The Gold Zone is situated immediately adjacent to the Rand Refinery with direct access to export facilities associated with Johannesburg International Airport. Located in Germiston, it is 15km from the Johannesburg central business district and 20km from Johannesburg International Airport. The Zone consists of dedicated, purpose-built buildings in an enclosed security area.

12 13

Kaiser Associates Economic Development Practice. FRIDGE is a NEDLAC (National Economic Development and Labour Council) initiative.

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Tenants of the Gold Zone are offered the benefits of Rand Refinerys secure industrial and transport infrastructure in Germiston and the Refinerys high-security vaults at Johannesburg International Airport. Tenants export products can be transported to the vault facility on the airside at the airport and this enables the South African Revenue Services to keep track of the value and volumes of export products. Manufacturing on site began in February 2002 but to date has attracted only one tenant (one of the largest manufacturers) and has yet to meet its objectives. Regarding the aim of creating a jewellery-orientated tourist destination, manufacturers interviewed expressed doubt about this on the basis that the Gold Zone is geographically isolated from other tourist destinations. Furthermore, manufacturers were concerned that relocating to the Gold Zone in Germiston would remove them geographically from their local client base. Manufacturers also expressed concern that being located in the Gold Zone would limit their ability to source their gold from suppliers other than Rand Refinery. Manufacturers expressed concern that if they were located in the Gold Zone, it would limit their ability to source their gold from suppliers other than Rand Refinery...

Industry publications
SA Jewellery News SA Jewellery News is the official mouthpiece of the JCSA. It has been published monthly for the last 70 years and belongs to the Jewellery Trade Magazines Network. The circulation is 10,000 copies monthly to the trade and subscriptions cost R144 per annum. Distribution is by mass mail-out to subscribers monthly by Isikhova Publishers and the publication is fully funded by the JCSA. Jewellers Network Jewellers Network is a jewellery trade publication directed at the manufacturing sector. Published independently, it comprises an annual directory and monthly magazine. These publications are funded by advertising and cover fees. In preparing the directory, the company maintains a database covering in excess of 3,000 businesses associated with the jewellery industry, including manufacturers, retailers and suppliers of all equipment, hardware, raw materials and accessories. The directory is printed annually in hard copy and is published in Johannesburg at the end of January. Those companies appearing in the directory are not charged for either their directory listing or for copies of the annual publication. For those readers not appearing in the directory, a charge of R144 per copy is charged. Jewellers Network also publishes a monthly magazine, JewelTrader, which is distributed free of charge to those in the trade who are listed in the annual directory. The content focuses on the trade and the buying and selling of jewellery services in the local industry. The company also offers a direct mail service through which clients can mail their own promotional materials using the Jewellers Network database at rates agreed with Jewellers Network. In 2003, Jewellers Network launched a debut retail exhibition in South Africa, Jewels for Less, which was held at Vodaworld in Midrand. 4.3 JEWELLERY RETAILING 4.3.1 Size, structure, ownership and vertical integration According to the Department of Trade and Industry (DTI), local retail sales of jewellery during 2003 totalled R2.4 billion14, equivalent to 1% of total retail sales. Ranked by percentage share, this is shown below.

Quotable quotes: My local clients are my bread and butter and are based in the northern suburbs of Johannesburg. My tourist sales are seasonal and highly variable as they are dependent on the currency. If I move to the Zone, I fear that I will lose my local clients. Manufacturing jeweller

14

This will be the last year of data publication. See later for discussion.

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Tariff code 2003 Rand (000) 7,285 14,462 10,785 9,250 13,547 22,784 4,884 12,646 6,306 2,444 2,568 2,830 6,244 19,612 4,486 7,502 2,394 9,351 9,979 234,923 Share (%) 31.0 6.2 4.6 3.9 5.8 9.7 2.1 5.4 2.7 1.0 1.1 1.1 2.7 8.3 1.9 3.2 1.0 4.0 4.2 100.0

According to the Department of Trade and Industry (DTI), local retail sales of jewellery during 2003 totalled R2.4 billion, equivalent to 1% of total retail sales...

Perishable/ processed food Inedible groceries Alcoholic and non-alcoholic beverages Footwear Men's and boys clothing and accessories Ladies', girls' and infants clothing and accessories Textiles Household furniture Domestic appliances Audio appliances TV sets, videos etc Other domestic furnishings Glass, crockery, cutlery, kitchenware Pharmaceuticals, medicines, cosmetics and toiletries Books, magazines and newspapers Sport and recreation requisites Jewellery, silverware, watches and precious stones Hardware All other merchandise Total
Data source: STATS SA, 2003.

According to STATS SA there are two sets of statistics, sales by type of business and sales category by type of merchandise. The category 'Jewellers' in the first set covers only specific jewellery retailers and totalled R1.625bn in 2003. This excludes jewellery counters sited within larger retail stores selling a range of other consumer products. The second category, 'Jewellery, silverware, watches and precious stones' covers all jewellery sales and thus includes the discount stores and general department stores that sell jewellery as well as those retailers that sell jewellery exclusively15. Two points need to be made about this data: first, this category of retail sales includes fine gold jewellery, watches, silverware, platinum jewellery and stones. The way that it is presented does not allow for the distinction between pure gold jewellery plus predominantly gold jewellery (with set stones) as distinct from the other categories of non-gold jewellery or watches; and second, STATS SA has recognised weaknesses in the data to the extent that it no longer collates or publishes these statistics, and 2003 is the last year for which data is available. STATS SA concerns included: the accuracy of large enterprise data. Although some large retailers did give an accurate breakdown, others reported categories as unchanging in percentage each year which raised doubts as to their accuracy; the accuracy of small and medium enterprise data as the sample coverage was low; and the response rate to surveys. STATS SA reported that, by including large questionnaires with such frequency (monthly), their response rate fell to levels of reduced statistical significance.

15

The jewellery figures quoted in the accompanying table refer to the second set of statistics that include all jewellery sales (gold, silver, platinum watches, pearls and so on) in all stores including discount stores.

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After taking advice from consultants, STATS SA elected to cease collating this data and no alternative is being considered. While recognising STATS SAs concern about the data, it has been used in this review since no other source of national sales figures for jewellery exists. Furthermore, to incorporate as much of the sales as possible, the second category of data which includes non-gold jewellery such as watches, pearls, silver, platinum and stones was used. We were then left with the task of determining what proportion of total sales represented gold-only jewellery. On the basis of gold jewellery fabrication, the import figures used in this review and findings with respect to mark-ups along the jewellery manufacturing chain, it is estimated that 58% of total jewellery retail sales in 2003 applied to gold-only product. In both value and volume terms, the local jewellery sector is characterised by a high level of consolidation with 13 large retail chains owned by nine companies16 dominating sales and accounting for 77% of the total value of jewellery sales over the last three years (2002-2004 inclusive).17 An analysis of ultimate ownership of these retail names shows that the jewellery retail sector is even more consolidated than is suggested by these 13 companies. It is estimated that 64% of total jewellery retail sales annually in the country originate from stores that belong to six retail groups. Of the list of large retail stores, one is conspicuous by its absence. Woolworths does not offer jewellery of any description (fine gold, silver or stones), having recently eliminated the range from its product line. Discussions with the company indicated that it is store policy that all merchandise must be available for purchase off-thepeg (that is customers are self-serving up until the cash point stage). The only exception the company has made with respect to this policy is the dedicated and serviced counter selling mobile telephones. 4.3.2 Distribution networks An analysis of the collective extent of the distribution network of the 13 main retail chains offering fine gold jewellery revealed 951 shops and branches across South Africa selling gold jewellery. Only stores that offer gold jewellery were included in this figure. Stock held and sold by retailers differed regionally, and there are a number of branches of these retail chains that do not offer gold jewellery. The results of this analysis by company are presented in the table that follows. The Foschini group (including American Swiss and Sterns) dominates, accounting for 40% of the retail stores offering jewellery around the country. Truworths accounts for almost 23%. The two corporate groups between them accordingly account for almost two thirds of all jewellery retail outlets in South Africa.18

Quotable quotes: South Africans really like their yellow gold white metals just do not seem to feature locally as predominantly as elsewhere in the world. Platinum has a following among the super-rich and, more recently, has captured some of the wedding/engagement ring sector. Silver is flea market stuff - dispensable. Gold falls between the two. Buyer for a major retail store

In both value and volume terms, the local jewellery retail sector is characterised by a high level of consolidation with 13 large retail companies dominating sales and accounting for 77% of the total value of jewellery sales over the last three years...

An analysis of the collective extent of the distribution network of the 13 main retail chains offering fine gold jewellery revealed 951 shops and branches across South Africa selling gold jewellery...

16

Both Sterns and American Swiss belong to the Foschini Group. Game, Dions and Makro belong to Mass Discounters. The Tourvest group owns five retail jewellery outlets namely Forma Viva, Tanur, Pinns, Murdock and Diamond Works. See later for estimates of marker shares. 18 See later for analysis of market shares by turnover
17

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Number of jewellery retail stores by company Retailer Truworths American Swiss Edgars Sterns Foschini Galaxy Game/Dions NWJ Arthur Kaplan Makro Browns Tourvest Grp Total
Data Source: Virtual Metals.

Stores 214 169 109 109 103 90 61 44 18 13 12 9 951

% 22.5 17.8 11.5 11.5 10.8 9.5 6.4 4.6 1.9 1.4 1.3 0.9 100

On a regional basis the distribution of these retail stores is as follows: Regional distribution of major jewellery retailers Gauteng Western Cape KwaZulu-Natal North West Eastern Cape Free State Mpumalanga Northern Cape Limpopo Total
Data source: Virtual Metals.

Number 292 227 130 86 62 57 48 34 15 951

% 30.7 23.9 13.7 9.0 6.5 6.0 5.0 3.6 1.6 100.0

Research among the jewellery manufacturers shows that the jewellery retailers diverged in their business models. This is reflected in different product ranges, suppliers, customer bases, inventory management and mark-ups...

Research among the jewellery manufacturers shows that the jewellery retailers diverged in their business models. This is reflected in different product ranges, suppliers, customer bases, inventory management and mark-ups. Examples of the various business models follow. Game, Dions and Makro are mass retailer discount stores, offering a range of consumer goods at highly competitive prices. Within these stores, the companies have jewellery counters selling lightweight and mass-produced gold jewellery at prices that discount other retailers. The value of their gold jewellery sales is a small percentage of total store turnover (just less than 5%)19. They stock core product lines which they know sell well and their jewellery stock turnover rate is higher than that of traditional jewellery retailers. Price is the most important factor in the minds of their customers and the companies are considered the first point of entry for jewellery buyers. Throughout the discussion and comparisons d that follow, they are referred to as discount stores. Truworths, Foschini and Edgars offer jewellery counters in stores that sell a range of clothing, cosmetics, fashion accessories and soft furnishing. Prices are geared to a more upmarket client base than the discount stores and the jewellery range and the prices reflect the different client base. The jewellery sales still account for only a fraction20 of turnover and the jewellery is not considered core to the companies businesses. These stores are referred to as r retail chains.

19

20

White goods such as fridges, washing machines and cookers and electronic equipment such as TVs, videos and DVDs top the list of sales. It was not possible to confirm the exact figure but interviewees indicated that this was substantially less than 10%.

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d Sterns, American Swiss, Arthur Kaplan and Browns are categorised as dedicated local jewellery retailers. Their product ranges are exclusively jewellery and watches and their customer base is predominantly local (at least 80%) with the balance being tourists. Their target markets are the middle to higher end of the range and their pricing is structured accordingly. d Galaxy and NWJ are also dedicated local jewellery retailers but both also exhibit unique characteristics that differ from the companies described above. Galaxy is not only a retailer with 90 stores around the country, it is also a manufacturer, featuring in the medium-sized category of fabricators, and a wholesaler to the local jewellery industry of final product. Galaxy therefore is the largest most vertically integrated jeweller in the country. NWJ is also a medium-sized manufacturer. The unique feature of this company is that it has franchised its retail outlets throughout the country. The franchises run independently but provide a guaranteed destination for NWJs manufactured output. Thus NWJ also shows high levels of vertical integration. Tourvest which operates the retailers Forma Viva, Pinns, Murdock, Tanur and d Diamond Works is designated as a dedicated tourist retailer. Only 20% of their sales are to local customers and their product line is geared specifically to tourists in South Africa. s Finally, this section must make reference to single-outlet retailers that run their independent businesses usually in the main shopping malls21. (South African retail shopping is characterised by centralised shopping malls rather than main street or high street shopping.) These jewellers also invariably call themselves manufacturers although they are more involved with jewellery repairs rather than jewellery manufacturing. Thus, their shops double as a retail store and basic repair workshop. To avoid double counting., they are included in the discussion on manufacturing. Calculations, however, suggest that they account for 27% of the value of total annual retail sales of jewellery in South Africa and, therefore, the review refers to them where their presence is pertinent to the analysis.

The cumulative market share of the independent single outlet retailers was inferred from the estimated market share of the 13 large retailer chains. This involved detailed discussions with office bearers representing 10 of the major retail stores and an analysis of these companies financial results. The results for 2004 are tabulated as follows: Estimated retail market shares by category in 2004 Dedicated local jewellery retailers Single outlet retailers Discount stores Dedicated tourist retailers Retail chains Total
Data Source: Virtual Metals.

% 42.9 27.1 15.6 10.0 4.4 100.0

Data collation, analysis and comparisons of the local jewellery retailing sector proved more difficult than was the case in respect of jewellery manufacturing. There were a number of reasons for this. Firstly, the sector is intensely competitive with respect to market shares and market niches. As a result, the sector was less forthcoming in providing the statistical basis needed for a full sectoral comparison. The degree of consolidation in the sector compounded this reticence.

21

While we have defined these retailers as single-outlet companies, we acknowledge that there are some entities that have two or more shops. They tend however to be few and far between relative to the one-shop retailer.

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Secondly, where a retail jewellery company was part of a larger commercial entity, the pertinent jewellery sales data was very often collated by the company for the larger entity and the statistics specific to the jewellery component of the overall business were not always available. As an example, the discount stores could confirm how many staff were involved with jewellery buying and the counter sales of jewellery in their stores. However, they could not confirm the number of staff involved with jewellery inventory management, security, accounting, marketing or advertising since these people fulfilled functions at a corporate level for a wide range of products and not just specifically for jewellery. The costs of these services, therefore, were accounted for at head office level.

4.3.3 Employment profiles, education and skills On a weighted average basis by sales of the major retail stores, an analysis of employment profiles and the level of education and skills in the sector showed the following. On a gender basis, the weighted average suggests a ratio of employment that strongly favours women in the retail sector at 88:12. This reflects the dominance of women in the sales teams in individual shops. Men act more as administrators and serve in accounting, and as buyers for these companies. Unlike the manufacturing sector, the age profile of the retail workforce did not represent a normal distribution but favoured the 18-25 age group. Again this reflects a sales force made up of younger women. The chart on the left demonstrates this. In respect of racial groups, employment in the retail sector is shawn in the chart on the left. Turning to education and skills levels within the jewellery retail sector, the research showed that in excess of 86% of the staff employed by the large jewellery retail stores have either a matric or some form of tertiary education. This profile was similar across the various retail categories as defined in this review. An analysis of job descriptions in this sector shows that, on a weighted average basis, sales teams comprise almost half (49%) of the jobs in the retail sector, with management and administration making up 47%. The technical (eg IT) component of the staff profile only accounts for 4% as the chart on the next page shows.

Quotable quotes: Two days before Christmas we have fraught looking men coming into our branches, pointing at something on display and saying How much is that, just wrap it please. Buyer for a major retail store

4.3.4 Jewellery retail business profiles and retail strategies (including marketing)

Seasonality and marketing Three events dominate the retail calendar. In order of importance, they are Christmas (December), St Valentines Day (February) and Mothers Day (May). However, retailers do proactively organise other sales-generating events during the course of a year,.
The busiest times for all the retailers are the last two to four shopping days prior to Christmas Day when stores will record sales in excess of monthly averages for the remainder of the year. Customers over the Christmas period, St Valentines Day and Mothers Day are mostly men buying for their wives and partners. At other times of the year, buying is more frequently a joint decision, with couples coming into the shops together and the intended recipient of the gift having a substantial say regarding what is to be purchased. This is particularly the case when higher priced jewellery is being bought. Women also buy jewellery for themselves, but usually less expensive items. In addition to the traditional calendar events, retailers hold sales, commonly twice yearly, aimed at moving stock by discounting prices. Sterns and American Swiss

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hold an annual winter diamond jewellery sale between June and July and their competitors often pre-empt this event with promotional campaigns of their own in May. Irrespective of the competition, dedicated local retailers all reported increased sales over this period. The only exceptions to these seasonal patterns are those companies, defined as dedicated tourist retailers, whose customer base is 80% reliant on tourism. Their sales are seasonal, in that northern hemisphere visitors tend to visit South Africa during their winter. The tourist season peaks in November/December, but there is also an influx of tourists during the late South African summer months, mainly between January and April.

Promotional activity An analysis of the advertising undertaken by retailers highlighted differences in the quality and quantity of gold jewellery advertising, and in the amount spent annually on marketing.
The retail chains spend on average between 3.5% and 5.5% of annual turnover on marketing. Those interviewed unanimously agreed that this amount ought to be higher, closer to 6-8% of annual turnover. With respect to the mass discount stores, it was not possible to isolate the marketing spend specific to jewellery. These companies advertise in daily and weekend newspapers (usually in colour and usually in the form of inserts). Their jewellery is not advertised independently of the stores other range of products and gold jewellery might share a page with white goods and electronic goods for example. The advertising emphasis is on price discounting. The retail chain stores also advertise in newspapers. Although the advertisements are in leaflet/brochure format, they are of a substantially higher quality than those of the discount stores with good photographic reproductions on glossy paper and in A5 format. The advertising emphasis is less on price discounts, and more on value for money. Again, gold jewellery shares advertising space with cosmetics and makeup, perfumes and soft household furnishings. Dedicated local jewellery retail stores differentiate their advertising from that of the retail chain stores with full-colour inserts appearing not only in newspapers, but also in fashion magazines. These inserts tend to be more substantial in volume, advertising a wider range of products and photographed in close-up detail. The marketing emphasis is value for money and luxury spending. The dedicated tourist retailers and the upmarket single outlet retailer target a totally different market. Their advertising focuses on single pages in full colour fashion and womens magazines. They also concentrate marketing spend on tourist magazines destined for hotel rooms and on local and international airline in-flight magazines. The retailers that make most use of this promotional route are those dominant in more expensive diamond- and tanzanite-set jewellery. Less up-market, single outlet retailers do not appear to do any active marketing, save for brochures which they distribute via their shops. Retailers who have attempted to sell their product via the internet reported that this approach had been particularly unsuccessful. Dedicated local jewellery retail stores differentiate their advertising from that of the retail chain stores with full-colour inserts appearing not only in newspapers, but also in fashion magazines... The retail chains spend on average between 3.5% and 5.5% of annual turnover on marketing...

Customer profiles and product lines The various categories of retailers address different customer bases and different buying preferences. The following tables collate average retail prices for a very basic range of core product and give an indication of the varying customer bases associated with each category of retailer. Given that jewellery retailers stock thousands of different items, direct comparisons are not easy. Nevertheless, comparisons have been made as directly as possible by identifying the average total

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weight of the basic products. For the dedicated local jewellery retailer, the sector has been further segmented into a high, mid-range and low-end of the product line. The tables need to be read together with the notes that follow: Price of selected items Rand inc VAT Sleeper earrings Fine chain Other neck chains Bangles Dedicated tourist retailers Not on offer R2,000R5,000 R10,000 to R25,000 R5,000 upwards Discount stores R29.99-R34 R199R2,000 R700R1,600 R199 for 4mm R1,399 for 15mm R299R799 Not on offer Retail chains R30-R50 Up to R2,000 R2,000R5,000 R1,200R2,500 Average weight in grams 0.2 each Up to 5 10 upwards 5 upwards

Rings with diamonds

R5-25,000 upwards R34,000 to R65,000

R1,000R2,500 Not on offer

Rings with tanzanite

8 upwards including stones 10 upwards including stones

Data Source: Virtual Metals.

Quotable quotes: We sell 25,000 pairs of Creole earrings a year at R29.99 per pair. Buyer for a major discount store

Dedicated local jewellery retailers Price of selected Mid-range items Rand inc VAT Sleeper earrings R49 upwards Fine chain R399 upwards Other neck chains R800 upwards Bangles R499R999 Rings with diamonds R1,099 to R5,200 Rings with tanzanite R3,000 R10,000

Low-end

High-end

R89R199 R349R999 R2,000 upwards R349R1,200 R299R40,000 R1,500 R10,000

R250 and over R1,000 and over R5,000 upwards R2,000 R34,000 R100,000 R50,000 R120,000

Average weight in grams 0.2 each Up to 5 10 upwards upwards 5 upwards 8 upwards including stones 10 upwards including stones

Data Source: Virtual Metals. Notes: Fine chain refers to the light chain used to hang pendants. Other neck chains refer to heavier chain with larger links, worn as jewellery in its own right as opposed to being used to hang pendants. Bangles refer to non-chain bracelets. Where diamonds and/or tanzanite are included in products, prices vary vastly, depending on the size and quality of the stones. In the case of the Discount Stores and the low end of the market Dedicated Local Retailers diamonds refer to cubic zirconia or diamond chips.

Discount stores cater for the first-time buyer and the lower end of the retail market. Within this customer profile, components of the product range are preferred by different customers. Chain necklaces with matching bracelets are favoured by both black men and women. Bangles (non-link) are favoured by white women. Rings with zirconia find favour with Indian women. Earrings, especially sleepers and Creole, are favoured by black customers. The entire product range is 9 carat and almost exclusively yellow gold. Looking at dedicated local jewellery retailers, there is a close overlap in the geographical positioning of Sterns and American Swiss retail outlets, largely for historic reasons. These retailers used to be competitors, until the Foschini Group bought Sterns in 1993. Since then, Foschini has differentiated between the two in product lines. American Swiss is geared towards younger, more self-assured buyers

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while Sterns targets a more conservative buyer who welcomes advice and reassurance from sales staff. Thus, the American Swiss jewellery range is more influenced by latest fashion trends whereas Sterns is more traditional. Dedicated local jewellery retailers stock a full range of products. As the price tables showed, there are tiers of dedicated local jewellery retailers each serving a different profile of customer. Nevertheless, each has a core range of firm favourites that remain popular such as classic link chains, bangles, cross pendants, solitaire rings, and hoop, stud and sleeper earrings. 95% of this range is 9 carat. There are some 18 carat items usually associated with diamond settings and engagement rings. Retailers adapt the latest designs and fashions to the core range. Over time these have included items such as Russian wedding rings, linked bangles22 and friendship rings. New items are added to the stock regularly, usually every three months and these additions represent an estimated 10% of the core range. Dedicated tourist retailers target a different market. Located mainly in Cape Town and Johannesburg, these stores are reliant on visitors to the country. With respect to this market segment, the strength of the rand influences the level of jewellery purchases. Tourists arrive in South Africa with a predetermined Dollar, Pound or Euro budget. The value of the Rand against these currencies will then dictate how much visitors will have available to spend on jewellery and keepsakes after they have paid for their holiday expenses such as hotel accommodation, meals and car hire. The stronger the Rand, the less will be spent on jewellery. Discussions with retailers indicated that tourists regularly anticipate buying a piece of good quality jewellery during a visit to South Africa. Invariably it is gem-set, usually with diamonds but more recently tanzanite. Being on holiday, tourists have the time to shop around and be selective. Tourist retailers reported that their jewellery range is not 9 carat but 70% 18 carat, and associated with good quality and sizeable diamonds and tanzanite, and to a lesser extent other stones. The remaining 30% is 14 carat. These retailers noted that even visitors from the United Kingdom, who are accustomed to 9 carat gold jewellery, will opt for 14 carat when on holiday in South Africa. They also reported that diamond engagement rings feature high in their range. Retailers in this sector have attempted to brand their companies rather than their product. They acknowledged that their products lack an obvious and easily identified brand, and they attempt to brand themselves by offering a superior service, including: the finish and quality of the final goods; sales expertise and advice; after sales service (repairs); personalised design work; reputation and reliability (especially with respect to stones); and packaging associated with the company.

Quotable quotes: We dont buy 6,000 pieces of the same item and shift them over six months. We buy a few items of a wider range, viewing them more as a fashion that will move every two to three months. Buyer for a dedicated local retailer

Dedicated tourist retailers target a different market

Quotable quotes: The tourists visiting our shops dont necessarily want something with a strong African design they come more for the stones. They want a nice piece of jewellery, a reminder of their trip that they will be able to wear back home in the years to come. We cannot understand the preoccupation with the African look among promoters and designers. Buyer for a retailer specialising in the tourist trade

Retailers in this sector have attempted to brand their companies rather than their product...

Inventory management and security Inventory management forms an important part of the retailers business as large volumes of unsold stock represent a financial cost. Since the contents of shop windows are financed, the unsold stock represents unrealised profits and locked-up capital. Four options are open to jewellery retailers with respect to unsold items. They can:
discount the price until the stock sells; or move the stock to other branches around the country; or return the stock to the manufacturer; or send the stock to a refiner for remelting.

22

Three linked bangles or rings each of a different colour gold: yellow, white and red.

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Our interviews revealed varying policies with respect to inventory management. Two of the dedicated local jewellery retailers prefer not to return stock to either refiners or manufacturers, but to continue to discount prices until the items sell. Depending on the item, these stores will begin discounting the price after six to 12 months of the piece appearing in the show cases. Dedicated tourist retailers will buy a collection and display it for three months in their stores... Dedicated tourist retailers will buy a collection and display it for three months in their stores. If unsold within that period, the retailers will return the items to the manufacturer through resale. Sending material for remelting is the least attractive alternative since they receive back only the gold content, less the recycling fee, resulting in a financial loss to the retailer of the original manufacturers mark-up, the cost of holding the stock and the recycling fees. Whatever the policy towards inventory management among these retailers, they attach no sentimental value to their stock. This differentiates them from the singleoutlet independent retailer. A jeweller who is both manufacturer and retailer and, as a small business, carries a limited number of pieces, is more likely to hold unsold stock for a period longer than is financially prudent. Having made it themselves, these retailers seem reluctant to acknowledge that a piece might not be that popular and appear reluctant to take the decision to cut their losses and send the item back for recycling of the gold content. In terms of stock loss, retailers reported that loss as a result of internal theft (theft by staff as well as shoplifting by customers) was minimal and estimated this at about 1% of the value of the stock. This is because security is in place. External theft in the form of armed robbery is more of a threat.

Quotable quotes: Shoplifting is not an issue. The way we show customers the jewellery does not really give people a chance to pocket anything. But we have been held up at gun point. Dedicated Local Jewellery Retailer

The majority of jewellery retail outlets do not suffer the same financial and cash flow constraints identified with jewellery manufacturing...

Financial issues Given that 64%23 of total retail jewellery sales in South Africa are generated by companies that belong to larger corporate groups offering a wide range of consumer durables, the majority of jewellery retail outlets do not suffer the same financial and cash flow constraints identified with jewellery manufacturing. Nevertheless, in the single-outlet, independent retailer, where typically the jeweller runs a small workshop on the same premises as the retail store, financial constraints similar to those suffered by the manufacturers apply, namely, lack of access to affordable funding and recurring cash-flow issues.
Three of the large retailers (other than those such as Galaxy and NWJ where the business is integrated from manufacturing through to retail), reported that they financially assist their major manufacturing suppliers. This is done by forwarding to the manufacturer payment to the value of the gold contained in an order, on placement of the order, so that the manufacturer can pay in full for their raw materials. All other costs, including the cost of labour, the manufacturers mark-up, transport and delivery etc, are settled only after delivery of the order.

23

American Swiss, Sterns, Galaxy, Edgars, Foschini, Truworths, Game, Dions and Makro.

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With respect to terms offered by retailers to end-customers for jewellery, the various categories of retailer showed different business practices. Retailer Cash Discount None 35% 10% over R5,000 Credit facilities (months) None 12 24 6 12 18 6 12 18 6 12 6 12 18 Interest charged per annum None 15% 35% 0% 17% 17% 0% 10-14% 10-14% 0% 20% 0% 12.7% 12.7% Other

Mass Discount Browns American Swiss

None 4 Month lay-bye None

Quotable quotes: We are always on the lookout for something different something with a wow factor that will catch on and become the latest fad. When taking on a new supplier, we look at a range and then ring around the industry to check out the manufacturer. It is a very small world and everyone knows everyone else. Buyer for a discount store

Sterns

7% over R5,000 No details given 10% over R10,000

None

Arthur Kaplan Galaxy

None 3 month lay-bye for purchases over R500

Data Source: From retail stores.

Quotable quotes: Our suppliers are very protective of our relationship with them to the extent that they will over-carat their alloys rather than make the mistake of under-carating. We have our stock assayed on a regular basis. Buyer for a discount store

4.3.5 Relationships with suppliers The vertically integrated jewellery retail companies, Galaxy and NWJ, have close relationships with their suppliers, being separate businesses within the same companies. But the discount stores and other dedicated local jewellery retailers also exhibited a close alliance with suppliers in offering financial assistance by paying upfront for the gold contained in an order. This relationship also extends to design work to the extent that large retailers will travel with manufacturers to international jewellery fairs to jointly look at the latest product ranges. Discount stores order thousands of pieces of the same item of jewellery. They cannot rely on the small manufacturer who may not have the capacity to produce jewellery in this volume. They therefore concentrate on business relationships with the large and medium-sized manufacturers in the country. They will, however, also give consideration to smaller orders produced by other manufacturers where the product line does not offer core designs but rather fashion goods that might sell quickly. Dedicated local jewellery retailers carry a core range of many more different pieces compared with discount stores, and they do not order items in the same quantity. This allows them to order jewellery from the smaller manufacturers. 4.3.6 Imports All the retailers interviewed import jewellery product, both directly and through wholesalers, particularly where the local industry is not geared to produce the latest designs. The discount stores noted that they import at peak periods, where the local industry cannot supply the volumes needed swiftly enough. The two vertically integrated jewellery companies reported that at an exchange rate of R6 to the Dollar, they can import goods including the 20% import duty, plus a 2% to 3% clearing charge for less than they can fabricate comparable items in their own local workshops. Discount stores order thousands of pieces of the same item of jewellery...

Dedicated local jewellery retailers carry a core range of many more different pieces compared with discount stores...

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Mark-ups and costs In addition to mark-ups to gold product added by the refiners and manufacturers, retailers apply their own mark-up to the final product. Variations between categories occur. All mark-ups cited here include VAT at 14%.
Indicative retail mark-ups in the South African jewellery industry Indicative Comments Mark-Ups Dedicated local jewellery retailers 250% For core products Up to 350% For specialised range and fast sellers Dedicated tourist retailers 250% For core products Up to 350% For specialised range and fast sellers. Where diamonds are included mark-ups can be higher Discount stores 20% - 50% For non-core range 100%-150% For core products Retail chains 250% + For specialised range and fast sellers
Data source: Interviews.

Retailers apply their own mark-up to the final product...

Quotable quotes: We dont lose any money on jewellery. If we offer buy a chain and get a free bracelet, rest assured the cost of the bracelet is in our price. Buyer for a discount store

The mark-ups applied by dedicated local jewellery and tourist retailers are high, ranging from 250% to 320%...

The mark-ups applied by dedicated local jewellery and tourist retailers are high, ranging from 250% to 320%. The 250% mark-up is applied both to core products, designed to attract customers into the store where they may spend money on more expensive goods, and to experimental products where the retailer is yet to be convinced of the ranges popularity. If a range then sells well, the retailer will consider increasing the mark-up to the 320% level. In stores catering for tourists, mark-ups can exceed 350% if high quality stones, especially diamonds, are included. A comparison between mark-ups achieved by the manufacturers and the retailers reveal a large differential in the retailers favour. This, however, does not imply that the retailers profits are proportionately higher. For retailers applying a 300% markup, the profit margin achieved for very basic 9 carat core product is 70% after costs of sales are accounted for, as well as cash discounts24 that might be offered. For the discount stores that apply mark-ups of 50% to 150% (depending on the product line) the profit margin is lower, ranging from 6% to 33%. The cost profiles of the major dedicated local retailers and the retail chains are shown below: Cost profiles of the major dedicated retailers and retail chains Inventory Labour Rent/overheads Marketing Other Total
Data source: Interviews.

% 58.0 14.1 7.8 4.7 14.8 100.0

24

See previous table which lists discounts offered ranging from 7% to 35% depending on the store and the ticketed price of the item.

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As with all analyses, the cost estimates have been made on a weighted average basis. Our analysis here showed that the cost of purchasing and holding inventory predominates and represents 58% of the cost profile. 4.3.7 Price exposure and financial risk All the large retail stores reported that they are exposed to both the Dollar price of gold and the Rand/Dollar exchange rate. Their exposure to the Dollar-based price of gold relates to the extent to which they may be importing finished product from manufacturers abroad. The dedicated tourist retailer is particularly exposed to the value of the Rand against other currencies as tourists visit with a budget fixed in their local currency and the amount they have available to spend is then dictated by the number of Rands that they can buy with their foreign currency. None of the retailers interviewed expressed concern about the absence in South Africa of financial mechanisms to offset their gold price risk. None were aware that the JSE Limited offers a Krugerrand contract25 and they were unfamiliar with the workings of gold futures and options contracts traded by the international exchanges such as COMEX/Nymex. Since 64% of the value of total jewellery retail sales is from retail stores that are a part of larger companies, the costs of running their businesses are funded internally. To that extent, they are not exposed to interest rates. Those retailers (both large and independent) that are not part of larger commercial groups, either have to fund their business from profits generated or to borrow, and are thus in the same position as the manufacturers with respect to raising affordable credit. They echoed the concerns voiced by the manufacturers of having to pay 2-3% above the prime interest rate, as well as having to provide collateral of up to 120% of the value of the loan. The cost of purchasing and holding inventory represents 58% of the cost profile...

All the large retail stores reported that they are exposed to both the dollar price of gold and the rand/dollar exchange rate...

25

See Chapter 5 for further details of the Krugerrand contract.

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CHAPTER 5 FINAL PRODUCT: COINS, INDUSTRIAL END USES AND INVESTMENT

CHAPTER 5 CHAPTER 5
Photograph courtesy: Rand Refinery Limited

Contents: 5.1 THE SOUTH AFRICAN COIN INDUSTRY 5.1.1 The South African Mint Company (Pty) Ltd and Coin World 5.1.2 Other mints and coin producers 5.1.3 Employment profile of the coin sector 5.2 COIN PRODUCTS 5.2.1 Krugerrands 5.2.2 The Natura coin series 5.2.3 The Protea coins 5.2.4 The R1 and R2 coin series 5.3 DENTAL ALLOYS 5.4 ELECTRONICS 5.5 INVESTMENT 5.5.1 The JSE Limiteds Krugerrand contract 5.5.2 ABSAs NewGold Gold Bullion Debenture 102 102 103 103 104 104 106 107 107 108 110 110 110 111

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Apart from jewellery, other end uses of gold in South Africa include coins, dental alloys and electronic components. In 2004, the fine gold used in these sectors was: Fine gold usage in South Africa 2004 Non-Jewellery Applications Coin/medal fabrication Dental alloys Electronics Total
Data source: Virtual Metals.

t 2.93 0.04 0.01 2.98

% of global fabrication 1.98 0.07 0.004 0.49

In South Africa, these sectors are small, accounting collectively for 0.87% of South African gold mine output in 2004 and 0.49% of global consumption in these sectors. 5.1 THE SOUTH AFRICAN COIN INDUSTRY In 2004, fabrication of gold coins accounted for 2.93t of fine gold, about 1.96% of total gold consumed in coin fabrication worldwide... In 2004, fabrication of gold coins in South Africa accounted for 2.93t of fine gold representing 1.96% of total gold consumed in international coin and medal fabrication. The following tables show coin fabrication and sales in tons of fine gold between 2002 and 2004. South African coin fabrication 2002 - 2004 Fine gold - t Krugerrand bullion Krugerrand proofs Proteas Naturas R1 R2 Medallions Total
Data source: SA Mint, Universal Mint and Gold Reef City Mint.

2002 0.76 0.22 0.09 0.18 0.01 0.03 0.00 1.29

2003 1.81 0.19 0.02 0.15 0.02 0.02 0.00 2.22

2004 2.34 0.18 0.19 0.18 0.01 0.03 0.00 2.93

South African coin sales 2002 - 2004 Fine gold - t Krugerrand bullion Krugerrand proofs Proteas Naturas R1 R2 Medallions Total

2002 0.91 0.19 0.05 0.13 0.01 0.03 0.00 1.33

2003 2.18 0.15 0.01 0.15 0.01 0.02 0.00 2.51

2004 2.87 0.17 0.18 0.18 0.01 0.02 0.00 3.43

Data source: Rand Refinery, SA Mint, Universal Mint and Gold Reef City Mint. Note: Annual sales exceed minting due to sales out of inventory. Medallions appear in these tables as zero fabrication and usage since the gold volumes involved are less than 10kg.

5.1.1 The South African Mint Company (Pty) Ltd and Coin World The South African Mint Company (Pty) Ltd is a wholly-owned subsidiary of the South African Reserve Bank (SARB). It was established on 1 September 1988 and in October 1990 moved from Pretoria to its current location at Gateway in Centurion. Its main function is to mint coinage under the Reserve Bank Act of 1989. The South African Mint can produce both legal tender and commemorative gold coins, although currently all the gold coins issued are legal tender. Decisions with respect to current and future coin programmes are taken by the Government at Cabinet level. The SARB requires Cabinet approval for planned coin issues, details of which are published annually in the Government Gazette. The coins are then struck by the SA Mint and made available for purchase by the public. The SA Mint currently

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produces several legal tender gold coins, namely Krugerrands, Naturas, Proteas and the R1 and R2 cultural coin series. Coin World (a wholly-owned subsidiary of SA Mint) is a retail outlet and museum on the premises of the South African Mint. All the analysis that follows regarding the SA Mint relates to the Coin World business of the Mint only, and not the Mint in its entirety, since the Mints main function is to strike and distribute the countrys legal tender coinage. 5.1.2 Other mints and coin producers In addition to the SA Mint, there are two other companies that strike gold coins. Their products are commemorative medals and medallions and not legal tender coins. These are the Cape Mint and the Gold Reef City Mint. The Cape Mint, located in Cape Town, strikes commemorative gold coins to order for export. The Cape Mint collaborates with the Universal Mint, a coin sales broker with no actual production facility, on certain of these export projects. In 2004, these companies collectively struck coins for the Cook Islands and Uganda to commemorate various national milestones. The mark-ups for these issues are not made public but the manufacturing costs were reported to be R18 per coin irrespective of the coin size. These costs pertain to gold coins and exclude packing and shipping charges. Buyers of coins from the Universal Mint and the Cape Mint are required to pay up front for the purchase of the gold on placement of their order. The terms for the balance of the payment, including minting, delivery cost etc, are then 30 days after delivery of the coins. The Gold Reef City Mint in Johannesburg also strikes gold medals, medallions and commemorative coins for sale to local purchasers and tourists visiting Gold Reef City. The company purchases gold grain from Rand Refinery or other secondary refiners. It produces its own blanks and strikes its own coins and medals. Apart from marketing its own products, the Gold Reef City Mint also markets Krugerrands. While the client base for these Krugerrands is mainly local purchasers, tourists visiting Gold Reef City also buy from this source. The mark-ups applied to the coins sold to tourists also reflect a commission paid to the tour operators who ensure that tourists visit the mint. Interviews conducted with these mints indicated that they are operating at well under capacity although they declined to indicate their current rates of minting. Should demand for coin products increase, they would be able to meet orders through increasing existing capacity utilisation. 5.1.3 Employment profile of the coin sector An analysis of staffing in the South African coin sector follows. The figures associated with the SA Mint staff relate directly to Coin World and not to staff involved with the striking and issuing of monetary coins in circulation. Coin sector Men Women Total
Data source: From interviews.

In addition to the SA Mint, there are two other commercial minting facilities operational in South Africa...

Staff profile Number 40 42 82

% 48.0 52.0 100.0

The age profile of the coin sector staff showed a statistically normal distribution. The demographic make-up shows a predominance of whites and coloureds at 37% each and blacks at 26%.

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52% of the staff employed in the coin sector have a matriculation certificate (matric) as a basic qualification and another 19% have education after matric. Some 29% do not have a matric qualification. 64% of the staff in the coin sector are in manufacturing, specifically in preparing the blanks, striking the coins and polishing and packing the finished product. Another 16% are involved in marketing, leaving 7% and 4% involved in the administrative and technical sides of the business respectively. 5.2 COIN PRODUCTS Coins manufactured by the South African Mint Company are distributed for sale via Coin World, Rand Refinery and 10 local dealers throughout the country. According to the SA Mint, the active local market for gold coins totals 10,000 buyers of which 6,000 are regular purchasers. These buyers are either investors or collectors. 5.2.1 Krugerrands Krugerrands were first minted on 3 July 1967. They have been produced and sold locally and internationally every year since. They are legal tender coins of 22 carat or 916.67 parts per 1,000 gold (the remaining 83.33 parts per 1,000 made up of copper). Krugerrands have been produced and sold locally and internationally since 1967... Krugerrands were first minted in one size only one full troy ounce (31.1035 grams) of fine gold. From 1980, three other coins, termed fractionals, were introduced the 1/2 ounce, the 1/4 ounce and the 1/10th ounce. Since the launch of these fractional coins, the original Krugerrand is sometimes referred to as a full or one-ounce Kruger and within the local and international coin trade the word Kruger or Krugerrand refers to the original, full-sized ounce coin. In striking and marketing Krugerrands, the industry differentiates between the bullion Krugerrand and the proof Krugerrand. While the design of the coins is identical, there is a difference in quality and price. The term proof is not a grade, but a term applied to particular coins. These coins have the raised part of their design in a matt or sand-blasted finish while the background of the coin has a highly polished or mirror finish. The dies used to strike proofs are usually sand-blasted first and then the area of the die that corresponds to the coins background is polished. Prior to striking proofs, the coin blanks are specially polished. The blanks are then hand-fed on to the stamping press and after being double struck (two stampings or strikings of the die to give a perfect finish with the sharpest image), the proof coins are then sealed in capsules or gift sets and allocated a certificate of authenticity which states the number of proof coins struck in that year. For a collector, a proof Krugerrand would be termed internationally FDC, which stands for fleur de coin a coin with no blemishes and of the highest quality. In addition to this, the proof Krugerrand has 220 serrations (raised demarcations along the edge of the coin), compared with 180 serrations on the bullion Krugerrand. In contrast, bullion Krugerrands are not double struck and they are sold not in sealed capsules but in presentation gift boxes. The coin blanks for Krugerrands are manufactured, and supplied exclusively by Rand Refinery... The coin blanks for Krugerrands are manufactured and supplied exclusively by Rand Refinery and coins are struck to order. The reason for Rand Refinerys exclusivity is largely historical since, in the early years of the Krugerrand, it was the only primary refinery operating in South Africa. On receipt of the coin blanks, the SA Mint strikes the bullion coins and then sends them to Rand Refinery or other outlets for distribution and sale. The conversion charge (the cost of striking the coin from the blank) levied by the SA Mint is R2.60 per coin, irrespective of the size of the coin. The SA Mint strikes and markets its own proof Krugerrands. Any coin blanks subject to mis-strikes during the minting process are returned to Rand Refinery for remelt.

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The price of the bullion Krugerrand is linked to the international gold price with a fixed premium, while proof Krugerrands, including fractionals, are offered in limited quantities at a price based on a fixed premium that is adjusted on a quarterly basis. The number of proof Krugerrands minted annually is a Cabinet decision; however, the total number of Krugerrands issued (both proof and bullion) is limited to a maximum of 500,000oz of fine gold per annum. Krugerrand specifications are as follows: Krugerrand specifications Face value Rand 1 oz 1/2 oz 1/4 oz 1/10 oz Serrations 1 oz 1/2 oz 1/4 oz 1/10 oz 180 150 140 115 10 5 2.5 1 Mass g 33.9305 16.9653 8.4826 3.3931 Min diam mm 32.61 26.93 21.94 16.45 Gold content parts per thousand 917 917 917 917 Min thick mm 2.74 2.12 1.79 1.25 Gold content g 31.104 15.552 7.776 3.11 Max thick mm 2.84 2.22 1.89 1.35 The price of the bullion Krugerrand is linked to the gold price...

Max diam mm 32.77 27.07 22.06 16.55

Data source: SA Mint, www.taxfreegold.co.uk and www.24carat.co.uk.

The mark-ups on bullion Krugerrands over the value of the contained gold are as follows: Krugerrand mark-ups 1 oz coin 1/2 oz coin 1/4 oz coin 1/10 oz coin
Data source: SA Mint.

% 3 5 7 9

In June 2005, the mark-up on a proof Krugerrand was calculated at 42% above the gold price. The level of these mark-ups far exceeds the level of mark-ups on gold bars, and gold coins are not a cost-efficient means of retail investment in gold, but therefore tend instead to be purchased as commemorative gifts or by collectors. The fractional coins have never been as popular as the full ounce coins and are usually purchased on a one-off basis with many of them destined to be set in jewellery, normally pendants. Krugerrands are also sold in full sets, containing one of each size coin. The ratio of full ounce Krugerrands to fractional coins (both bullion and proof coins) in terms of the number of coins minted is tabulated below. Krugerrands - fractional ratios - % Number of bullion coins struck 1 oz 1/2 oz 1/4 oz 1/10 oz Total 2002 41.6 0.0 27.1 31.2 100.0 2003 62.3 16.1 1.7 19.9 100.0 2004 100.0 0.0 0.0 0.0 100.0

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Krugerrands - fractional ratios - % Number of proof coins struck 1 oz 1/2 oz 1/4 oz 1/10 oz Total
Data source: Calculated from SA Mint.

2002 31.0 25.1 19.0 25.0 100.0

2003 26.2 19.1 26.0 28.6 100.0

2004 25.5 17.8 30.2 26.5 100.0

Sales of Krugerrands are split equally between local buyers and those destined for export...

According to the SA Mint, sales of Krugerrands are currently split equally between local buyers and those coins destined for export. This ratio is affected by two factors, namely the international gold price and the Rand/Dollar exchange rate. The performance of the Rand against the Dollar affects investment decisions on the part of local buyers. The international gold price affects offshore investors buying decisions. When the Krugerrand was first introduced in 1967, it was the first bullion legal tender coin of its kind. It was the leading gold coin sold worldwide at the time that gold coins were the principal medium for retail investment in gold. Peak sales of 187t occurred in 1978, but falling retail interest in gold and progressive sanctions imposed on South African goods saw Krugerrand sales decline. Between 2002 and 2004, sales of Krugerrands again increased off a low base at a rate of 45% per annum. Sales of the US Eagle bullion coin1 showed similar but not quite as strong growth, at 30% per annum. Buoyant international gold prices and heightened interest in gold as an investment throughout this period appear to have encouraged greater interest in these coins. The SA Mint holds inventory of Krugerrands for up to one year. After this, the unsold coins are remelted at the SA Mint and restruck into new coins with the current date. They are not returned to Rand Refinery. Rand Refinery also holds inventory of Krugerrands and hence the Refinerys reported sales of coins can be in excess of the reported levels of coin minted in any one year. Under the Reserve Bank Act of 1989, the South African Reserve Bank is obliged to buy back Krugerrands from the general public. These coins are not resold but are either taken back into the countrys gold reserves2 or are sent back to Rand Refinery for remelt. By law, members of the public can return unwanted coins to any branch of the South African Reserve Bank. In practice, this rarely happens since the holder of the coin would receive only the fine gold Rand value of the coin and would lose the premium initially paid for the coins. 5.2.2 The Natura coin series The Natura gold coin series was launched in 1994 as South Africas first 24 carat gold coin. Three series have been issued since: the Big Five from 1994-1998, the Monarchs of Africa from 1999-2001 and, in 2002, the Wild Cats of Africa. The details are as follows. Big Five 1994 1995 1996 1997 1998 Monarchs of Africa 1999 2000 2001 Wild Cats 2002 2003 2004 Lion Rhinoceros Elephant Buffalo Leopard Kudu Sable Oryx Cheetah Lion Caracal

1 2

Directly comparable, as the Eagle is also 22 carat. See Chapter 6 for further details covering South Africas gold reserves.

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Natura coin specifications Face value R 1 oz 100 1/2 oz 50 1/4 oz 20 1/10 oz 10
Data Source: SA Mint.

Diam mm 32.69 27.00 22.00 1.50

Mass g 31.107 15.553 7.777 3.110

Metal content parts per thousand 999.9 999.9 999.9 999.9

5.2.3 The Protea coins The Protea gold coin series was launched in 1986 and was initially struck in 22 carat gold. Since 1998, however, the series has been struck in 24 carat. In the years 1987, 1989 and 1990 no Protea coins were issued. The details of the Protea issues are as follows: 1986 Centenary of the Gold Rush 1988 500th Anniversary of Bartholomew Diazs Circumnavigation of the Cape of Good Hope 1989 300th Anniversary of the Landing of the Huguenots 1990 150th Anniversary of the Great Trek 1991 Tribute to 100 years of SA Nursing 1992 Centenary of Minting in SA 1993 200 Years of Banking in SA 1994 Centenary of Nature Conservation in SA 1995 Centenary of Railway Links 1996 The New Constitution 1997 South African Women 1998 Year of the Child 1999 The Mining Industry in SA 2000 The Wine Industry in SA 2001 The Tourist Industry in SA 2002 Soccer and World Summit 2003 Cricket 2004 10 Years of Democracy Protea coin specifications (24 carat coin) Face Value Diam R mm 1 oz 25 32.69 1/10 oz 50 16.50 R1 Silver 1 32.70
Data source: SA Mint.

Mass g 31.107 3.11 15

Metal content parts per thousand 999.9 999.9 Ag 925

5.2.4 The R1 and R2 coin series The R1 gold coin was introduced in 1997 as a legal tender 24 carat proof quality coin. The coin depicts cultural diversity in South Africa as follows: 1997 Heart transplant (30th anniversary) 1998 The San the Lost People 1999 The Zulu culture 2000 The Xhosa culture 2001 The North and South Sotho cultures 2002 The Tswana culture 2003 The Tsonga culture 2004 The Venda culture

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R1 coin specifications Face Value R 1/10 oz 1
Data source: SA Mint.

Diam mm 16.50

Mass g 3.11

Metal content parts per thousand 999.9

The R2 gold coin was also introduced in 1997 as a legal tender 24 carat proof quality coin. The themes since then have been as follows: 1997 Mrs Ples Almost Human 1998 Coelacanth The Living Fossil 1999 Thrinaxodon The Mammal-like Reptile 2000 Little Foot Most complete skeleton found 2001 Gondwana Continental drift 2002 Robben Island 2003 Greater St Lucia Wetland Park 2004 Ukhahlamba-Drakensberg Park

R2 Coin Specifications Face value R 1/4 oz 2


Data source: SA Mint.

Diam mm 22.00

Mass g 7.777

Metal content parts per thousand 999.9

The target market for the Natura, Proteas and R1 and R2 coins is the small investor and collector...

The target market of the Naturas, Proteas and the R1 and R2 coins is the small investor and collector. With respect to Naturas and Proteas, the design is changed every three to four years. This is timed to maintain the interest of the collector but without offering too many new designs, which would price the collector out of the market. The R1 and R2 gold coins are re-launched with a new design every year. At 1/10th of an ounce and 1/4 of an ounce respectively, they are affordable enough to support annual issues. The fact that these four coin issues are struck in 24 carat gold not only differentiates them from the Krugerrand but also allows for direct comparison (in terms of caratage and hence, price) between them and other international bullion coins that are 24 carat for example, those bullion coins struck and marketed in Canada and Australia. The SA Mint buys 24 carat grain from Rand Refinery and produces its own coin blanks, from which it strikes the coins in-house to meet demand for the four 24 carat coin programmes. The mark-up on the coins is 30% and the gold represents 95% of input costs to the SA Mint. 5.3 DENTAL ALLOYS According to the South African Medical and Dental Council (now known as the Health Professions Council of South Africa), there are 3,500 registered dentists in the country. Dentists themselves do not have to hold permits to work with gold alloys since they work with pre-ordered, made-to-measure inlays only, supplied by independent dental laboratories. Only in instances where a dentist maintains his own laboratory will that practice require a permit; otherwise, it is the dental laboratories that hold the precious metal permits. The South African Police Service Diamond and Gold Branch reports that 427 valid dental licences had been issued in the country as at 2004. Of the total, 23 were issued in the year, implying an increase of 5.7% compared with 2003.

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A regional breakdown of these permits is shown below for 2003 and 2004. In terms of number of permits issued, this aspect of the gold business appears to be concentrated in the Cape region, with more than half of the dental permits on issue in 2004 issued in the Western Cape. Number of valid dental permits 2003 total 231 128 24 11 10 0 0 0 0 404 2004 total 231 147 24 13 11 1 0 0 0 427 % of 2004 total 54.1 34.4 5.6 3.0 2.6 0.2 0.0 0.0 0.0 100

Western Cape Gauteng KwaZulu-Natal Mpumalanga Eastern Cape North West Free State Limpopo Northern Cape Total

Data source: Virtual Metals analysis of South African Police Service data.

Gold usage in dental treatment cannot be expected to be a material growth sector owing to the downturn worldwide in the usage of gold alloys for dentistry purposes. This is largely because medical and dental insurance does not cover the cost of the gold as a dental material. A survey of medical insurers revealed only one that compensated members for payment of gold used in dental work, and in that instance, only to premium members. A similar lack of growth potential is mirrored internationally as medical insurers in countries such as Germany have, over time, amended their insurance cover to patients, discouraging the use of gold in dental treatment. In terms of scrap generation, dental alloys are frequently returned to recyclers for remelt since the manufacture of a dental construction generates a very high level of wastage, estimated by recyclers at 75% to 90% per inlay. Dental alloy can vary in caratage and colour and is applied according to the customers specifications. Dental products Alloys Description Star cast 110, 200, 400, 550, 602 Starbond 515G, 780G, 860G, 575G, 730G, 750G

Gold usage in dental treatment is not a growth sector...

Data source: Musuku Beneficiation Systems.

Discussions with refiners and recyclers revealed that, in 2004, no more than 0.04t of fine gold was purchased by the local dental industry. Dentists reported that this sector had shown no growth in recent years due to insurers exclusion of gold in dental treatment.

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Quotable quotes: To work with a crown that will eventually weigh 5g of gold, the dentists have to begin with at least 20g of alloy. The balance gets recycled immediately. Recycler
5.4 ELECTRONICS The level of gold usage in the manufacture of electronic components in South Africa is insignificant. The refiners reported that they supplied collectively 0.01t to South African companies manufacturing components for a variety of electronic hardware, including switches and connectors. This represents less than 0.004% of the global total of 250t3 of fine gold destined for use in electronics. Research revealed five companies that either manufacture or assemble electronic components using gold. One, Bosco Printed Circuits (Pty) Ltd, dominates, although its exact market share could not be established. The company uses gold in manufacturing the fingers which connect external cards to computer hardware and in instances where superior connections are required in telecommunications hardware. The gold is applied through electroplating. Printed circuit boards (PCBs) are manufactured in South Africa but discussions with the industry revealed that these PCBs do not contain gold. Where high performance PCBs, which require gold usage, are needed, they are imported. 5.5 INVESTMENT Historically, South Africans have been limited in the ways that they could invest in gold... Until recently, South Africans were limited in the ways that they could invest in gold. They could (and still can) buy coins in the form of Krugerrands, Proteas or Naturas. However, while bullion coins have a place for the collector, they are not considered a competitive alternative in an investment portfolio. This is because the premium levied on purchase is not recouped on sale of the coin. South Africans could and still can invest in gold equities and, in the absence of a Dollar or Rand denominated gold futures contract, they could trade the Krugerrand futures contract offered by the JSE Limited (discussed below). Recently, however, South African citizens have been offered access to a gold Exchange Traded Fund (ETF). These two investments vehicles are described below. 5.5.1 The JSE Limiteds Krugerrand contract The JSE Limited offers a Rand-denominated futures contract based on the Krugerrand through which the public and institutions such as pension funds can take an investment exposure to gold, other than buying coins or gold mining equities. The contract specifications are: Contract Code Underlying instrument Expiry dates & times Krugerrand futures KGRD 1 Krugerrand 17h00 on 3rd Thursday of March, June, September & December or previous business day if a public holiday In whole Rands to 2 decimals Official closing price as determined by the JSE Limited Physical delivery Futures R2.50

Quotable quotes: I dont see any growth potential in the South African electronics manufacturing industry. We import components from the Far East cheaper than we could ever manufacture them here. Electronic component manufacturer

Quotations Expiry valuation method Settlement method Clearing house fees


Data source: JSE Limited.

Virtual Metals global industry estimates for 2004

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Krugerrand futures have failed to become a liquid and actively traded contract. The reason for this is not clear. It is possible that, in the past, private investors who were likely to invest in gold other than equities would have bought Krugerrands and therefore there was little reason for them to make use of the futures contract. In other words, those who wanted bullion coins would have bought them outright and those investors who might make use of a futures contract would not have an interest in bullion coins. This does not, however, explain why the institutions have not made use of this contract since fund managers are permitted to place up to 10% of their funds in Krugerrands. Discussions with portfolio managers reveal that they have invested neither in the physical coins nor the futures contract; turnover figures bear this out. A reason for this is the loss of the initial premium payable on the purchase of the coins once the coins are subsequently resold. In the fourth quarter of 2004 only 48 Krugerrand futures contracts were executed. In the first two months of 2005, the contract traded four times. 5.5.2 ABSA NewGold Gold Bullion Debenture An ETF allows an investor to trade shares or securities in an exchange listed fund (shares which represent small amounts of gold, usually 1/10th or 1/100th of an ounce) as simply as the investor could trade in the equities of exchange-listed companies. Gold ETFs are funds, the sole asset of which is physical gold, and the value of which is fully backed by physical gold, held as allocated metal by a nominated custodian. The shares are traded on a stock exchange just as any other exchange-listed security. The cost of buying into a gold ETF is the spread4 as with a normal share purchase, plus brokerage charges. There is then an annual management fee of between 0.3% and 0.4% compared with the 3% premium over gold for buying a one ounce Krugerrand. Gold ETFs are designed to be cost effective and to provide investors with a secure way to invest in gold. On 2 November 2004, ABSA Bank launched a gold ETF in South Africa called the NewGold Gold Bullion Debenture, the third such ETF after similar launches of ETFs in Australia (on the Australian Stock Exchange) and the United Kingdom (on the London Stock Exchange). Two similar products were launched in the United States shortly afterwards, one by State Street Global Advisors, called streetTRACKS Gold Trust and one underwritten by Barclays Bank Plc called the iShares COMEX Gold Trust. Gold ETF launched in South Africa in November 2004...

The difference between the bid and offer (buy or sell) price on the underlying asset.

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The South African product5, issued by a public company called NewGold Issuer Limited, is administered by ABSA Bank and Rand Refinery functions as custodian. Each debenture is valued at 1/100th of an ounce of fine gold and is priced in SA Rands. The price of the debenture closely follows the international gold price. The specifications are: NewGold Listing Issuer JSE Code Price Entitlement Underlying asset Custodian Administered Minimum investment Gold Bullion Debenture JSE Limited NewGold Issuer Ltd, Reg Number 2004/014 199/06 GLD ZAR price of 1/100th troy ounce of fine gold Initially 1/100th troy ounce of fine gold, reduced daily by the management fee Gold kept in 400 oz London Good Delivery Bars in allocated form Rand Refinery ABSA Investment Management Services (AIMS) Lump sum and ad hoc investments R1,000 Recurring or monthly debit order investments - R300 Management: 0.4%pa accrued daily debited in gold Creation and redemption: 0.15% Brokerage and statutory fee: standard brokerage fees apply Lump sum and ad hoc investments: Initial fee (excl VAT): 0.3%, annual management fee (excl VAT): 0.8% Debit order: Initial management fee (excl VAT): R2.50/order; Annual management fee (Excl VAT): 0.8%

Fee structure NewGold Gold Bullion Debentures

Fee structure NewGold investment plan

Data source: ABSA Bank.

Immediately after its launch on 2 November 2004, purchases in the South African ETF took the assets to 3t of gold, before declining slightly. Buyers of the product were local pension funds and financial institutions. Since its launch, progress has been slow. The product is traded in the smallest of the four gold investment markets which are now home to ETFs and therefore it stands to reason that in comparison with the other ETFs, its offtake has been the smallest. The actual offtake of all four ETFs traded are compared in the accompanying table. ETF Offtake in Metric Tons of Fine Gold Launch Average Date traded daily volume t Australia 28-Mar-03 0.04 UK 9-Dec-03 0.75 South Africa 2-Nov-04 US (SSGA) 18-Nov-04 6.74 US (Barclays) 28-Jan-05 0.2 Total

Average daily Total offtake t offtake t (at 30 June 2005) 0.01 7.89 0.14 46.95 0.01 2.87 1.15 181.51 0.12 12.42 251.64

Source: Virtual Metals calculations from company data. Note: Data as of 30/06/05, SSGA = State Street Global Advisors.

In terms of offtake per day, the South African ETF is more comparable with the longer-running Australian ETF. Both products are nevertheless dwarfed by the UK ETF, and especially the State Street Global Advisors US fund offtake.

http://www.absabrokers.co.za/Individual/0,2999,2762,00.html#newgold

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NewGold is currently subject to a ceiling on the number of debentures that ABSA can create up to 500,000oz worth of debentures per annum. Should the bank wish to generate more, it would require prior permission from the Minister of Finance. With respect to the ability to take physical delivery on redemption of the debentures, investors wishing to do so would need to hold a valid precious metals permit as required by the Mining Rights Act. Only blocks of 400,000 debentures or more (equivalent to 4,000oz of gold or more) can be redeemed at a time. In May 2005, Barclays plc bought 60% of ABSA. This development is considered by ABSA to be supportive of NewGold in South Africa, since Barclays has its own ETF in the United States, and is committed to the ongoing marketing and administration of these investment products.

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CHAPTER 6 TRANSFORMING THE INDUSTRY: LEGISLATIVE, FISCAL AND FINANCIAL CONTEXT


Contents: 6.1 INTRODUCTION 6.2 KEY LEGISLATION AFFECTING THE GOLD INDUSTRY 6.2.1 The Mining Rights Act 20 of 1967 and the Precious Metals Bill 6.2.2 The Mineral and Petroleum Resources Development Act 28 of 2002 6.2.3 The Broad-Based Socio-Economic Empowerment Charter for the Mining Industry (the Mining Charter) 6.2.4 The Mineral and Petroleum Royalty Bill 6.3 TRANSFORMING THE INDUSTRY: BLACK ECONOMIC EMPOWERMENT, EMPLOYMENT EQUITY AND SKILLS DEVELOPMENT 6.3.1 Black Economic Empowerment (BEE) 6.3.2 The Employment Equity Act 55 of 1998 6.3.3 The Skills Development Act 97 of 1998 6.4 TAXATION 6.4.1 Corporate tax 6.4.2 Value-Added tax 6.5 FINANCING THE SOUTH AFRICAN GOLD BUSINESS 6.5.1 The mining and refining sector 6.5.2 The jewellery sector 6.6 THE ROLE OF GOVERNMENT MINISTRIES AND ASSOCIATED ENTITIES IN THE GOLD INDUSTRY 6.6.1 The Department of Trade and Industry (DTI) 6.6.2 Industrial Development Corporation (IDC) 6.6.3 The South African Reserve Bank (SARB) 129 129 131 134 121 122 123 124 124 125 126 126 126 121 119 121 117 116 116 116

Photograph courtesy: AngloGold Ashanti Limited

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6.1 INTRODUCTION Key legislation affecting the South African gold industry is considered in this chapter, including: the Mining Rights Act 20 of 1967 and its proposed amendments; the Minerals and Petroleum Resources Development Act 28 of 2002 (MPRDA); the Broad-Based Socio-Economic Empowerment Charter for the Mining Industry (The Mining Charter); and the Mineral and Petroleum Royalty Bill. This body of legislation has had a significant impact on the gold industry and will continue to shape its evolution... This body of legislation has had a significant impact on the gold industry to date and will continue to shape its evolution. It is therefore dealt with in some detail. Other legislation exists which applies to the gold industry, and more particularly to gold mining, for example, on mine health and safety. It would, however, be outside the scope of this study to provide a complete overview of all of the various legislative measures that impact on the sector, and these aspects of the legislative framework for the industry have not therefore been covered. The gold industry is additionally subject to a number of legislative and regulatory measures that address the issue of transformation, for example on Black Economic Empowerment (BEE), employment equity and skills development. This chapter describes these measures and their impact on the South African gold industry. 6.2 KEY LEGISLATION AFFECTING THE GOLD INDUSTRY The mining industry is by far the largest participant in the South African gold business, in terms of investment, numbers employed, annual turnover, net asset value and contribution to the local economy. The legislation highlighted in this section applies primarily to the mining industry, although many of its provisions also have an impact on refining and jewellery manufacturing. 6.2.1 The Mining Rights Act 20 of 1967 and the Precious Metal Bill Historically, the Mining Rights Act of 1967 (specifically Chapter XVI) has had a significant impact on the way the South African gold business has evolved, as it prohibited private individuals and institutions from holding gold in any form other than bullion coins or jewellery1. In other jewellery manufacturing economies, jewellery manufacturers were able to benefit from the existence of private gold holdings in their own or neighbouring countries (in the case of Italy, for example, significant holdings exist in neighbouring Switzerland). These private holdings, typically lodged with commercial banks, led to the development of an active gold-lending market. The existence of such a market was an enabling factor in the growth of the jewellery manufacturing sector, as jewellers were able to borrow gold from commercial banks at relatively low lease rates. The Mining Rights Act regulates the possession and trade of gold in businesses where gold is used as a raw material, such as refining and jewellery manufacturing. At the time of publication of this review, Chapter XVI was the last remaining chapter of the Mining Rights Act still in place. The Precious Metals Bill, which is currently in the process of Parliamentary approval and which will replace the remaining sections of the 1967 Mining Rights Act still in force, aims to reduce the administrative procedures relating to the possession and trade of gold as a raw material that are imposed by the Act. It stops short, however, of total deregulation of the metal.

The Mining Rights Act of 1967 has had a significant impact on the way the South African gold business has evolved...

Bullion coins are gold coins (usually 22 or 24 carat). All bullion coins currently minted in South Africa are legal tender. Refer to Chapter 5 for a full explanation and description of these coins.

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The Bill amends the definition of wrought and unwrought metal in the Mining Rights Act and introduces new categories of licences for users of precious metals. In terms of the Bill, gold is considered unwrought if it is unrefined or has been refined to a purity of up to but not including 99.95%. Semi-fabricated metal is defined as metal which has been refined beyond 99.95% and is in the form of sheet, tube, wire, grain, plate, strip or rod, or any other such form approved by the Diamond and Precious Metals Regulator (a new position to be created by the Bill). In its current form, the Bill allows for three categories of licences for the acquisition, possession or disposal of precious metals in unwrought and semi-fabricated form. The three categories of licence provided for by the Bill are: refining licences, which authorise the holder to buy, receive, refine or dispose of unwrought precious metals. Refining licences are granted for a period of 25 years and are renewable for further periods of 25 years; beneficiation licences, which authorise the holder to buy, receive, change, add value to and dispose of semi-fabricated metal. Beneficiation licences are granted for a period of 10 years and are renewable for further periods of 10 years; and jewellers permits, which confer the same rights as beneficiation licences but which are granted for a period of five years, renewable on application to the Regulator for further periods of five years. Holders of refining licences are required to keep a register of all transactions in precious metals and to submit this register quarterly to the Regulator. Holders of beneficiation licences and Jewellers permits are obliged to submit annual financial accounts prepared in accordance with Generally Accepted Accounting Pratice (GAAP) to the Regulator, no later than 90 days after the end of each financial year. It is anticipated that the Bill will be passed into law in early 2006. 6.2.2 The Mineral and Petroleum Resources Development Act 28 of 2002 South Africas economic policies are based on the principles of private enterprise and the free market, thus allowing for the development of commerce without undue State intervention. After the election of the first representative government in 1994, it was recognised that the countrys mineral and mining policies required review as the majority of the population had largely been excluded from participating in the ownership and management of the mining industry. This review began in April 1995 and the ensuing process involved representatives from government, mining companies, the junior mining sector, labour, and associated communities, and culminated in the release of a White Paper, A Minerals and Mining Policy for South Africa, in October 19982. The policies that were presented in that White Paper were then embodied in the MPRDA, which was passed into law in October 2002 and promulgated (thus becoming law) in May 2004. The MPRDA is the primary act of Parliament that governs mining activity in South Africa. Under this Act, a new mineral rights regime has been introduced in terms of which new-order rights replace so-called old-order prospecting and mining rights that were issued under the Minerals Act 50 of 1991. All old-order mining rights must be converted within a period of five years (that is by 2009) of the Act having become law3. The MPRDA is the primary act of Parliament that governs mining activity in South Africa... The Bill, in its current form, allows for three categories of licences for the acquisition, possession or disposal of precious metals in unwrought and semi-fabricated form...

All these groups collectively became known as the stakeholders and it is to them that this review refers when mentioning the stakeholders. Old-order rights refer to all old-order prospecting rights and old-order mining rights.

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The MPRDA is based on the principle of state custodianship of mineral and petroleum resources... The MPRDA is based on the principle of state custodianship of mineral and petroleum resources. Prospecting, exploration and mining rights for all minerals now vest in the state and applications for those rights have to be made directly to the state. This is in contrast to the previous legislative regime, where mineral rights were privately-owned, though with significant restrictions such as the need to obtain government approval before the minerals in question may be exploited. Under the MPRDA, mineral rights have become an important instrument in achieving transformation in ownership and management in the mining industry. This transformation goes beyond the mine gate as the Act also stipulates that holders of mineral rights should contribute towards the socio-economic development of host communities and communities that contribute their labour to the industry. Transitional provisions in the MPRDA facilitate the conversion of existing, old-order, prospecting and mining rights to new-order prospecting and mining rights. For successful conversion, applicants are required to satisfy the objectives of the MPRDA as set out in the Mining Charter.

Mineral rights have become an important instrument in achieving transformation in ownership and management in the mining industry...

New-order mining rights The most important right for operating a commercial mine in South Africa is the new-order mining right which can be granted by the Ministry of Minerals and Energy if the application meets the following requirements: the metal or mineral can be mined optimally in accordance with the mining work programme; the applicant has access to financial resources and has the technical ability to optimally conduct the proposed mining operation; the financing plan is compatible with the intended mining operation and the duration thereof; mining will not result in unacceptable pollution, ecological degradation or damage to the environment; the applicant has provided financially and otherwise for the prescribed Social and Labour Plan; the applicant has the ability to comply with the relevant provisions of the Mine Health and Safety Act, 1996 (Act No. 29 of 1996); the applicant is not in contravention of any provision of the MPRDA; the granting of the mining right substantially and meaningfully expands opportunities for Historically Disadvantaged South Africans (HDSAs), including women, to enter the mining industry and will promote employment and advance the social and economic welfare of all South Africans; and the applicant complies with the Mining Charter.
Once allocated, a mining right guarantees security of tenure for up to 30 years... Once the mining right is allocated, security of tenure is guaranteed for up to 30 years as long as the conditions under which the right was granted continue to be met. The rights may be renewed for further periods of up to 30 years. At the time of publication, one gold mining company, AngloGold Ashanti, had converted all its old-order mineral rights to new-order rights. Another gold mining company, Harmony, had converted old-order mineral rights for two of its operations, subject to certain conditions to be fulfilled by Harmony.

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Prospecting and small-scale mining permits In addition to the core new-order mining right, the following prospecting and smallscale mining permits are provided for in the new legislation. Reconnaissance permissions allow the holder to carry out searches for minerals by geological, geophysical and/or photogeological surveys, including remotesensing techniques. They are valid for two years. Prospecting rights enable the holder to search for minerals by methods which disturb the surface or subsurface. Prospecting rights confer exclusivity to apply for a renewal, a mining right and the right to remove and dispose of any mineral to which the right relates. The Minister of Minerals and Energy may, depending on the type of mineral and extent of the project, request the applicant to expand the opportunities for HDSAs to participate in management and ownership. Prospecting rights are granted for a term of up to five years and may be renewed once, if good reasons are provided, for a period not exceeding three years. Mining permits are suitable for small-scale mining operations. They may be issued if the mineral in question can be mined optimally within a period of two years and the mining area does not exceed 1.5 hectares in area. A permit is valid for a maximum period of two years, and may be renewed up to three times for one year. It does not afford the holder any exclusivity, and cannot be transferred or disposed of. Retention permits are granted for prospecting rights holders who can show that mining is uneconomic due to market conditions at the time. The permit allows prospecting rights to be extended for a period not exceeding three years. It can be renewed once for two years and is not transferable.
6.2.3 The Broad-Based Socio-Economic Empowerment Charter for the Mining Industry (The Mining Charter) The Mining Charter, an integral part of the regulatory framework governing the mining sector, provides a means by which the historical, social and economic inequalities in South Africas mineral industry can be addressed. The explicit objectives of the Mining Charter are to: promote equitable access of the nations mineral resources to all South Africans; expand opportunities for HDSAs, including women, to enter the mining and minerals industry and to benefit from the exploitation of the nations mineral resources; utilise the existing skills base of the mining industry for the empowerment of HDSAs; expand the skills base of HDSAs in order to serve the community; promote employment and advance the social and economic welfare of mining communities and the major labour sending areas; and promote beneficiation of South Africas mineral commodities.

The Mining Charter, an integral part of the regulatory framework governing the mining sector, provides a means by which the historical, social and economic inequalities in South Africas mineral industry can be addressed...

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The Mining Charter scorecard sets targets and a timetable for addressing these objectives... The Mining Charter scorecard sets targets and a timetable for addressing these objectives in seven core areas of activity. These seven areas and the relevant scorecard undertakings in each area are summarised in the following table: Human resource development - Improving opportunities for employees to become functionally literate and numerate - Implementation of career development paths for HDSA employees, including skills development - Systems for mentoring empowerment groups - Publication of employment equity plans and annual progress reports - Establishment and implementation of a plan to achieve 40% HDSA participation in management within five years - Identification and fast-tracking of a talent pool - Establishment and implementation of a plan to achieve 10% participation of women in mining within five years, and 15% within 10 years - Agreements to ensure non-discrimination against foreign migrant labour - Formulation of integrated development plans for communities where mining takes place and implementation of these plans in cooperation with Government - Improvement of standards of housing, including upgrading of hostels, conversion to family units and promotion of home ownership for mine employees - Improved nutrition for mine employees - Preferred supplier status for HDSAs - Identification of current levels of procurement from HDSAs and commitment to increase spend with HDSA suppliers - 15% HDSA ownership of equity or attributable units of production in five years and 26% in 10 years

Employment equity

Migrant labour Mine community and rural development

Housing and living conditions

Procurement

Ownership and joint ventures

The Mining Charter has two additional provisions, on beneficiation and reporting. The provision on beneficiation is unique in that it is the only provision of the Mining Charter which does not have to be met in full in order for mining companies to qualify for conversion to new-order mining rights. It is also the only provision of the Charter which can be used by mining companies to offset Mining Charter commitments on HSDA ownership. Achievement of the beneficiation target under the Mining Charter allows companies to offset a proportion of the 26% 10-year Mining Charter target on ownership and joint ventures. This provision also states that companies have to identify current levels of beneficiation of product and indicate the level to which this will have to be grown in order to qualify for offset. At the time of publication of this review, neither the extent of the beneficiation offset nor the beneficiation levels to be achieved by mining companies in order to qualify for offset had been determined. The provision on reporting states that companies have to report annually on compliance with the commitments of the Mining Charter.

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6.2.4 The Mineral and Petroleum Royalty Bill The National Treasury announced in 2004 that the Mineral and Petroleum Royalty Bill (introduced to the Assembly as the Money Bill) would become effective from 2009. The Bill is based on the principle that South Africas mineral resources are non-renewable and that they belong to the nation, with the State as custodian. The objective is to tax the depletion of the countrys mineral resources. It proposes that mineral producers (including gold) pay a royalty on mineral production. Royalties may be fixed at different levels in order to take account of the relative profitability of the different industries. A fundamental criticism of the Bill is that the proposed royalty is to be levied on revenue and not profit. It is argued that this reduces the value of mineral assets that can be mined econimically. Supporters of a royalty on revenue maintain that a revenue focus is necessary as mineral producers might otherwise state profit figures in a way which would enable the company to reduce or avoid royalty payments. Critics of the proposals also claim that a structure which fixes the level of royalty payments according to the type of mineral to be mined is too simplistic. They argue that it should not be assumed that all diamond mining is more profitable than all platinum mining, and all platinum mining than all gold mining. In February 2005, the Minister of Finance told Parliament that a second draft of the bill would retain the principle of a royalty on revenues but would include substantial refinements based on comments received from interested parties. It would also accommodate key concerns relating to mineral beneficiation and small-scale mining. If passed, royalties will be levied from 2009 in order to dovetail with the mining companies conversion to the new-order mineral rights regime as laid out by the MPRDA. 6.3 TRANSFORMING THE INDUSTRY: BLACK ECONOMIC EMPOWERMENT, EMPLOYMENT EQUITY AND SKILLS DEVELOPMENT Prior to 1994, much of South Africas economic wealth was concentrated in the hands of white South Africans. Post apartheid, government has developed policies to promote the more equitable distribution of wealth in a free market context, by actively supporting and favouring the economic empowerment of HDSAs. 6.3.1 Black Economic Empowerment (BEE) A BEE Commission was established in May 1997 under the auspices of the Black Business Council (now merged into Business Unity South Africa), a body representing 17 black business and professional organisations. The concept of the BEE Commission arose from a resolution taken at the Black Management Forum National Conference, held in 1997. The prevailing view was that HDSAs themselves should direct and take charge of a new vision for BEE, a process that, until then, had been controlled by the private sector. The Commission was not established as a legal entity and had no legislative powers. Its main role was to co-ordinate the consultative process out of which its recommendations are submitted to government. At the end of 2001, the Commission submitted a report to the government in which it recommended that a national, integrated, BEE strategy should: be a coherent socio-economic process; be established in the context of the countrys then Reconstruction and Development Programme; be aimed at addressing the imbalances of the past by seeking to substantially and equitably transfer and confer the ownership, management and control of The Bill is based on the principle that South Africas mineral resources are non-renewable and that they belong to the nation, with the State as custodian...

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South Africas financial and economic resources to the majority of its citizens; and seek to ensure broader and meaningful participation in the economy by black people to achieve sustainable development and prosperity.

The Commissions report and recommendations were adopted by the Governments Economic and Transformation Committee (ETC) on 3 March 2001 and specific targets were set for BEE for the 10-year period to 2011. The Broad-Based Black Economic Empowerment Act of 2003 and its associated codes of good practice were published in two phases, the first of which was released on 1 November 2005. The Act is the key item of legislation introduced by Government to effect its empowerment objectives. The Act and its associated codes will apply to the refining, manufacturing and retail aspects of the gold value chain. The mining industry including the gold mining sector, however, will not be subject to the codes initially, but will be expected to align itself to the codes ahead of the expiry of the mining charter in 2014. Two other items of legislation which were put in place in order to facilitate achievement of Governments BEE targets are: - the Employment Equity Act 55 of 1998; and - the Skills Development Act 97 of 1998. These are described in detail below, as they have a significant impact on the South African gold industry. 6.3.2 The Employment Equity Act 55 of 1998 The purpose of the Employment Equity Act is to achieve equity in the workplace by promoting equal opportunity and fair treatment in employment by eliminating discrimination. The Act prohibits unfair discrimination on the grounds of race, gender, pregnancy, marital status, family responsibility, ethnic or social origin, colour, sexual orientation, age, disability, religion, HIV status, conscience, belief, political opinion, culture, language or birth. The Act further serves to implement affirmative action to redress the disadvantages in employment experienced by designated groups and to ensure their fair representation in all occupations and levels in the workforce. Designated groups are black, coloured or Indian people, women, or people with disabilities. Affirmative action is defined as measures intended to ensure that suitably qualified employees from designated groups have equal employment opportunities and are equitably represented in all occupations and levels in the workforce. The Act identifies designated employers as those who employ 50 people or more or those whose turnover is above a certain threshold (R7.5 million in the case of mining and R10 million in the case of manufacturing). It includes municipalities and state organisations, although the defence force, national intelligence and revenue services are exempt. The Act therefore applies to most South African gold mining companies and both of the primary refiners. It also applies to medium and large jewellery retailers and manufacturers. Most of the small manufacturers and retailers, and some of the secondary refiners, are exempt by virtue of the size of their payrolls and turnover. The Act stipulates that designated employers shall promote affirmative action within their organisations in accordance with an employment equity plan. Each employment equity plan must set out the steps the designated employer intends taking to achieve employment equity over the next one to five years. To do this, the designated employer needs to analyse its workforce profile, as well as its employment practices and policies. In drawing up the plan, the employer must consult with unions and employees to gain consensus with respect to its contents.

The purpose of the Employment Equity Act is to achieve equity in the workplace by promoting equal opportunity and fair treatment in employment by eliminating discrimination...

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Employment equity plans must be submitted to the Department of Labour on an annual basis. Each employment equity plan must: have annual objectives; include affirmative action measures; have numerical goals for achieving equitable representation of the appropriate demographics among employees; have an annual timetable; have internal monitoring and evaluation procedures including dispute resolution mechanisms; and identify persons to monitor the plan. The Labour Court has the power to make appropriate orders, award compensation or impose fines for non-compliance with the terms of the Act. The Act provided for the establishment of a Commission of Employment Equity on 14 May 1999. The eight members of this Commission are nominated by voting members of Nedlac4 who represent organised labour, commercial entities, the State and entities of community and development interests in the Development Chamber of Nedlac. The Commission oversees the implementation of employment equity on a national level, reporting annually on emerging trends, progress on implementation of the employment equity legislation and the challenges faced by government, employers and employees in dealing with equity issues in the workplace. 6.3.3 The Skills Development Act 97 of 1998 The Act is aimed at developing and improving the skills of employees in the workplace. The Act sets out to: provide a framework for the development of skills in the workplace; build development strategies into the National Qualifications Framework (NQF); provide for learnerships that lead to recognised qualifications; and provide for the financing of skills development by means of a levy-grant scheme and National Skills Fund. The NQF forms the overall structure for education and training within the country. It came into being through the South African Qualifications Authority Act (SAQA) 58 of 1995. As a government body, it sets out how different education and training standards and qualifications must be achieved and how courses should be accredited. The NQF is implemented via the following structures: SAQA which is responsible for overseeing the development and implementation of the NQF. It is accountable to the Departments of Labour and Education; National Standards Bodies (NSBs), which set standards in education in particular industrial sectors or fields. There are 12 such bodies, of which the Mining Qualifications Authority (MQA) is one; Education and Training Quality Assayers (ETQA), which oversee the quality of education and training. Any provider of educational services must be registered with the ETQA; Sector Education and Training Authorities (SETAs) covering each sector of the South African economy. Members of a SETA are drawn from trade unions, government and bargaining councils. SETAs replace the old industry training boards; and the Skills Development Fund, which funds projects identified in the national skills development strategy as national priorities or other projects related to the achievement of the purposes of the Skills Development Act as determined by the Director-General.

The Skills Development Act is aimed at developing and improving the skills of employees in the workplace...

National Economic Development and Labour Council.

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The Skills Development Act applies to all employers except for the public service, religious organisations or charities, public entities that receive more than 80% of their funding from Parliament and employers whose total payroll is less than R250,000 per annum, or those who do not have to register in terms of the Income Tax Act. Affected employers must pay an amount equal to 1% of their workers gross pay as a skills development levy5. This levy is paid to the SETA and the Skills Development Fund to be redistributed back to individual companies in the form of training grants and associated finance. SETAs are the recipients of 80% of the revenue and the Skills Development Fund receives the remaining 20%. SETA programmes pay grants directly to employers in the sectors in which they operate. The Skills Development Fund finances training programmes identified as priorities on a national level. For more information on the role of SETAs and training and skills transfer in the gold industry, refer to Appendix 3. 6.4 TAXATION There are various categories of taxation applicable to South African business and commercial entities. This section deals with corporate tax and Value-Added Tax (VAT), as they relate to the gold industry. 6.4.1 Corporate tax Corporate tax is levied on income derived by South African resident companies on their worldwide income. Dividends received from foreign companies are exempt. For tax rate purposes, a distinction is made between gold mining companies and non-gold mining companies. Mining income derived from gold is taxed at different tax rates from non-gold mining income. Non-gold mining companies are taxed at the basic rate of 29%6 on gross income less deductions (as per the Income Tax Act). In addition to the basic rate, a secondary tax on companies (STC) of 12.5% is payable on the net amount of dividends declared by the company. With respect to branches of foreign-owned companies conducting mining activities in South Africa, a tax rate of 35% is payable on non-gold mining income. In the case of gold mining companies, mining income is taxed on a mine-by-mine basis at a sliding rate, which increases and decreases in line with that particular mines profitability. The origin of a distinct taxation formula for gold mining companies lies in the following circumstances: - the capital-intensive nature of the South African gold mining industry, as described in chapter 2; - the deep level mining associated with South African gold deposits means that there is generally a long lead time between inception of a gold mining project and first production; - the nature of individual orebodies, which means that there are significant variances in the relative potential profitability of each mine.

5 6

Including overtime payments, leave pay, bonuses, commissions and lump sum payments. Reduced from 30% in the budget of February 2005.

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The formula used to determine the rate of income tax which a gold mining company pays on its taxable income is known as the gold tax formula. For the tax year 2005/6, it is as follows: Gold tax formula as at 2005/06 Profit to revenue ratio 5 10 15 20 25 30 35 40 45 50
Data source: AngloGold Ashanti.

Average tax rate % 0.00 22.50 30.00 33.75 36.00 37.50 38.57 39.38 40.00 40.50

This rule means that each mines tax rate is calculated separately and applied to the taxable mining income derived from that particular gold mine. In the case of all gold mining income, capital expenditure is deductible in full from gold mining income in the year in which it is incurred. This contrasts with the rule applicable to capital expenditure incurred in the manufacturing sector where it is deductible over five years or over an agreed period of depreciation. Capital expenditure may only be deducted from the mine for which the expenditure was incurred. Any capital expenditure in excess of taxable profits may be carried forward to subsequent years of assessment, but can still only be set off against the taxable income of the particular mine for which it was incurred. This rule is relaxed when a taxpayer has more than one mine to the extent that excess capital expenditure can be set off against 25% of the taxable income of another mine in the same year. 6.4.2 Value-Added Tax (VAT) The Value-Added Tax Act 89 was introduced in 1991 and amended in 2004. VAT is levied on all goods and services at a standard rate of 14% or at a zero rate. The latter rate applies to the export of goods and services, the sale of a business as a going concern, international transportation and the supply of certain unprepared foodstuffs. Any business with a turnover exceeding R300,000 per annum must register for VAT. A registered business is required to charge VAT on sales, account for value-added tax on all goods and services supplied, complete and submit VAT returns regularly, keep proper accounting records for inspection and issue VAT invoices. VAT payments and refunds operate on a two-month cycle7 - a factor cited by the jewellery manufacturers, especially the smaller ones, as adding to cash-flow problems in their companies.

This rule means that each gold mines tax rate is calculated separately and applied to the taxable mining income derived from that particular gold mine...

In other parts of the world, for example the UK, VAT operates on a 3-month cycle.

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The mining industry does not pay VAT on export sales and is entitled to a refund in respect of all value-added taxes paid by it on, for example, raw materials and stores. Bullion coins are exempt from VAT but all other products - for example finished jewellery, jewellery alloys and semi-fabricated jewellery - are subject to VAT, at the standard rate. 6.5 FINANCING THE SOUTH AFRICAN GOLD BUSINESS 6.5.1 The mining and refining sector Mining and refining of gold are capital-intensive processes that require substantial financing. Mining projects are associated with long lead times, and because of the deep level, hard-rock nature of South African gold mining, local gold mining is particularly capital-intensive. These projects are normally funded internally by the company itself, or by raising capital on the equity market, or by a combination of both. Where banks approve loans, it is common for those banks to expect the mining company to put in place some form of gold price hedging programme8 in order to protect the viability of the project in the event of lower gold prices in future. Gold hedging programmes are explained more fully in Appendix 4. One of the constraints on growth of the South African gold jewellery manufacturing sector has been the absence of cost-competitive facilities for the financing of precious metals in the fabrication pipeline... 6.5.2 The jewellery sector One of the constraints on growth of the South African gold jewellery manufacturing sector has been the absence of cost-competitive facilities for the financing of precious metals in the fabrication pipeline. Financing of gold working capital in jewellery manufacturing is a problematic issue for manufacturers worldwide. Unlike other manufacturing industries (such as textiles for example), gold jewellery manufacturers have to deal with the high cost of working capital, over and above other conventional financial outlays necessary in establishing a business. The high cost of gold and the periodic volatile nature of its price render it particularly expensive and potentially risky for a manufacturer to have financial exposure to the gold tied up in the manufacturing process, in finished product or in inventory. This issue is not therefore unique to the South African jewellery manufacturing sector. There are two reasons, however, why financing of gold working inventory poses a particular problem for South African gold jewellery manufacturers. In established gold manufacturing countries such as Italy, the commercial banking sector typically has an active bullion lending business. Long-standing relationships exist between the local banks and the jewellery industry. The local commercial bank will complete a credit rating of the local jewellery manufacturer and based on these results will issue a letter of credit or guarantee against the metal loan. The bullion bank or the local commercial bank will then lend the gold to the manufacturer. This kind of lending scheme has not developed in South Africa. One of the reasons for this, as highlighted earlier in this chapter, has been the absence of private gold holdings in the South African economy, a result of the prohibition on private gold ownership. Such schemes allow manufacturing jewellers to benefit from gold lending rates based on the gold lease rate, which is typically lower than monetary interest rates.

Hedging to minimise price risk involves locking in the price the producers receive or the consumer pays for future settlement. See Appendix 4 for a more detailed explanation.

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South African manufacturers therefore have to rely on standard bank loan agreements for financing working gold inventory. South Africa is a high interest rate environment and South African manufacturers are therefore also penalised by the interest rate environment in which they operate relative to manufacturers in other parts of the world. The graph illustrates the difference between gold lease rates, the basis for gold lending schemes in established jewellery manufacturing economies such as Italy and Dubai, and South African monetary interest rates.

Loan costs The cost of financing gold in process to South African manufacturers is at a substantial premium to overseas competitors. South African jewellery manufacturers pay prime interest rates plus a 2% to 3% risk premium. As at mid-2005, the prime overdraft interest rate in South Africa stood at 10.5%, implying a total loan cost of between 12.5% and 13.5%.
In very limited instances and specific to the large and medium-sized manufacturers, financing mechanisms which are more comparable to although not exactly the same as international methods of financing are in place. The details are confidential to those local manufacturing jewellers but it is believed that gold can be borrowed (against a guarantee of up to 120%) for between 2% and 7% with an additional 1.5% to 3% fee to the lending financial institution to cover the provided guarantee. Access to this type of finance is by far the exception, and it does not apply to the small and micro manufacturers. It should be noted, however, that it is equally unlikely that small and micro gold jewellery manufacturers, for example in Italy and Turkey, would have access to this type of financing.

Quotable quotes: Credit is the key. If a manufacturer cannot get credit, he cannot grow his business. And the key to credit is reputation. International bullion banker

Collateral requirements Many South African jewellery manufacturers report that, in order to finance the purchase of gold, local banks require them to lodge collateral equivalent to 120% of the value of the loan. This collateral covers possible fluctuations in the value of the gold price, and hence in the value of the metal borrowed, as well as the Rand/Dollar exchange rate.
International gold loans also require collateral cover to protect the lender from gold price volatility. Details of this are decided between the parties concerned, but interviews revealed that a cover ratio of 110% to 120% is common practice. The issue of collateral is, however, dependent on the banks credit rating of the jewellery manufacturer and on the quality of their business relationship. Since this is confidential between the parties, there is no norm that can be cited for the jewellery manufacturing industry. In February 2005, Standard Bank in the UK announced its intention to launch a new gold financing scheme targeted at the jewellery market in Dubai. The bank noted that there would be no cash margin requirements, variation or margin calls. At the time of writing this report, full details of the new scheme had yet to be made public.

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Insurance Full insurance coverage of metal in stock and in the fabricating pipeline is a prerequisite for any gold loan internationally. Those South African jewellery fabricators interviewed noted that while they had insurance cover for third party liability and stock in transit, the premiums associated with insuring jewellery inventories and metal in the manufacturing pipeline make such insurance prohibitive. The absence of insurance has implications for a fabricators ability to participate in gold financing schemes.
The Rand Refinery has in place a consignment agreement through which jewellery manufacturers can borrow fine gold...

The Rand Refinery Gold Consignment Agreement The Rand Refinery has in place a consignment agreement through which jewellery manufacturers can borrow fine gold. This gold consignment agreement is not a scheme designed to fund working gold inventory but facilitates the funding of inventory of finished goods, enabling manufacturers to produce jewellery in anticipation of future demand.
Features specific to this financing include: gold can only be used for the manufacture of jewellery; the manufacturer undertakes not to source gold from any other supplier for the duration of the loan, unless Rand Refinery is unable to act as supplier; the loan carries a four-month notice period and is reviewed annually on the anniversary of signature; the manufacturer is responsible for insurance from the time of delivery of the gold; the manufacturer must give 24 hours notice of intention to purchase the gold and Rand Refinery will invoice for the gold valued at the Dollar per troy ounce gold price based on the London fix of the day of invoice. VAT is then added in terms of South African regulations; the manufacturer is bound to keep full records covering the date of delivery, serial numbers of the consignments, quantities delivered and will give anyone authorised by Rand Refinery access to these records; the collateral for gold borrowed is finished product lodged with Rand Refinery for the term of the loan; and any amount falling due for payment by either of the parties bears interest at the prime rate plus 2% calculated on the due date until date of payment in full.

The AngloGold Ashanti/Gold Fields/BAE Systems/Saab Gold Advance Scheme AngloGold Ashanti, Gold Fields, BAE Systems and Saab have developed a Gold Advance Scheme intended to assist gold jewellery manufacturers with financing.
The objectives of the Scheme are to: reduce the costs to South African jewellery manufacturers of funding inventory, thereby enabling them to compete more effectively with international manufacturers; significantly increase the volume and value of South African jewellery manufacture and exports; and attract new investors and entrants into the jewellery manufacturing sector in South Africa. The initial intention is that the Gold Loan Scheme shall have sufficient collateral to lend up to 1,000kg of fine gold... The initial intention is that the Gold Loan Scheme shall have sufficient collateral to lend up to 1,000kg of fine gold, but this may be increased as the capacity of the local jewellery manufacturing industry to absorb this lending and to provide guarantees develops.

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The participants are: BAE Systems/Saab, large multi-national technology companies focusing on defence, aviation and space and with offset obligations under the DTIs National Industrial Participation programme; AngloGold Ashanti, South Africas largest gold mining company; Gold Fields Limited, the second largest gold mining company in South Africa; and Standard Bank, one of the largest four banks in South Africa with established international subsidiaries. The role of the participants is as follows: BAE Systems/Saab, AngloGold Ashanti and Gold Fields will act as underwriters; and Standard Bank will act as manager of the scheme. A scheme committee, consisting of the underwriters and the scheme manager will approve gold loan applications and oversee the Scheme. The structure and mechanism of the gold loan is as follows: collateral is required to 120% of the value of the gold advanced; the underwriters will collectively underwrite two-thirds of the value of the collateral required in the form of a Dollar guarantee from BAE Systems/Saab and a South African Rand guarantee from the two mining companies; the borrowing jeweller will be required to provide security for the remaining one-third of the collateral required in the form of non-gold security; Standard Bank will lend the gold to the jewellery manufacturer from its own balance sheet; once a due diligence has been completed on the borrower by Standard Bank, as manager of the scheme, and the criteria met, the application will be submitted to the scheme committee for approval. The pricing of each loan will be determined on a case-by-case basis; once approved by the scheme committee, Standard Bank will manage the loan and operate a margining mechanism to ensure that the value of the collateral advanced to the manufacturer does not fall below a level that significantly increases the risk profile of the loan. If, as a result of either gold price or Rand/ Dollar exchange rate movements, the cover ratio of the loan falls to 110%, the jeweller will need to advance sufficient funds to restore the value of the collateral to the original cover ratio; and administrative costs of the loan including the costs of the due diligence (credit evaluation and physical/insurance audit), the cost of legal documentation and ongoing monitoring and administration of the loan, are for the account of the jewellers. 6.6 THE ROLE OF GOVERNMENT MINISTRIES AND ASSOCIATED ENTITIES IN THE GOLD INDUSTRY 6.6.1 Department of Trade and Industry (DTI) Since 1994, the DTI has had as a core objective the re-integration of South Africa into the global economy. To achieve this, the DTI actively seeks to: encourage higher levels of foreign and domestic investment in the South African economy; increase market access for South African products and services world-wide; and encourage a fair, efficient and competitive marketplace for domestic and foreign investors, consumers and businesses. Central to the DTIs policies are the development of small, medium and micro enterprises (SMMEs). To this end, the DTI runs a number of other investment schemes, classified broadly into those that offer: investment support; small business development; increasing competitiveness; training and skills transfer ; innovation and technology; and export assistance.

Since 1994, the DTI has had as a core objective the re-integration of South Africa into the global economy...

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A number of these incentive schemes are open to the various sectors of the local gold industry, and are suited to the jewellery manufacturers. In general, however, uptake of these incentive schemes on the part of the jewellery manufacturing sector is low. The various programmes run by the Department of Trade and Industry are as follows:

The Small Medium Enterprise Development Programme (SMEDP) is open to local and foreign companies, close corporations, co-operatives, sole proprietorships and partnerships investing up to R100 million in land, buildings, plant and equipment for new projects or in expanding existing businesses...

Small, Medium Enterprise Development Programme (SMEDP) The Small Medium Enterprise Development Programme (SMEDP) is open to local and foreign companies, close corporations, co-operatives, sole proprietorships and partnerships investing up to R100 million in land, buildings, plant and equipment for new projects or in expanding existing businesses.
The programme offers cash incentives for small- or medium-sized businesses in South Africa, especially those relating to manufacturing. It aims to encourage the establishment of new projects and the expansion of existing projects, by subsidising the cost of the fixed assets. It also aims to create wealth and generate employment, encourage entrepreneurial development and promote empowerment. The incentive package is made up of an investment grant which is applicable for the first two years of an acquisition of specified assets calculated on a sliding scale. An additional investment grant is payable in the third year provided that wages amount to at least 30% of the manufacturing costs. All incentives under this scheme are tax-exempt. A survey of 383 companies in Ekurhuleni Metro in mid-2003 by the Corporate Strategy and Industrial Development research project at the University of the Witwatersrand found that the SMEDP was the most widely-used incentive programme, at 7% of firms. It also found firms using it were 27% more likely to have recorded employment growth and 55% more likely to have high output growth than those not taking advantage of the programme. This research did not establish what proportion of uptake was associated with the gold industry.

The Foreign Investment Grant encourages foreign entrepreneurs to invest in new manufacturing entities in South Africa...

Foreign Investment Grant The Foreign Investment Grant encourages foreign entrepreneurs to invest in new manufacturing entities in South Africa. Grants are extended for the qualifying costs of moving machinery and equipment from abroad into South Africa. It is supplementary to the investment grant of the SMEDP.
To qualify, foreign companies must be registered as incorporated legal entities in South Africa. The scheme specifically excludes investors from the Southern African Development Community (SADC) and the South African Customs Union (SACU). The grant is limited in that it excludes used or second-hand machinery and equipment, as well as new machinery and existing technology. Grants of up to a maximum of R3 million per project are considered and are offered as a one-off to a foreign entity entering the South African market. The grant cannot exceed the actual cost of relocating the machinery, or of 15% of the value of the relocated machinery, whichever is the lower. The level of up-take by the gold business of these investment grants is not certain.

The skills support programme makes available grants for training and development and the increase of skills levels among employees...

Skills support programme Managed jointly by the DTI and the Department of Labour, this programme makes available grants for training and development and the increase of skills levels among employees. 50% of the training costs are subsidised, up to a maximum of 30% of the companys total wage bill.

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The programme is designed to enhance other incentive schemes such as the SMEDP and companies that qualify for that programme automatically qualify for the Skills Support Programme. The grant is payable to new projects or to the expansion of existing ones. There are no restrictions on the type of training that can be offered. All grants under this scheme are payable for up to three years and are tax-exempt. The level of up-take by the gold business of this support programme is not certain.

National Empowerment Fund (NEF) The National Empowerment Fund was established in 1998 to promote, through grants, economic equality and transformation in the South African economy. It commenced operating in 2001.
The Fund has three components: the Generator component aims to assist with investment in black-owned businesses ranging in size from R0.25 million to R1 million; the Accelerator component normally targets investment in a range of R1 million to R3 million; and the Transformer component looks at investments in the range of R3 million to R10 million. In certain instances, investments rising up to R20 million may be considered. The recipients of funding include new enterprises, businesses that are expanding and the BEE transformation of existing businesses. After initial difficulties and criticism over the slow disbursement of funds, (only R5 million had been spent by 2004), the Government announced in August 2004 that this initiative would be boosted over the following 12 to 18 months with the capitalisation of the NEF to R2 billion. The level of uptake of this funding by the gold business is uncertain. 6.6.2 Industrial Development Corporation (IDC) The IDC is a self-financing national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in Africa and to the economic empowerment of the South African population, thereby promoting economic prosperity for all citizens. The IDC achieves this by promoting entrepreneurship through the building of competitive industries and enterprises based on sound business principles. Corporate Profile and Vision The Industrial Development Corporation of South Africa (the IDC): is a self-financing, state-owned national development finance institution; provides financing to entrepreneurs engaged in competitive industries; follows normal company policies and procedures in its operations; pays income tax at corporate rates and dividends to its shareholder; and reports on a consolidated basis, with its Annual Report freely available to the public. The vision of the IDC is to be the primary source of commercially sustainable, industrial development and innovation to the benefit of South Africa and the rest of the African continent. Key to the IDCs activities are the following: providing risk capital to the widest range of industrial projects; identifying and supporting opportunities not yet addressed by the market; maintaining financial independence; building upon and investing in human capital in ways that systematically and increasingly reflect the diversity of our society; and establishing local and global involvement and partnerships in projects that are rooted in or benefit South Africa and the rest of Africa.

The National Empowerment Fund was established in 1998 to promote, through grants, economic equality and transformation in the South African economy...

The IDC is a self-financing national development finance institution whose primary objectives are to contribute to the generation of balanced, sustainable economic growth in South Africa and to the economic empowerment of the South African population, thereby promoting economic prosperity for all citizens...

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Financing The aims of the IDC with respect to the sector are to provide funding to small and medium-sized mining, mineral beneficiation and jewellery manufacturing enterprises and to play a leading role in the development of commercially sustainable mining and beneficiation projects in South Africa and the rest of Africa. The IDCs financing terms include: unique financing packages that suit the requirements of each project; financing structured to take into account cash flow, normally including a capital repayment moratorium of one year; and a repayment period of between three and five years. The minimum amount that can be invested is R1 million and the maximum is R500 million. Financing instruments used include: equity; quasi-equity9; limited recourse finance10; commercial loans; wholesale finance; share warehousing11; export/import finance; short-term trade finance; and guarantees. The procedures adopted by the IDC are as follows: Initial screening

The aims of the IDC with respect to the sector are to provide funding to small and medium-sized mining, mineral beneficiation and jewellery manufacturing enterprises...

Basic assessment Feasibility completed Term sheet Feasibility not fully investigated *MOU/Co-operation agreement

Due diligence

Feasibility study

Decision-making (Investment committee)

Legal agreements

Disbursement

Post-investment management
* Memorandum of understanding

9 10 11

Financing which has characteristics of both debt and equity. Project financing, where the money lent is done so on the basis of the projects financial viability, not that of the company. Loans against shares.

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On receipt of an application, an initial screening will be undertaken to ensure that all the required basic information has been submitted to enable the IDC to fully assess the application. This basic assessment establishes whether the IDC norms regarding economic merit, financial structure and IDC exposure have been met. A team of professional staff, covering the disciplines of marketing, production/technical and finance will then visit the applicant to evaluate the application. The duration of this visit will normally be between three and five working days. With respect to decision-making, applications of up to R10 million are considered weekly by a Credit Committee. The Executive Management meets weekly to consider applications above R10 million up to R60 million. The IDCs Board of Directors generally meet on a monthly basis to consider applications for larger amounts. An agreement will be forwarded to the applicant for signature after the application has been approved. After all conditions precedent to the loan (which could include the registration of bonds) and other formalities of the loan agreement have been complied with, the loan may be drawn down, usually against proof of expenditure. The period following the termination of the project will be managed according to a mutually agreed plan, to include Board representation, relationship maintenance and strategic value-added support. Support for the Mining and Jewellery Sectors Support for the gold industry at the IDC was initially facilitated by two Strategic Business Units (SBUs) namely the Resources and Beneficiation SBU and the Entrepreneurial Mining and Jewellery SBU. These two SBUs merged in July 2005 to form the Mining SBU. The focus of the Mining SBU is firstly on larger projects with greater involvement from IDC staff, mainly equity type transactions augmented by other financial instruments. The IDC becomes involved in project development, typically at the end of feasibility, and includes mining projects as well as large-scale mineral beneficiation projects. Secondly, the SBU is involved in small, medium and large scale mining and jewellery projects that are already in or beyond the implementation phase and include the transfer of ownership to black economic empowerment (BEE) parties, preferential procurement to BEE and SME service providers to the mining industry. According to the IDC, the entitys total mining exposure, as at June 2005, was as follows: Mining exposure as at June 2005 Sector Mining: coal and lignite Mining: gold and uranium Mining: non-ferrous metals Stone quarrying, clay, sand Mining: diamonds (including alluvial) Mining and quarrying n.e.c. Services incidental to mining Manufacture: basic iron and steel Basic precious and non-ferrous Other fabricated metal products Manufacturing n.e.c. Other Total
Source: Industrial Development Corporation

The primary focus of the Mining SBU is on larger projects with greater involvement from IDC staff...

Secondly, the SBU is involved in small, medium and large scale mining and jewellery projects that are already in or beyond the implementation phase...

Rand value 69,166,284 721,330,952 1,335,199,262 53,194,403 66,629,090 153,081,847 167,944,442 487,360,526 1,610,060,811 93,9759,189 46,456,270 10,484,339 5,660,667,415

% 1.2 12.7 23.6 0.9 1.2 2.7 3.0 8.6 28.4 16.6 0.8 0.2 100.0

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The IDCs approval rate for gold jewellery projects (measured in terms of the number of applications approved relative to the total applications received) is about 20%. Finance was mainly provided for working capital and a small portion for plant and equipment. The challenges faced by the IDC in dealing with gold jewellery financing applications, by order of importance, include: inadequate loan security; incomplete business concepts; lack of an adequate marketing plan; and lack of sufficient management expertise. The inability of the jewellery manufacturer to provide sufficient loan security is neither new nor specific to the IDC. The IDC requires a minimum of 40% of the loan to be secured. With respect to incomplete business concepts, the IDC gives applicants the opportunity to address areas of the business plan which have not met IDC criteria after the initial business plan has been assessed. Of concern to the IDC is the fact that applications for jewellery manufacturing loans frequently fail to show full enough appreciation of the required marketing of the final product. While the business plans may address the product and the manufacturing component, some of the applications fail to demonstrate full understanding of the targeted market and the necessary strategies which need to be implemented in order to achieve the envisaged market share. In terms of management, the IDC reports that potential newcomers to jewellery manufacturing need to demonstrate sufficient management skills (technical, financial and marketing) and understanding of the jewellery industry in order to successfully implement a jewellery project. 6.6.3 The South African Reserve Bank (SARB) South Africas central bank, the South African Reserve Bank (SARB), was originally the sole purchaser and marketer of local gold production. In recent years, especially with the partial lifting of exchange controls, the Reserve Bank has withdrawn from this role in the gold market. In terms of the Reserve Bank Act of 1989, SARB still has the following powers and functions relating to precious metals: the buying, selling, trading and holding for itself and others in safe custody all financial instruments including precious metals. Gold traded is for the profit or loss of the Government; striking precious metal coins through its subsidiary, the South African Mint; the determination, in consultation with the Ministry of Finance, of the price of gold at which any gold held by SARB is valued; and the management of gold held by SARB as part of South Africas reserves.

South Africas central bank, the South African Reserve Bank (SARB), was originally the sole purchaser and marketer of local gold production. In recent years, especially with the partial lifting of exchange controls, the Reserve Bank has withdrawn from this role in the gold market...

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Until December 1997, SARB was the sole marketer of all South African gold production. Prior to that date, all mine output was offered to the SARB via Rand Refinery within 30 days of production. In 1998, SARB granted local gold miners permission to sell all their output in the open international markets and gradually withdrew from its role as the purchaser of South African gold production. This had the effect of greatly reducing the presence of the SARB in the international gold market. To date, the SARB still purchases and markets limited amounts of production from the smaller mines, and continues to manage the countrys reserve position. This stood at 124t at the end of June 2004. South African gold holdings as a percentage of total reserves have fallen sharply since 1997, in line with the increase in the countrys non-gold reserves, which are predominantly held in Dollars. The increase in gold reserves in June 2000 was the result of a $500 million golddenominated syndicated loan facility put in place internationally by the SARB and drawn down over a period of three years. SARB is also permitted to place limited amounts of gold on deposit with commercial banks. The volume of gold varies but does not exceed 10t (320,000oz). Given that total gold lending internationally (national central banks and official institutions such as the Bank for International Settlements) currently amounts to 3,770t, South Africas contribution to the gold deposit market is less than 1%. Most recently, SARB has allocated 500,000oz (approximately 15.6t) of fine gold for sale through NewGold Issuer Limited, the public company issuing the gold Exchange Traded Fund (ETF)12 recently launched by Absa in the country. This tonnage defines the current maximum potential size of the initial South African ETF. All gold coins struck and offered by the South African Mint are legal tender. By far the most famous is the Krugerrand but also on offer are the Protea series and the Natura series. Details of these coins can be found in Chapter 5.

12

See Chapter 5 for a full description of NewGold and an analysis of all Exchange Traded Funds.

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Photograph courtesy: AngloGold Ashanti Limited

CHAPTER 7 CHAPTER 7

Contents: 7.1 TRADE 7.1.1 South Africa as an international trading partner 7.1.2 Customs and excise and the imports of gold to and from South Africa 7.1.3 Results of the customs data analysis 7.1.4 Export considerations and structural initiatives 7.2 TOURISM 138 140 143 148 138 138

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South Africa, as a major importer and exporter of goods, has long-standing trade relationships with a number of countries... South Africa is a major importer and exporter of a wide range of goods and services and consequently has long-standing trade relationships with a number of countries. As the worlds largest miner of gold, (14% of global production in 2004)1, South Africa is an important participant in the international gold market. 7.1 TRADE 7.1.1 South Africa as an international trading partner Since the first democratic elections in 1994, the value of South Africas total exports has on average risen by 12% per year, while the value of total imports has risen by 15% on average per year. In value terms, the contribution of mining to South African exports has fallen from 50% in 1994 to 32% in 2004. In contrast, the importance of the manufacturing sector to exports (in value terms) has increased over the same period from 40% to 60%. By region, Europe and Asia account for 60% of the value of all South African exports. The proportion of exports to Asia, currently 24%, can be expected to rise with increased demand for raw materials from China. The United States, United Kingdom and Japan are the top importers of South African goods and services in value terms, representing collectively 33% of the total of the countrys global exports in 2004. The largest source of South African imports is Germany, which accounted for 14.6% of the value of imports into the country in 2004. These imports are mainly heavy-duty equipment and machinery. By region, South African imports on a value basis are even more consolidated than exports, with Asia and Europe accounting for 80% of goods imported in 2004. 7.1.2 Customs and excise and the import and export of gold to and from South Africa The analysis of gold imports and exports into and from South Africa differentiates between the authorities definitions of monetary gold (bars), coin and other fine gold products that refer to jewellery either in finished or semi-fabricated form. Before presenting the analysis, some comments on the data are warranted. South Africa conforms to and uses the international Harmonised Commodity Description and Coding System (HCDCS or HC) in the recording and reporting of all trade data.

Since 1994, the value of South Africas exports has on average risen by 12% per year...

In value terms, the contribution of mining to South African exports has fallen from 50% in 1994 to 32% in 2004...

See Chapter 2 for details.

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The HCDCS codes relevant to the gold industry are shown in the following table: Harmonised commodity description and coding system (gold) 71.08 Gold Unwrought, semi-fabricated or powder form 71.08.10 Non-monetary 71.08.11 Powder 71.08.12 Other unwrought 71.08.13 Other semi-manufactured form 71.08.13.1 Bars, rods, plates, sheets and strip 71.08.13.2 Foil 71.08.13.9 Other 71.08.20 Monetary 71.13 Jewellery 71.18 Coin
Data source: Department of Trade and Industry

To collate a summary of imports and exports of fine gold into and out of South Africa, the trade figures associated with the above HCDCS codes going back to 1999 were analysed. In each year, analytical anomalies with the official data were encountered. These are listed below and it should be noted that they are in no way unique to South Africa. Similar anomalies are encountered in the analysis of trade statistics of other countries: there were instances where clear typographical errors had been made, as tonnage figures bore no relation to quoted Rand values; there are a number of sub-codes, and it is unclear from their definitions exactly to which precious metals they refer and the form of the precious metals; and there were instances where the units of measurement had been confused. For example, the volume figures were in grams when they ought to have been in kilograms or vice versa. Further, there were instances where there were no tonnage figures, only Rand values, in the category covering 99% of gold exports (defined as country unknown or origin of goods unknown). The table below was extracted from the DTIs website and demonstrates the situation. Examining the more detailed statistical database provided by Customs and Excise still left a number of unanswered questions: 2004 Gold exports Code 7108 Origin of goods unknown India UK Hong Kong US Total DTI trade data Rand value 28,053,783 24,496 3,439 271 58 28,082,047

% 99.9 0.1 0.0 0.0 0.0 100.0

Data source: Department of Trade and Industry website.

there were instances of South Africa importing metal to itself, with no clear explanation for this. These figures may have represented semi-fabricated jewellery exported for finishing and then re-imported into the country for sale, but this is only conjecture; and

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while Customs and Excise appear to collate the data on a monthly basis, the data is only published on an annual basis. Due to concerns about accuracy, and lack of data with respect to the volumes as described above, analysis of volumes was therefore based on the Rand values. On an annual basis, the analyst was then obliged to apply an average Rand gold price for the year, taking into account the Rand/Dollar exchange rate and the international gold price in Dollars.

Given these concerns, the analysis of trade figures has relied more on the value of trade (in millions of Rand) than on the quoted volumes (in grams, kilograms or tons). This approach addresses the concerns about the volumes but raises other concerns with respect to the interpretation of the values. Obviously, the exchange rate used greatly affects the calculation of the final gold tonnages. Even using end-period data as opposed to averages can greatly influence the outcome, particularly when the currency has been subject to wide trading ranges during the year under review. Accordingly, while we have made the best use possible of the data available, there is the potential for a margin of error. 7.1.3 Results of the customs data analysis

Exports of gold from South Africa According to the trade figures collated by Customs and Excise, annual exports of fine gold from South Africa between 1999 and 2004 were as follows, expressed in the calculated tonnages from the Rand values:2
Fine gold exports from South Africa 1999-2004 (t) Monetary gold 1999 452 2000 451 2001 414 2002 418 2003 408 2004 421
Data Source: Virtual Metals Analysis of Customs and Excise data.

Coin 1.07 0.48 0.47 0.39 0.42 0.72

Jewellery 1.81 2.48 2.84 3.70 4.50 5.07

Exports of fine gold in bars totalled 421t in 2004...

Exports of fine gold in bars (monetary gold) totalled 421t in 2004, up from 408t in 2003. Exports of fine gold coins and medallions totalled 0.72t, up from 0.42t the previous year. Fine gold exports in the form of jewellery product have risen over the past five years at an annual average of 23%, albeit from a very low base in 1999 of the calculated Rand value equivalent of 1.81t. This increase in exports of gold jewellery has occurred despite a volatile Rand, with the exchange rate against the Dollar depreciating by 20% annually between January 1999 and December 2001, before appreciating by 24% a year between January 2002 and December 2004 (see the accompanying chart).

Fine gold exports in the form of jewellery have risen over the past five years...

The methodology used for the calculation of the tonnages from the Rand value in all cases was as follows: Virtual Metals used the appropriate HCDCS code which gives an annual value in billions of Rand. This was divided by the average Rand gold price in the respective year to give a tonnage figure. Allowance was then made for the mark-up on the various gold products where appropriate.

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The stronger Rand has made South African gold jewellery exports more expensive. Interviews with the gold jewellery manufacturers who produce primarily for the export market confirmed that, in recent years, the strong currency has affected their ability to export final product.3 As manufacturing costs became more expensive in the wake of the stronger Rand against the Dollar, these manufacturers adjusted their marketing to recapture more of the local market in the face of declining overseas market share. In effect, the strong Rand also placed pressure on domestically-focused local fabricators as they now have to compete with local manufacturers who were previously targeting the export market. The effect of the strong Rand aside, the increase in the levels of fine gold exports of jewellery reveals some potential for local fabricators to break into the overseas markets, although from a low base. Details gained from the interviews with the primary manufacturers tied in closely with the Customs and Excise figures. Cumulatively, the 20 fabricators interviewed reported exporting at least 4.1t of fine gold in 2004. In addition, according to the research, another 0.5t is believed to be for indirect export via tourism. Furthermore, this research acknowledges that there must be some exports of gold product by manufacturers who were not interviewed although, given the fabrication sample covered by the interviews, this volume is considered to be relatively small. The chart on the right shows the country destination of this exported jewellery. In considering the growth potential of jewellery exports, there are two important considerations. South Africa enjoys favoured nation status with the USA via the African Growth and Opportunity Act of 2002 (AGOA)4, which allows South African gold jewellery fabricators to export their finished product to the USA free of import duties. This gives South African jewellery manufacturers a 6% cost advantage over their European and Far Eastern competitors, on whom the 6% duty is levied for jewellery product destined for the USA. The predominance of the United States as an importer of manufactured jewellery (62% of the total amount of jewellery exported from South Africa in 2004) is partly a function of South Africa benefiting from AGOA status with that country. Under the South African/European Trade Development and Co-operation Agreement (TDCS)5, a Free Trade Area (FTA) between South Africa and the European Union is being developed through the gradual abolition of import and export tariffs between the two trading partners. Import and export duties are gradually being removed from their maximum of 20% in 2003 to zero by 2012. This implies that the country will be able to export local gold jewellery dutyfree into Europe. Therefore, over the next six years, the European market will gradually open up to South African jewellery manufacturers at an increasingly attractive fiscal rate. The strong Rand has placed pressure on local manufacturers targeting the South African market...

This reciprocal removal of trade duties between South Africa and the European Union is, however, a double-edged sword. It implies that European jewellery manufacturers will, in turn, be able to import their products into South Africa, ultimately duty-free. This will gradually remove the 20% fiscal protection currently in place for South African manufacturers with predominantly local target markets.

3 4 5

See Chapter 4 for further comments. AGOA is discussed in more detail later in this chapter. TDCS is discussed in more detail later in this chapter.

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The following table details the proposed reciprocal reduction in import and export tariffs agreed between the European Union and South Africa: Phase-down between the European Union and South Africa Reciprocal tariff Import/export tariff % 2004 20.0 2005 17.6 2006 15.0 2007 12.6 2008 10.0 2009 7.6 2010 5.0 2011 2.6 2012 0.0
Data source: TDCS.

Increasing trend for jewellery manufacturers to seek trade outlets outside traditional markets...

The reduction of tariffs applies to jewellery fabricated from gold, silver and PGMs.6 The implication is that locally produced precious metal jewellery will eventually enjoy access to this market, free of import duties. Apart from South Africas traditional major trading partners, there is an increasing trend for jewellery manufacturers to seek trade outlets with other markets. SubSaharan Africa has been cited as a potential market with manufacturers investigating possible business opportunities in countries such as Nigeria, Ghana and Mali. The reasons given for this interest in other African countries are largely associated with increased levels of overall business being conducted and jewellery being perceived as one of many opportunities for increased trade. Although manufacturers intend to consider other African markets as a potential destination for their jewellery product, little in the way of business in these areas appears to have been generated to date.

Imports of fine gold to South Africa Trade figures collated by Customs and Excise indicate that annual imports of fine gold by product, between 1994 and 2004, were as follows, expressed in the calculated tonnages from the Rand values:
Fine gold imports to South Africa 1994-2004 (t) Monetary gold 1999 0.00 2000 0.03 2001 0.01 2002 0.07 2003 0.00 2004 0.00
Data source: Virtual Metals Analysis of Customs and Excise data.

Coin 2.68 1.67 0.96 0.71 0.46 0.32

Jewellery 0.85 1.16 0.87 0.67 0.74 1.28

It should be noted that no data was available on imports of non-South African gold production known to be refined in South Africa. This is because ownership of mine production remains with the mine and is not passed on to the refinery when the dor is delivered for refining. However, once manufactured (mainly into bars), these products are recorded as exports from South Africa, irrespective of the country of origin of the gold. Imports of fine gold coins in 2004 were recorded at 0.32t and imports of gold jewellery in 2004 totalled a calculated Rand-value-equivalent of 1.28t of fine gold. Gold jewellery imports have not shown the same growth as the gold jewellery exports, as the accompanying chart shows: The chart on the left shows the Rand value of jewellery imports into South Africa. In calculated tonnages of fine gold, the imports show a similar profile. Between

Platinum group metals

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2001 and 2003, these imports varied between 0.67t and 0.87t of fine gold. In 2004, they increased to the calculated tonnage equivalent of 1.28t. As the accompanying chart shows, much of this increase in imports of gold jewellery7 came from Hong Kong and China, which accounted for one third of total imports. This increase in imports of jewellery product from China and Hong Kong appears to be a combination of three factors: increased trade and imports of a wide range of products from these countries; finished product that is cheaper to manufacture in these countries because of lower labour costs relative to South Africa; and the strengthening Rand, especially between 2002 and 2004, which reduced the cost of importing goods into South Africa. Interviews confirmed that the level of imports of gold jewellery is highly subject to fluctuations in the Rand/Dollar exchange rate, rising in times of Rand strength and falling when the Rand weakens against the Dollar. With the stronger Rand, especially between 2002 and 2004, the trade reported a sharp increase in the number of commercial entities importing finished jewellery into the country. More seriously, many claimed that the strength of the Rand was encouraging a high level of smuggling of finished jewellery into the country, avoiding both the 20% import tax and 14% VAT. This is obviously not reflected in the official trade statistics and it must be assumed that the official figures that are presented here understate the true levels of gold jewellery entering the country, possibly by a wide but unverifiable margin. 7.1.4 Export considerations and structural initiatives

The South African/European Trade Development and Co-operation agreement (TDCS) The South African/European Trade Development and Co-operation Fund (TDCS) provides for the creation of an FTA between the European Union and South Africa by no later than 31 December 2012. By this date, 90% of all trade between the two partners will be free of customs duties. The European Union will remove duties on 95% of South Africas exports to the European Union over 10 years. Similarly, South Africa will remove duties on 86% of the European Unions exports to South Africa over a 12-year period.
It should be noted that the phase-out of the duties takes place over a different time horizon the reduction of duties as they apply to South African fabricated goods for export to Europe takes place more quickly than the reduction of duties on European manufactured goods for export into South Africa. The implication here is that South Africa will have a limited window of opportunity during which local manufacturers will benefit from being able to export to Europe at a lower rate of tax compared to European manufacturers exporting to South Africa. From 2012, however, the zero-rate tax rate will apply to both trading partners. Goods to which the FTA protocol will apply need to: be produced in their entirety from products grown or mined in South Africa or the European Union or derived from these products or their by-products; or contain manufacturing inputs imported from outside South Africa or the EU, but which conform to the specific processing rules pre-described for each tariff heading. The duty phase-out allowed for by the TDCS has important implications for the local jewellery industry and a table of the phase-down was presented earlier in this chapter.

Quotable quotes: I reckon at least another 50% over the official import figures is being brought in through the green channel in suitcases. It is killing the local manufacturer who has overheads to pay. pay. Jeweller manufacturer Smuggling can be an individual coming into the country wearing 10 tennis bracelets or it can be more organised in which case the volumes are huge. Jewellery manufacturer Quotable quotes: I reckon at least finished product. Even official am importing another 50% over the with import figures is being brought in through thevery duties, VAT and a clearance cost, I can land green channelgoods in Southis killingcheaper than I can similar in suitcases. It Africa the local manufacturer who has overheads to pay. make the stuff. pay. Jewellery mnnuactuuer r maauf factr re

Duty phase-out as a result of TDCS has important implications for the local jewellery industry...

According to the trade codes and definitions, this gold jewellery may contain set or mounted stones. However, it is clear that it excludes unset or loose diamonds, which have a separate coding category.

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The African Growth and Opportunity Act of 2000 (AGOA) AGOA was signed into law in the USA on 18 May 2000 as Title 1 of The Trade and Development Act of 2000. Since then the Act has been amended twice on 6 August 2002 and 12 July 2004 extending the terms and tenure of the Act.
AGOA offers incentives for African countries to continue their efforts to open their economies and build free markets. These incentives are in the form of trade between the country and the USA free of duties, and quotas on specified product lines. It provides reforming African countries with the most liberal access to the American market available to any country with which the USA does not have a Free Trade Agreement. AGOA originally covered the eight-year period from October 2000 to September 2008, but amendments signed into the law by President George Bush in July 2004 further extend AGOA to 2015. AGOA builds on existing USA trade programmes by expanding the duty-free benefits previously available only under the Generalised System of Preferences (GSP) programme. Duty-free access to the United States market under the combined AGOA/GSP programme now stands at approximately 7,000 product tariff lines. AGOA allows access to the USA market, free of import duty, for the 37 African countries designated as eligible, South Africa included. Those qualifying are chosen according to various pre-defined criteria, including evidence of progress towards the following: market-based economies; development of political pluralism and the rule of law; elimination of barriers to trade and investment; adherence to legal infrastructure; commitment to democratic principles and human rights issues; protection of intellectual property; increased availability of health care and education; protection of workers rights; and efforts to combat corruption. The USA is one of South Africas major trading partners... The USA is one of South Africas major trading partners: exports from the USA to South Africa greatly exceed USA exports to other Sub-Saharan countries. Between 2001 and 2003, the percentage of South African exports to the USA covered by AGOA or the GSP provisions rose steadily from 21% in 2001 to 32% in 2002 and 34% in 2003. In 2004 it fell back to 30%. However, in value, it continues to rise, from $1.69bn in 2001 to $1.78bn in 2004. In terms of African exports to the United States, South Africa ranked second only to Nigeria. While exports from Nigeria were heavily weighted in favour of oil and oilrelated products, exports from South Africa comprised a diverse range of products of which jewellery was but one, accounting for 1% of the total. However, this total does not include monetary gold exports to the US, as South African Customs do not break this data series down by country of destination. By sector, minerals and metals were the largest single category of exports to the USA under AGOA, comprising 36% of exports by value. This share is, however somewhat smaller than the minerals and metals sectors share of the total South African exports (including AGOA and non-AGOA).

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Value 000 $ 2004 Total exports to USA Minerals and metals: excluding monetary gold Transportation Chemicals Agricultural products Machinery Textiles and apparel Misc. manufactures Forest products Energy Electronics Footwear
Data Source: AGOA.

Exports under AGOA 639,845 539,144 219,428 148,976 16,630 119,622 57,648 24,615 14,237 890

Total imports from USA 111,320 867,566 501,563 189,052 381,997 31,612 56,774 96,648 113,402 474,776 1,460

Dollars

3,874,580 649,459 394,724 224,955 192,044 180,505 87,064 81,951 55,282 47,434 1,024

ATA Carnet The ATA Carnet system is an internationally operated and recognised means of facilitating trade and streamlining customs procedures for temporary export of a variety of products. The system operates under the international customs conventions administered by the World Customs Organisation (WCO).
In 2000, some 200,000 carnets were issued globally covering goods valued at $12 billion. ATA stands for Admission Temporaire/Temporary Admission and covers commercial samples, professional equipment and goods for exhibit and return to the country of origin. In practice, and specific to the local jewellery industry, the ATA carnet is issued by the South African Chamber of Business (SACOB) to South African exhibitors of jewellery prior to leaving the country to exhibit at one or several foreign venues. This ensures that the exhibitor is exempt from paying provisional duties and taxes for temporary importation purposes in the country of destination. The exhibitor, in order to be issued with the appropriate ATA carnet, has to comply with SACOB regulations by photographing, tagging, weighing and valuing each item of jewellery and each piece being taken out of South Africa for exhibition purposes. South Africa is one of 59 countries in which ATA carnets are issued and accepted. For South African jewellers, this facilitates exhibiting in countries such as the USA, Israel, China, Japan, Australia and throughout Europe. For local jewellers wishing to export their goods temporarily, the ATA Carnet eliminates VAT payments and customs duties on their return. Carnet holders also do not have to post any securities at customs. Holders can make customs arrangements ahead of travel, visit more than one country on the same carnet and use the carnet for multiple trips through its annual validity. Fees vary according to the country and are determined by the value of the goods, the number of countries to be visited plus any additional security, insurance or other services. In South Africa, SACOB charge the following: for goods valued at R100,000 or less there is a flat-rate fee of R1,300 per carnet; for goods valued in excess of R100,000 the flat-rate fee is R1,900 per carnet; and express services for the issuing of carnets attract a further R300 charge. If the exporter wants SACOB to complete all the paperwork, there is an additional fee of R500. South Africa is one of 59 countries in which ATA carnets are issued and accepted... In 2000, some 200,000 carnets were issued globally, valued at $12 billion...

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In addition, the temporary exporter must lodge a cheque or bank guarantee for 50% of the value of the goods for export. This is fully refundable on re-importation of the goods. While the ATA carnet system assists jewellers who intend to exhibit overseas as temporary exporters, the requirement for a cheque or bank guarantee to the value of 50% of the value of the goods for export still poses a problem, especially for small and micro manufacturers. SACOB is the countrys only issuing and granting association... SACOB is the countrys only issuing and granting association, acting in accordance with international customs conventions. The fees paid to SACOB as a Section 21 Company8 for the service go to covering the costs of printing and issuing the carnets, as well as to the associated insurance of the goods and administrative fees. SACOB does make an undisclosed profit on issuing carnets.

TISA concentrates on the manufacturing sector and the development of small, medium and micro enterprises...

Trade and Investment South Africa (TISA) Trade and Investment South Africa, (TISA), is an agency working under the auspices of the Department of Trade and Industry (DTI). It is designed to provide a one-stop shop for investors and exporters at a national level.
As a service delivery agency that combines trade and investment promotion, TISA is positioned to assist the DTI so that it may maximise the synergies between investment and export. TISA operates out of the DTI in South Africa and out of 50 diplomatic offices globally, providing core market information and identifying marketing and investment opportunities. TISAs strategy is threefold: the development of Industrial Development Zones (IDZs); the development of special investment packages to match those being offered by competing countries; and the development of policy for the creation of investor-friendly environments. TISA concentrates on the manufacturing sector (including jewellery fabrication) and the development of small, medium and micro enterprises (SMMEs). TISA also coordinates provincial development initiatives. While TISA appears to have made progress in encouraging South African presence internationally via trade exhibitions, the overall concept has some way to go before its stated objectives are met. As yet, the local jewellery industry is not fully aware of the incentives offered through TISA. This lack of awareness is not confined to TISA services but also extends to those training incentives which are offered, for example, by the MQA. In this regard, South Africa is competing with initiatives such as the DMCC9 in Dubai which was established in 2002. The DMCC is an industrial development zone offering one-stop refining and trading facilities for the precious metals and diamond industries. The DMCC offers investors a number of incentives, the most relevant of which for this discussion is a 50-year tax free status for investors with respect to both personal and income tax, no foreign exchange controls and no restrictions on capital repatriation.

Industrial Development Zones (IDZs) The DTIs Industrial Development Zone (IDZ) Programme is designed to encourage international competitiveness in South Africas manufacturing sector. The IDZ programme was established under the Manufacturing Development Act No 187 of 1993 as amended in 2000.
An IDZ is a purpose-built industrial area... An IDZ is a purpose-built industrial estate linked to an international airport or port that contains a Controlled Secured Area (CSA). A CSA is exempt from duties, VAT and import duties on machinery and assets.

8 9

A company established not for profit. Dubai Metals & Commodities Centre.

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Each IDZ is designed to: provide a location for the establishment of strategic manufacturing investments; promote and develop links between domestic and zone-based industries, maximise existing infrastructure, generate employment and encourage the transfer of technology; and allow for the exploitation of resource-intensive industries. The primary intended characteristics of an IDZ are that, ultimately, it should: have direct links to international gateways; be geared towards production for export; have dedicated customs support; have access to duty-free importation of raw materials and inputs; have a zero VAT rating on supplies procured from within South Africa; have import status on finished goods sold locally; and have the ability to qualify for government incentive schemes. There are currently four IDZs at different stages of development. The first IDZ is the Coega Industrial Development Zone near Port Elizabeth which took its first tenant in May 2005. While it is operational, it is too early to evaluate its success. The second is in Richards Bay and is under development. The third is ELIDZ, the East London Industrial Development Zone, which was first granted a licence to operate in March 2003. In July 2005 it was announced that the ELIDZ was finalising the first phase of its infrastructural development and had attracted three investors, the largest of which was a glass manufacturer. This IDZ is focusing on the automotive, agricultural and pharmaceutical sectors and not on the precious metals industries. The fourth is a proposed IDZ at Johannesburg International Airport, the details of which are given below, since the proposal relates directly to the local gold industry. There are four IDZs at different stages of development...

The Proposed Johannesburg International Airport (JIA) IDZ A consortium led by Mintek, the Airports Company of South Africa (ACSA), Blue IQ and Rand Refinery, has been set up to establish a Precious Metals/Jewellery Manufacturing Precinct. The precinct would be designated as an IDZ and consist of two centres one at JIA within the High Security Zone on a five hectare plot; the other at Rand Refinery on the 2.5 hectare Gold Zone site. This IDZ is specifically designed for the manufacture and export of jewellery products.
The purpose and objectives of this IDZ are to: achieve national beneficiation objectives by building South Africas export capacity in jewellery and related industrial sectors; create an integrated centre linking production, beneficiation, retail, and export of precious metals; create a regulatory fiscal environment (ie. zero VAT on export related transactions) for the manufacture and export of South African produced jewellery; establish an export centre for the trading and cutting of diamonds; establish a global centre for national and international applied research and development, utilising precious minerals and metals primarily for jewellery related applications; administer gold, platinum and diamond loans; and allow for the phased implementation of a mineral/metal exchange initially to support working capital for jewellery production and industrial production of precious metal/mineral product, as well as the exchange of scrap and refined product. As at the time of wriring, construction is scheduled to begin in February 2006.

The proposed IDZ at Johannesburg International Airport relates directly to the local gold industry...

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7.2 TOURISM

South Africa had 6,677,839 visitors in 2004; this industry is still relatively small in global terms. The vast majority of those who arrived in the country were from within Africa to seek employment and therefore cannot be considered tourists. The country is ranked by The Economist (World in Figures, 2006) as the 25th most popular holiday destination. In international terms this may seem small. According to The Economist, tourist numbers amount to only 1/12th of the numbers visiting France and one-third of the numbers visiting Germany. Tourist arrivals 2004 000s 76,056 52,477 40,356 34,356 33,477 25,854 20,737 20,059 19,726 19,588 6,677 % change on 2003 1.4% 1.8% 7.0% 5.1% 0.0% 3.9% 1.4% 5.1% 3.3% 6.3% 2.7%

1 2 3 4 5 6 7 8 9 10 32

France Spain USA China Italy UK Russia Austria Mexico Germany South Africa

Data Source: South African Tourism Strategy Unit.

A more comparable data set for South Africa might be other long-haul destinations such as the USA, Australia or Thailand. South Africa receives more visitors than Australia or Brazil, but fewer than Thailand, Mexico or the USA. In reviewing data on South African tourist arrivals, it needs to be borne in mind that many visitors to South Africa are from neighbouring countries, and visit South Africa with the intention of purchasing basic commodities and white goods, rather than for the purpose of tourism. Tourist arrivals 2004 000s 40,356 19,726 11,231 6,677 5,200 4,155 % change on 2003 7.0% 3.3% 11.4% 2.7% 7.7% 2.2%

USA Mexico Thailand South Africa Australia Brazil

Data Source: South African Tourism Strategy Unit.

The majority of visitors to South Africa from outside Africa come from countries with historical connections with South Africa. The fact that the UK features high on the list of countries of origin of visitors is a function of the colonial history of South Africa and the continued close trade links between the countries and their people. This relationship also has some bearing too on the local jewellery industry in that the two markets show strong similarities.

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APPENDICES

APPENDICES APPENDICES

Contents: APPENDIX 1: THE INTERVIEW LIST APPENDIX 2: THE SOUTH AFRICAN ECONOMY IN AN INTERNATIONAL CONTEXT APPENDIX 3: TRAINING AND SKILLS TRANSFER APPENDIX 4: THE INTERNATIONAL GOLD MARKET 153 157 172 150

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THE INTERVIEW LIST
ACKNOWLEDGEMENTS Many people have assisted with the compilation of this review and their contribution and support is gratefully appreciated. To all the industry players who participated in the interview process a very special thank you! Gold Review Interview List Sector Banking/Finance Banking/Finance Banking/Finance Coins Coins Consultants Government Government Government Government Government

Quotable quotes: Apart from the VM team, I would like to extend a special thank you to the following who went the extra mile with this review. Gwyn Fourie of VM, Lebo Mogotsi of Lebone Resources, Claire Minnitt of 9 Dots, Lynne La Croix of Alan Mair, Margot Rudolf of the Foschini Group, Patrizia Tennent of Musuku, Adl Botha of Rand Refinery and Cathy Lapping of Ernst & Young. In keeping with the rest of this Review, I completed an analysis of this data sample noting that 100% of those who went the extra mile were women. Primary researcher

Company/department ABSA Bank Ltd Industrial Development Corporation (IDC) Standard Bank Plc (Dubai) SA Mint Company/Coin World Universal Mint 9 Dots Department of Minerals and Energy Department of Trade and Industry South African Customs and Excise South African Revenue Service South African Police Service Diamonds and Gold Government South African Reserve Bank Hallmarking Sheffield Assay Office UK Industrial Bosco Printed Circuits (Pty) Ltd Industry Body Chamber of Mines of South Africa Industry Body Jewellery Council of South Africa Industry Body SA Chamber of Business (SACOB) Industry Body South African Mining Development Association (SAMDA) Jewellery Manufacturing Alan Mair Manufacturing Jewellers Jewellery Manufacturing Andreas Salver Manufacturing Jewellers Jewellery Manufacturing Angelo's Manufacturing Jewellers Jewellery Manufacturing Creative Gold Manufacturing Jewellers Jewellery Manufacturing Daberon Manufacturing Jewellers Jewellery Manufacturing Haglund Jewellers Jewellery Manufacturing Michael's Designs cc Jewellery Manufacturing OroAfrica (Pty) Ltd Jewellery Manufacturing Orofino Gioielli Jewellery Manufacturing Peter Scott Jewellers cc Jewellery Manufacturing Piero G Manufacturing Jewellers Jewellery Manufacturing Pneuma Jewellers Jewellery Manufacturing Rob's Workshop Jewellery Manufacturing Schwartz Jewellers Jewellery Manufacturing Sid Forman Manufacturing Jewellers (Pty) Ltd Jewellery Manufacturing Silmar Marketing SA (Pty) Ltd Jewellery Manufacturing Simon Efune Manufacturers Jewellery Manufacturing Studio C Manufacturing Jewellers Jewellery Manufacturing Subsaharan Livingstone Jewellery Manufacturing/Retailing Galaxy Jewellers Jewellery Manufacturing/Retailing Natal Wholesale Jewellers Jewellery Manufacturing/Retailing Tourvest Group Jewellery Retailing Foschini Group Jewellery Retailing Mass Discounters Labour Union National Union of Mineworkers Mining AngloGold Ashanti Ltd Mining Gold Fields Ltd Mining Harmony Gold Mining Company Ltd Museum/Cultural Gold of Africa Museum Museum/Cultural Gold Reef City Mint Primary Refining Musuku Beneficiation Systems (Pty) Ltd Primary Refining Rand Refinery Ltd Publications Jewellers' Network Retailing Woolworths (Pty) Ltd Secondary Recycling Cape Precious Metals Secondary Recycling First Assay Secondary Recycling Metal Concentrators Secondary Recycling Perkins Metal Recovery Technical Council for Scientific and Industrial Research (CSIR) Technical Mintek Training Tshwane University of Technology Training Vukani-Ubuntu Community Development Projects Training Witwatersrand University of Technology

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APPENDIX 2 THE SOUTH AFRICAN ECONOMY IN AN INTERNATIONAL CONTEXT

APPENDIX 2 APPENDIX 2

Contents: A2.1 ECONOMIC CENTRES, DEMOGRAPHICS AND CONSUMER PROFILES A2.2 LEGISLATIVE AND FINANCIAL INFRASTRUCTURE A2.3 THE ECONOMY IN MORE DETAIL 152 153 154

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THE SOUTH AFRICAN ECONOMY IN AN INTERNATIONAL CONTEXT
South Africas lead economic indicators are as follows: Basic Economic Indicators 2003 GNI per capita ($) 2,780 GNI per capita ($ PPP) n/a Economic Growth GDP 2.8% Household cons. expenditure (year-on-year growth) 3.4% Consumer Price Inflation 5.8% Prime Overdraft Rate (end-year) 11.5% Rand/Dollar Exchange Rate (average) 7.56 Balance of Payments deficit (% of GDP) 2.0% 2004 3,630 10,960 3.7% 6.0% 1.4% 11.0% 6.45 3.0%

Data Source: World Bank, South Africa at a Glance, DTI, Reserve Bank, June 2005 Quarterly Report.

A2.1 ECONOMIC CENTRES, DEMOGRAPHICS AND CONSUMER PROFILES South Africa is the ninth largest country in Africa, and the 25th largest in the world by land area. At 1.22 million square kilometres, it is just under one-eighth the size of the USA but more than twice the size of France and five times larger than the UK. In terms of population, it is the fourth largest country in Africa, and the 26th largest country in the world. South Africas population density is 37.2 people per square kilometre, compared with 134 for China and 245 for the UK.1 Urbanisation has been a characteristic of demographic flows, especially over the past decade, resulting in distinct urban metropoles that dominate commercial, social, political and fiscal activities. These are: Greater Johannesburg - financial and commercial centre; Tshwane (formerly Pretoria) executive and administrative capital; Cape Town legislative capital and seat of parliament; Bloemfontein judicial capital; Durban; Port Elizabeth; and East London. Demographics at a glance (2004 unless stated) Population 44.8m Annual growth rate 2.0% Population/Sq Km 37.2 Population under 15 34% Birth Rate/1,000 22.6 Death Rate/1,000 16.9 Unemployment (2002) 29.5% Urban Population 57.7% Life expectancy Men 45.1 yrs Women 50.7 yrs Adult Literacy Male 87% Female 85%
Source: United Nations.

Data Source: CIA World Fact Book, 2003.

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THE SOUTH AFRICAN ECONOMY IN AN INTERNATIONAL CONTEXT
The unemployment rate, measured using the official expanded definitions2, has tended to increase since 1995, although it fell slightly in 2004. In September 20043 (the latest available data), the official rate was 26.2%, or 4.1 million people. Women have a slightly higher official unemployment rate of 30.2% compared to 23.1% for men. There is little difference, however, in the official unemployment rate for urban and non-urban areas. The official expanded rate, which includes discouraged workers4, was 41%. Unemployment by racial breakdown is as follows: black people have the highest official unemployment rate of 31.3%; and the corresponding figure is 21.8% for Coloureds, 13.4% for Indians and 5.4% for Whites. Formal sector employment has decreased from 79% of total employment in 1995 to 71% in 2004, while employment in the informal sector has grown from 14% of total employment in 1995 to 20% in 2001. In the absence of formal sector employment growth, the burden of absorbing the countrys expanding labour force falls on the informal sector. While there are no statistics to shed reliable light on the size of the informal sector and the contribution it makes to the South African economy, discussions with academics, commerce and government suggest that its contribution is considerable and increasing. Household expenditure % of total Food Housing Income Tax Transport Clothing/Footwear Furniture Health Insurance Drinks/Tobacco Personal Care Communication Recreation/Holidays Investments/Savings Education Household Pensions Domestic workers Fuel/power Other Total

2000 20% 16% 14% 10% 5% 4% 4% 3% 3% 3% 3% 2% 2% 2% 2% 2% 2% 1% 1% 100%

1995 22% 14% 9% 10% 4% 3% 4% 4% 3% 3% 3% 1% 4% 4% 2% 3% 3% 1% 3% 100%

Data Source: Income and Expenditure Surveys, Statistics South Africa.

A2.2 LEGISLATIVE AND FINANCIAL INFRASTRUCTURE South Africa has in place a modern and democratic constitution. It also has a longestablished judicial system operating within first world financial and commercial infrastructures. At the end of 2003, South Africa had the 18th largest stock market in the world in terms of capitalisation, and the largest in Africa. The country still has exchange controls in place although, since 1994, certain of these controls have been relaxed and further market liberalisation is anticipated.

3 4

Unemployment (official definition) includes all persons who during a specified reference period were: (i) without work, ie. were not in paid employment or self-employment; (ii) currently available for work, and (iii) seeking work, ie. had taken specific steps, in a specified recent period, to seek paid employment or self-employment. Stats SA OHS 1995 and LFS, 2004. This is the standard rate plus persons that did not take active steps to find employment in the month prior to the survey interview. It should be noted that the measure is controversial and will no longer be reported, although it will be possible to calculate it from the underlying data.

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Stock market capitalization US UK China Italy Australia India South Africa Mexico Turkey Austria Poland Zimbabwe
Data source: The Economist World in Figures.

$bn 14,266 2,412 681 615 586 279 268 123 68 55 37 24

A2.3 THE ECONOMY IN MORE DETAIL The formal South African economy, with the exception of 1998, has seen reasonably solid GDP growth over the last 10 years. In 2004 it recorded a GDP growth rate of 3.7% (see chart on previous page). Despite relatively robust economic growth, the fiscal authorities have kept inflation under control, as the chart on the previous page reveals, for both consumer and producer prices. This was achieved largely through the management of interest rates. The countrys foreign reserves are currently at record highs, in part as a consequence of the strong Rand. Reserves have increased since 1997 and by mid2005 stood at more than $15 billion. Nevertheless, fast rising imports mean that the number of months imports covered by reserves has remained essentially unchanged at between two and three months. The South African economy still operates in a high interest rate environment, certainly relative to the USA and Europe. Interest rates were at 7% in July, the lowest they have been since 1981. Real interest rates, in other words after adjusting for inflation, are 2.8% (CPI-X5 is 4.2%) as at July 2005. In recent years, the South African Rand has been volatile against most currencies, particularly the Dollar. Against the Dollar, it has seen record lows and multi-year highs in a space of only four years (see chart at left). The Rands weak point came in December 2001 when it fell to R12.1 to the Dollar before rebounding to highs of R5.6 in December 2004. It currently (September 2005) trades at R6.7 to the Dollar. While the movements in the Rand were influenced by the fortunes of the Dollar itself, some of the Rands performance can be attributed to internal financial and economic circumstances specific to South Africa. These currency movements have had an impact on the local gold industry. The strength of the Rand has placed a number of gold mining companies under pressure despite substantially higher Dollar-denominated spot gold prices. While the Dollar gold price has increased steadily from May 2000, the strengthening of the Rand against the Dollar has entirely offset those Dollar-denominated gains. Thus, the gold price in Rands received by the local gold mining industry since early 2003 has made serious inroads into the revenues earned, threatening the future of a number of operations. This is discussed in more detail in Chapter 2.

CPI-X is the measure of inflation the South African Reserve Bank targets.

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APPENDIX 3 APPENDIX 3
Photograph courtesy: AngloGold Ashanti

Contents: A3.1 LEGISLATION A3.2 AUTHORITIES INVOLVED WITH TRAINING A3.2.1 Sector Education and Training Authorities A3.2.2 Mining Qualifications Authority A3.3 JEWELLERY TRAINING AND SKILLS TRANSFER A3.4 ISSUES FACING THE JEWELLERY INDUSTRY WITH RESPECT TO TRAINING AND SKILLS TRANSFER A3.5 TRAINING INSTITUTIONS A3.5.1 Community-based training programmes A3.6 JEWELLERY COMPETITIONS 158 160 161 165 156 156 156 157 158

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A3.1 LEGISLATION The Government has put legislation in place to ensure training, development of skills and skills transfer in South Africa. The legislation applies to all sectors of the gold value chain. The Skills Development Act of 1998 and the Skills Development Levies Act of 1999 address skills development in South Africa in a structured manner. The Skills Development Act aims to equip South Africans with the skills to succeed in the global market and to offer opportunities to individuals and communities for self-advancement to enable them to play a productive role in society while the Skills Levies Act provides the infrastructure to fund the necessary training and skills development. Together, these acts provide a framework for the collection of funds through training levies payable by employers in South Africa (see Chapter 6 for details) and the disbursement of the funds via two mechanisms - Sector Education and Training Authorities (SETAs) and the National Skills Fund (NSF) which account for 80% and 20% respectively of the disbursement of funds. The beneficiaries of the Skills Development Act are all South Africans who require training, with a focus on unemployed or under-employed South Africans who are 16 years of age or older, or Historically Disadvantaged South Africans (HDSAs). Training projects funded by the NSF focus on national training priorities and usually target HDSA individuals but the Department of Labour notes that the emphasis should be as follows: women; HDSAs; and people with disabilities.

A3.2 AUTHORITIES INVOLVED WITH TRAINING A3.2.1 Sector Education and Training Authorities (SETAs) As a consequence of the skills development legislation, 27 SETAs1 have been established to administer the schemes funds and to manage national skills development. The SETAs, established in March 2000, are managed by the Department of Labour and are responsible for the distribution of funds accumulated from the training levies paid by employers in the specific sectors in which they operate. SETAs are also tasked to oversee the quality assurance of training provided within their sector and the accreditation of training providers. All SETA qualifications are accredited by the South African Qualifications Authority2 (SAQA), and must be reflected on the National Qualifications Framework (NQF). This framework plots all the available qualifications in South Africa and identifies them in terms of requirements and level of qualification. Each sector in the economy has its own SETA, including Government departments. Participants in SETAs are representatives from trade unions, Government and industry representative bodies from the specified sector (stakeholders). The South African government recognises the need to have industry related qualifications. As an integral part of the process, SETAs oversee Standards Generating Bodies (SGBs). The SGBs are representative groups tasked with the creation of standards according to which training must be undertaken. These bodies include industry representatives, organised labour and government. The SGBs create structures for the necessary qualifications and then present them through their relevant SETA to SAQA to be verified and registered.

This number has been reduced recently. After an initial period, some of the SETAs who failed to perform merged with others who did better in their delivery. Hence the term SETA-accredited as it applies to training programmes.

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Within its sector, a SETA must develop and implement a skills development plan, be responsible for quality controls of SETA projects and of training provided by its accredited training providers and for paying out development grants. Combined, they are responsible for R2.5 billion per annum of funding across the economy, although it is not clear whether the full amount of this funding has been spent on training programmes. The skills development levies paid by employers are distributed as follows: NSF projects receive and distribute 20% of the total skills levies through projects deemed of national strategic importance; SETAs utilise the remaining 80% as follows; 10% - Administrative and operational costs; 10% - Provided to constituents on the presentation of a workplace skills plan (a document detailing the training to be conducted by or through the employer with its staff)3; 50% - Provided to constituents after proof has been provided of the training delivered; and 10% - Discretionary grants such as learnerships, apprenticeship training etc. Contributions to skills development through the training levy on the part of employers in the private sector became compulsory on 1 April 2000. This requirement applies to employers who are registered with the South African Revenue Services (SARS) for tax purposes, or to employers with a payroll in excess of R250,000 annually4. The levy rate is equivalent to 1% of the total payroll and the collection of the funds is administered by SARS. Skills development levies are held in a separate fund from which 80% is distributed to the different SETAs and the remaining 20% is paid to the NSF. The SETAs then pay grants to employers who appoint Skills Development Facilitators who have to meet specified criteria5. Thus the private sector can recoup part of its contribution to the skills levy through these grants. A3.2.2 Mining Qualifications Authority (MQA) The MQA is a statutory body consisting of the State, employer and employee organisations in the mining industry. It was established as an outcome of the South African Qualifications Authority (SAQA) Act, (Act No. 58 of 1995) and the Mine Health and Safety Act, (Act No. 29 of 1996). The MQAs key function is to promote the objectives of the Skill Development Act through implementation of the National Qualifications Framework (NQF)6 and advise the Minister of Minerals and Energy on matters relating to education and training, standards and qualifications in the mining industry. To perform this function, the MQA undertakes the following: the development and facilitation of the implementation of a Sector Skills Plan (SSP); the generation of Unit Standards and Qualifications; the establishment, administration and promotion of learnerships and skills programmes; the maintenance of the quality of training provided; and the disbursement of skills grants from training levies. The SETA identifies the need for a learnership. A qualification and its associated unit standards are registered with the SAQA, under which the MQA is governed. The SETA then submits an application for learnership registration to SAQA.

This 10% fell away in the 2005 revision of the act and employers can now only claim back 5% of their contribution. A Workplace Skills Plan is, however, still a requirement. Revision of the act now allows a cut-off point of R500,000. Public service employees in the national or provincial sphere of government are excluded from this. The revision of the act no longer stipulates the requirement of a skills development facilitator, but a workplace skills plan and annual training report are still required. The National Qualifications Framework is a framework structuring qualifications and making it possible to find synergies between qualifications. It also allows for the redressing of past inequalities through a process called RPL or recognition of prior learning.

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Once SAQA has registered the learnership, skills programme or qualification, the SETA is then mandated to fund structured training programmes. To enter into a learnership, each learner must sign a three-way agreement with a workplace provider and an accredited training provider. This agreement forms a contract between the training provider, employer and learner and is lodged with the MQA before any funds are provided.

Quotable quotes: We were not given any choice with respect to our student and I was apprehensive. As it turns out, his attitude is very positive he is willing to learn and we are careful to build up his confidence when teaching him. While he is not fully qualified, he is certainly able to take his place at my workbench and be productive without ruining my equipment. Micro jewellery manufacturer

The contract details the responsibilities of each party and amongst others defines the minimum payment a learner must receive during training. This new structure provides full payment for the training, and the payment to the learner allows the learner the necessary means to attend the training. If the learner is unemployed, he or she will also need to sign a fixed-term employment contract with the workplace provider in accordance to South African labour law. Learnerships are primarily workplace learning programmes, supported by structured institutional learning, which result in a qualification. When learners have successfully been assessed against all the unit standards that make up a particular qualification, the MQA is responsible for issuing a qualification certificate to that learner. This certificate is only issued for qualifications that have been registered by SAQA and identified on the NQF. There is a low level of uptake of MQA grants on part of the small and medium jewellery enterprises. Of the 20 jewellery manufacturers interviewed, only seven noted that they had MQA-financed students. Four of these were micro or small jewellery manufacturers as defined in this review. Many of the jewellery manufacturers are unaware of the learnership programme offered by the MQA. Of the seven jewellery manufacturers that have had MQA learnership experience, four noted particular success. These jewellery manufacturers commented that they would continue with the learnership programme. A3.3 JEWELLERY TRAINING AND SKILLS TRANSFER Training in the design and manufacture of jewellery is formally provided via certificates, diplomas and degrees by a number of institutions in South Africa. Training courses are also offered by private organisations and through internal skills transfer by employees within the jewellery manufacturing sector. This section reviews these sources of skills and training. A3.4 ISSUES FACING THE JEWELLERY INDUSTRY WITH RESPECT TO TRAINING AND SKILLS TRANSFER Research revealed a number of concerns with respect to what the industry expects from the training institutions and what the training institutions deliver in terms of graduate competency.

Quotable quotes: We ask newcomers to make a plain but perfect wedding band. I then evaluate them firstly on their attitude, then on the product and finally on the time it took them to make it. Few seem to understand that if you cannot produce a perfect band you cannot be capable of more intricate work. Manufacturing jeweller

Throughout the interviews conducted for this review, a lack of understanding and communication between the training institutions and jewellery manufacturers was detected. This was particularly true with regard to the respective expectations of these two constituents regarding what training should be offered, the quality and standard of the training, the course content, levels of anticipated expertise from graduates and students, as well as how the industry should perceive future training needs and how it should be positioning itself to address identified training priorities.

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Many jewellery manufacturers are critical of the standard and skill of graduates of the training institutions, their level of competency on the workbench and their attitude towards their work. The institutions themselves raised concerns about what the industry expects from their graduates. This they deem unrealistically high and consider that criticism from the industry that students are not fully tutored to take their place productively on a workbench is unwarranted. The institutions argue that jewellery-making is a combination of taught technical skills, artistic flair and experience. In addition, while they could train a student to a reasonable level of competency on a workbench, only a limited number of students each year would excel, particularly in the field of jewellery design. The institutions also argue that manufacturers fail to consider the structure of the jewellery courses and that the industry fails to understand the lead times required in adjusting course content to meet industry requirements. The MQA report of May 20037 noted that the most requested skill from the jewellery industry was design. In late 2004, interviews for this review revealed that jewellery manufacturers were calling for practical applications and skills on the bench. There appears to be a lack of consensus on what the jewellery industry needs. As discussed in Chapter 4, the training institutions also raised a concern that the jewellery manufacturers were unwilling to acknowledge the certificates, diplomas and degrees held by their students. They suggested that the real reason behind this was a financial one in that, by not acknowledging the qualifications, the jewellers were not obliged to pay these graduates the appropriate salaries. While many jewellery manufacturers denied this, others noted that there was an element of truth in the concern raised. The training reportedly provided by the jewellery manufacturers, in some cases, raised two additional concerns on the part of the training institutions. The first concern is that training is used in a broad generic sense by the manufacturers. While the manufacturers provide the workbench experience and mentor staff on the workbench, employees do not necessarily receive formalised or structured tuition on the workbench. Mentoring on the benches is necessary and a vital component of gaining the experience needed to become a manufacturing jeweller. However, the process should not be confused with training which implies more formal, structured course work as defined by the training institutions. Secondly, mentoring that takes place in-house among the jewellery manufacturers appears to be very narrow. For example, a staff member might gain experience in casting or polishing, but receive no holistic exposure to the entire manufacturing and financial process within that business. As a result these employees are poorly equipped to start a business in their own right, or would be limited to performing the same function in another company.

Quotable quotes: How can I spend time with an institution helping their students when I am battling to keep my own company above water? I am so tied up with management issues, mainly financial worries that I dont even have the time to do what I was originally trained to do design jewellery. Jewellery manufacturer

Quotable quotes: Some years back the industry said it needed emphasis on design. Now it is calling for more practical work. When it asks for something it wants it immediately, without realising it takes years for us to be able to respond to these requests. The industry has no understanding of what goes into the planning and structuring of an academic course and there is no co-ordinated long-term planning or vision as to what the industry should be aspiring to in the long term. Therefore, there can be no consensus about training needs. Formal training institution

A Skills Analysis of the Jewellery Manufacturing and Gemstone Processing Industries in South African By the Human Science Research Council and Povey Mulvenna & Associates, pg 23.

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A3.5 TRAINING INSTITUTIONS Six educational facilities offer formal courses in jewellery design and manufacture. Five of these were formerly known as technikons but have now been renamed as Higher Educational and Training Institutions (HETs) or universities of technology. Apart from these training institutions, there are a number of community-based organisations that offer training courses in jewellery manufacturing. A number offer courses in gemmology, diamond sorting and cutting and watch-making. These training courses have been excluded from this analysis, which concentrates on gold. Finally, the jewellery manufacturers themselves maintain that they offer in-house training for employees. The six training institutions are: the Cape Peninsula University of Technology, formerly the Cape Technikon; the Tshwane University of Technology, formerly the Pretoria Technikon; Witwatersrand University of Technology, formerly the Witwatersrand Technikon; the Central University of Technology in Virginia, Free State; Durban Institute of Technology, formerly the Durban Technikon; and the University of Stellenbosch. The first five offer diplomas and technical degrees in jewellery design and manufacture while the University of Stellenbosch offers a Bachelor of Arts degree in jewellery design.8 In addition to these institutions, there are three SETA-accredited colleges that offer courses in jewellery design, manufacturing and gemmology. These are: the Cape College; the Port Elizabeth College; and the Bloemfontein College. All nine training institutions offer combinations of the following course work9: design of jewellery; model making for casting of jewellery; making rubber moulds and casting moulds; making waxes for rubber moulds and mould trees10; injecting metal into moulds (for casting); casting and cutting mould trees; cleaning castings; soldering and joining seams in items of jewellery; polishing of finished product; and electroplating to yield final finish. The fees to the student for a three- or four-year course in jewellery are approximately R14,000 annually, although the total cost for first year students is higher as they need to buy a jewellery tool box of basic tools and equipment, at a cost of R5,000. In 2004, 185 students were enrolled for the courses offered by these nine institutions. Enrolment numbers have been steady over the years, limited by capacity constraints, specifically the number of workbenches available for training. Graduates from these institutions have found employment within the jewellery manufacturing sector and among the private institutions offering training, such as Vukani-Ubuntu (see following page).

8 9

10

Diplomas are awarded by the universities of technology (formerly technikons) and degrees are awarded by universities. Excludes course work related to stones Wax tree: a structure on which casting moulds are suspended.

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A3.5.1 Community-based jewellery training programmes There are a number of community-based jewellery training institutions and programmes. These include: the Cullinan Jewellery School; Vukani-Ubuntu Community Development Projects (Atteridgeville, Barberton/Umjindi and Galeshewe); Minteks Bopa Batho; Virginia Jewellery School; Kgabane Jewellery Training; and Imfundiso Skills Development Project. These community initiatives are structured as Section 21 companies (companies operating on a not for profit basis) and are funded by sponsorships. These programmes have a number of objectives in common. These are: to fast-track basic training of unskilled, unemployed and inexperienced youth to produce jewellery; to place emphasis on African art and culture and encourage this in the creation of jewellery; and to promote beneficiation of the countrys natural resources.

Vukani-Ubuntu In 1999, Vukani-Ubuntu established South Africas first goldsmith training programme in a black township, Atteridgeville. The concept has been applied to other areas of the country including Virginia in the Free State in 2000, Barberton, Mpumalanga in 2000 and Galeshewe in the Northern Cape in 2005.11 The company has received the Impumelelo Award, awarded by the DTI, recognising Vukani as one of the top 300 black empowerment companies in South Africa.
The three-year jewellery design course trains inexperienced people to produce jewellery and other crafts of saleable quality in the shortest possible time. The course is broken down into skills programmes covering the following functions: benchman; polisher; repairman; modelmaker; and setter.

It also includes jewellery design and small business management skills and is industry focused. The project has two divisions: the training division, which trains students from previously disadvantaged communities; and the manufacturing division, which operates a hive12 in all the Vukani-Ubuntu projects, drawing trainees and craftspeople from the local community and assisting them to produce finished product. The hive represents an entire jewellery and crafts manufacturing infrastructure provided by Vukani-Ubuntu.

11

12

Vukani-Ubuntu has also opened its first gemstone cutting and polishing programme at Galeshewe in Kimberley. This handbook concentrates only on the first three projects which are directly involved with gold. Hives: Co-operative associations of manufacturers of similar products operating collectively and usually cost-effectively via the sharing of overheads and other fixed costs.

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The hive has the following characteristics: it affords people the opportunity to operate without needing to purchase expensive equipment and materials; it alleviates the need for participants to finance the formation of a small business and negates start-up costs; it offers participants a safe, secure working environment; it offers the participants a shareholding in the hive; it assists with marketing of finished product to enable the participants to focus solely on their chosen profession; and it provides experiential training to its trainees in a manufacturing environment where they work side-by-side with qualified jewellers. Details of the Vukani-Ubuntu projects are as follows: The Atteridgeville Jewellery Project Date Established Sponsors

Management Capacity 1st Year 2nd Year Hive Location Premised by Sustainable by 1st Intake
Data source: Vukani-Ubuntu

January 1999 AngloGold Ashanti Nelson Mandela Childrens Fund De Beers Pick & Pay Foundation National Development Agency Academy International Atteridgeville College Nedcor South African Breweries Inc National Lotteries Fund Jewellery Council of South Africa Vukani-Ubuntu 20 15 10 Atteridgeville, Gauteng Atteridgeville College 2006 January 1999 20 learners

The Atteridgeville Jewellery Project has achieved a 98% employment rate for its qualifying graduates. A number of graduates have started their own jewellery manufacturing businesses. The Harmony Jewellery School Date Established Sponsors

Management Capacity 1st Year 2nd Year Hive Location Premised by Sustainable by 1st Intake

September 2000 UNOPS-SEHD* Harmony Gold Cooperazione Italiana DTI Harmony Gold (originally Vukani-Ubuntu) 20 20 20 Virginia, Free State Harmony Gold Mining 2005 September 2000 20 learners

*United Nations Office for Projects - Small Enterprise and Human Development.

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The Harmony Jewellery School (previously the Virginia Jewellery Project) is managed by Harmony Gold Mining Company. The project was initially co-funded by UNOPS-SEHD and Harmony Gold Mining. Since then, the UNOPS-SEHD funding has expired and Harmony Gold Mining is now the primary funder. To date, Harmony Gold Mining has spent R5.3 million on the jewellery school, which includes refurbishment of the premises, the purchase of tools and equipment and the cost of course design and management. Harmony Gold Mining also subsidises the students travel costs and makes funding available for bursaries. Two courses are offered: the three-year National Diploma Course in Jewellery Manufacturing and Design; and the one-year Further Education Training learnership programme. The learnership programme often but not always serves as a bridging course in preparing students for the diploma. The school operates as a satellite of the Central University of Technology of the Free State. The University of Technology provides the training diploma and Harmony Gold Mining provides the funding, infrastructure and management of the project, as well as designing the course content. As of 2005, a total of 32 students were enrolled for the diploma and another 40 were enrolled for the learnership programme, 12 of whom have MQA funding. Four of the graduates are currently employed at the school as facilitators, assisting with teaching and course development. The Barberton Jewellery Project Date Established Sponsors

Management Capacity 1st Year 2nd Year Hive Location Premised by Sustainable by 1st Intake
Data Source: Vukani-Ubuntu.

May 2002 Umjindi Town Council Local Economic Development Fund African Pioneer Mining Department of Economic Affairs and Tourism (Mpumalanga Province) Vukani-Ubuntu 20 20 5 Barberton, Mpumalanga Umjindi Town Council 2006 February 2002 20 learners

In addition to its specific training programme, Vukani-Ubuntu is actively involved with the communities in the vicinity of its projects. In Baberton, the project includes a jewellery retail facility and an African art gallery actively promoting the work of 33 local artists.

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The Galeshewe Jewellery Project Date Established Sponsors Management Capacity 1st Year Location Premised by Sustainable by 1st Intake
Data source: Vukani-Ubuntu

January 2005 Nelson Mandela Childrens Fund Northern Cape Urban FET College Vukani-Ubuntu 13 Galeshewe, Kimberley Northern Cape Urban FET College 2008 April 2005 13 learners

Bopa Batho Bopa Batho means Building People and is aimed at developing and training people from South Africa's previously disadvantaged communities for jobs in the mining, minerals processing and minerals beneficiation industries.
Funded by Mintek, several programmes for technicians, technologists, engineers and artisans are in place, covering skills in the mining industry as well as in jewellery manufacturing. Mintek is the lead service provider for this initiative and programmes cover schoolbased teacher training through to skills development in conjunction with tertiary educational institutions and industry. Programmes cover small-scale mining and jewellery projects including the Kgabane Jewellery Training Programme (see below). Bopa Batho is administered by a Board of Trustees, which comprises Minteks CEO, Chairperson and General Manager of Research and Development, as well as representatives of contributing organisations and institutions. Bateman Africa has recently allocated five per cent of its shareholding to Bopa Batho.

Kgabane Project Kgabane, meaning precious, was initiated by the Department of Minerals and Energy and is a partnership between Mintek, Harmony Gold Mining Company, the MQA and the People's Bank. It is an accredited jewellery training initiative housed at Mintek, giving HDSA women the opportunity to develop jewellery-making skills.
In 2002/3, the project trained 153 learners, 53 more than its target. It trained 265 learners in 2003/4. Information on the graduates employment history after training was not available. In terms of the contract entered into with the MQA, Kgabane is required to train 250 learners in 2004/2005, a majority of whom are to be rural women of South Africa.

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Imfundiso Skills Development The Imfundiso Skills Development project was established in 2001.
The project has four operating centres: at the Cullinan Diamond Mine (formerly Premier Mine), east of Pretoria, in Gauteng Province (opened in 2001); at the Sekhukhune Education Multi-Purpose Centre, in the Sekhukhune District Municipality area, south of Limpopo Province, (opened in 2003 but started operating in January 2004); at the South West Gauteng Colleges George Tabor Campus in Dube, Soweto, (started operations in January 2004); and at the Thabamopo Education Multi-Purpose Centre, at Lebowakgomo, in the Capricorn District Municipality of Limpopo Province (established in September, 2004). The two-year jewellery design and manufacturing training course promotes African design through: the creation of unique, locally influenced art and design; manufacture of indigenous jewellery, blending various materials including gold, platinum, copper, brass, silver, wood and glass; and the marketing of finished products to tourists and industry. The course covers the following subjects: jewellery-making techniques and practical goldsmithing; jewellery design and drawing; and gemmology, metallurgy and business management. The course allows a student with no skills or formal education to: enrol at a university of technology or university for further studies in jewellery manufacture; be employed by the formal jewellery industry; or be self-employed through entrepreneurship; and work towards the continuation of the project in the training school. The course is geared to practical work, which makes up 80% of the curriculum. Design, drawing and theory make up the balance. Students start by working with brass and then move on to working in silver and gold as the course progresses. The first graduation ceremony took place in Cullinan on 14 April 2004 and the course was accredited by the MQA in the first quarter of 2005. Graduates from the programme have found employment with Orofino and SubSahara Livingstone. Students of Imfundiso have participated in AngloGold Ashanti's AuDITIONS Riches of Africa jewellery design competitions13 and in AngloGold Ashantis Traditional African Goldsmith Training programmes. Several of the Imfundiso students have won prizes and scholarships associated with these projects. A3.6 JEWELLERY COMPETITIONS In recent years, jewellery design competitions have been run in South Africa, sponsored by local gold companies. The objectives of these competitions include the recognition and encouragement of local talent and the promotion of public awareness of local jewellery design. The following section describes each of the competitions in more detail.

Quotable quotes: The industry should not underestimate the importance of these competitions for our students. They allow the students to have creative freedom beyond the confines of their theoretical course work. They really have fun but at the same time they are gaining valuable design experience. Formal training institution

The Jewellery Council of South Africas Collection Awards Jewellery Competition The Collection Awards jewellery design competition was founded and sponsored by the Jewellery Council of South Africa in 1994. In this annual event, the judges evaluate the jewellery in terms of its commercial viability. The criteria include interpretation of an annual theme, wearability, manufacturing practicality and the innovative use of materials.

13

See later for details.

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The competition is open to Southern Africas practising jewellers, apprentices and students of jewellery design. The competition receives in excess of 1,000 entries per annum. The theme for the 2005 competition was The Precious Palette. Designers were requested to draw their design from the world of colour. Winners receive their awards at the Jewellex annual exhibition, after which the collection is displayed at the International Jewellery London exhibition.

AngloGold Ashanti AuDITIONS Riches of Africa In 1999 AngloGold Ashanti14 established an annual South African gold jewellery design competition called Riches of Africa, with the following objectives: to promote the beneficiation of gold in the South African jewellery industry; to promote excellence in South African gold jewellery design; and to provide education and skills development in the South African jewellery industry.
In 2004, AngloGold Ashanti took the opportunity to re-launch Riches of Africa as AngloGold Ashanti AuDITIONS Riches of Africa, the gold jewellery design competition. The table that follows lists the number of entrants in the competition since its inception. Riches of Africa (now AngloGold Ashanti AuDITIONS Riches of Africa) Number of Entries 1999 2000 2001 2002 2003 Entries 204 594 320 1,282 1,112 Finalists 17 17 20 25 26
Data source: AngloGold Ashanti.

2004 1,189 24

Since its inception, a number of changes have been made to the competition with the intention of increasing its scope and positive impact. Among these are: the sponsorship by AngloGold Ashanti of workshops for all the competition entrants in design and goldsmithing techniques. These workshops are held in the Western Cape, KwaZulu-Natal and Gauteng; the addition of international judges to the judging panel; the inclusion of white and rose gold into designs; and the inclusion of the Riches of Africa competition under the AuDITIONS brand. From 2005/2006 onwards, AuDITIONS Riches of Africa will be held every two years. Winners will benefit from the biennial format as their pieces will gain a longer period of exposure. AngloGold Ashanti provides the gold used by entrants in their jewellery designs. The company owns the final pieces of jewellery but the competition entrants maintain ownership of their design. The prizes are: an overall winner's prize up to the value of R40,000; second prize to the value of R15,000; third prize to the value of R10,000; grant awards to students to the value of up to R45,000; and a merit award prize for the institution with the most winners.

14

At that stage still AngloGold.

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Once winners have been announced at the awards event, the winning pieces are exhibited at events held throughout South Africa and internationally. A total of 137 events and exhibitions have been arranged both locally and internationally over the past six years as the following table shows:15 Riches of Africa (now AngloGold Ashanti AuDITIONS Riches of Africa) Publicity and Promotions Eastern & Durban Johannnes- Regional InterWestern burg within national Cape & Pretoria South Africa 1999 5 2 8 1 3 2000 3 1 11 1 4 2001 6 1 7 3 4 2002 8 2 4 2 4 2003 10 1 8 4 4 2004 7 4 9 5 5 Total 39 11 47 16 24
Data source: AngloGold Ashanti

Total

19 20 21 20 27 30 137

Textures of Africa In 2004, the SA Mint sponsored a competition, called Textures of Africa, aimed at promoting jewellery designed specifically to incorporate the countrys 1/4 and 1/10th ounce gold and silver coins. The Mint is now in the process of organising the 2005 competition and intends to make this an annual event.
Participants submit a coin-related design in silver of no more than 80g. The reasons behind the decision to ask entrants to work in silver were two-fold: the lower cost of silver for the sponsor of the competition, and the fact that most entrants were students who were still completing most of their practical work in silver and not gold. Subsequent commercial orders for the winning designs have, however, been in gold. The SA Mint received 130 entries. It drew up a list of finalists, and a panel of independent judges from the industry including academics, marketers and manufacturers selected the winners. The pieces were judged on a number of criteria including design, finish, craftsmanship, creativity and practicality.

15

In addition, AngloGold Ashanti have hosted gold jewellery shows and displays in Turkey, Italy, the United Kingdom, Switzerland, Australia, Mali and Tanzania.

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APPENDIX 4 THE INTERNATIONAL GOLD MARKET

APPENDIX 4 APPENDIX 4
Photograph courtesy: AngloGold Ashanti

Contents: A4.1 THE OVER-THE-COUNTER MARKET A4.2 THE FUTURES EXCHANGES A4.3 GOLD HEDGING AND PRICE PROTECTION 171 172 173

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Of the 445t1 of gold refined in South Africa in 2004, 97% was fabricated into bars2 and exported. These bars were destined either for direct export into India or were shipped to international bullion banks3 for sale into the global gold market. The international gold market is a 24-hour market that covers the trading of gold spot, gold forward contracts, over-the-counter derivative products and exchangetraded futures and options contracts in gold4. Consumers and producers interact via the exchanges that trade gold or over-the-counter (on a principal-to-principal basis, via the bullion banks). Business centres dominant in physical gold trading include London and Zurich, with New Yorks physical business being overshadowed by its gold futures trade. Other important markets are to be found in Mumbai, Tokyo, Hong Kong, Istanbul, Singapore, Dubai and Shanghai. Of the Asian centres, Tokyo is biggest in terms of volumes. In the Middle East, Dubai has traditionally been a key gold trading centre, much of its trade being with India. The twice-daily London market price fix5 acts as an important indicator for gold traders everywhere, providing a mechanism for daily price benchmarking. Despite its name, this is close to an open auction process, with offers and bids netted off throughout the market as part of a bidding process during the fix itself. The five commercial banks which currently make up the members of the London gold fixing are: Barclays Bank plc; The Bank of Nova Scotia ScotiaMocatta; HSBC; Deutsche Bank AG; and Socit Gnrale. The fix is executed on a single price at which outstanding bids and offers are transacted. Clients who wish to transact on the fix place orders with the bank or bullion dealer, who will either be one of the fixing members themselves, or another bullion dealer who will be in touch with a fixing member (and with the client, if necessary) while the fixing proceeds. The fixing members net all orders before communicating their individual net interest at the fixing. The fix begins with the chairman suggesting a trying price, reflecting the market price prevailing at the opening of the fix. The fixing members then relay this to their dealing rooms which are themselves in touch with all interested parties. Any market participant may enter the fixing process at any time, or adjust or withdraw their order according to their view of the price as relayed to them. The gold price is adjusted up or down until all the buy and sell orders are matched and the price is declared fixed. The fix is therefore a full and fair representation of all market interest at the time. Outside the pricing mechanism of the London gold fixing, buying and selling physical gold in major bullion markets is a straightforward process for any established company in the gold business. Most transactions are by electronic or telephonic means. Payment for bullion trades is usually required in full by the end of the second working day after the spot contract has been executed. On receipt of payment, the bullion may be delivered or held in the dealers vault on behalf of the client. The latter is the most common practice apart from many Asian markets, where physical possession is usually preferred. Although the gold market is small compared to the stock and bond markets, it is a relatively deep and liquid market. In addition, trading spreads (the difference between the asking and the bidding prices) are narrow.

1 2 3

See Chapter 1 for a breakdown of the origin of this gold. See Chapter 3 for a breakdown of the different types of gold bars manufactured. Commericial banks that deal in bullion. 4 Each of these terms is defined in the glossary and discussed in more detail in this apendix 5 Which, from 5 May 2005, no longer happens in the London offices of N.M Rothschild but is now conducted via telephone.

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A4.1 THE OVER-THE-COUNTER MARKET (OTC) The over-the-counter gold market (OTC) is a principal-to-principal market which means trading occurs privately between the individual clients, free of the rigidity of an exchange6. All risks, including those of credit, are between the two parties to a transaction. The flexibility of the OTC market, in contrast to the relative rigidity of transactions on the exchanges, means that OTC trading accounts for the greatest portion of global trading in gold by far. It also provides confidentiality since transactions are conducted solely between the two principals involved. The main centres for OTC dealings are London, New York and Zurich, which are wholesale markets, with the lowest transaction size typically not less than 1,000oz. In general, mining companies and central banks tend to transact their business OTC through counterparty banks in London and New York. These markets also service manufacturers of jewellery and industrial products, as well as investment and speculative business. Zurich specialises in supplying physical gold to manufacturers of jewellery and industrial products. Centres such as Dubai and several cities in the Far East also transact important OTC business, typically involving jewellery and small bars (of one kilogram or less) for private investment in that region. A number of bullion dealers have offices around the world. Most of the major bullion dealers are either members or associate members of the London Bullion Market Association (LBMA). The LBMA, a collective organisation geared to meet the needs of the global bullion industry, is at the centre of the OTC market. It has a number of functions. Primarily, it applies requirements for the assay and quality control of gold bars and maintains an inventory of gold and silver refiners that meet these standards, known as the Good Delivery List7. The LBMA has also developed and introduced a number of standard agreements for transactions in gold. These cover the terms and conditions for forward, option and gold interest rate derivative transactions in the OTC market. The major advantage of standard documentation is that it defines market practice. Its utilisation by members of the LBMA avoids the need to continually negotiate and agree terms involved in bilateral agreements, and its broad acceptance also provides comfort to clients of the market. Additionally, the LBMA maintains statistics, issues gold-related publications and runs an annual international gold conference. The nine market-making bullion banks8 are members of the LBMA. These are: The Bank of Nova Scotia ScotiaMocatta; Barclays Bank PLC; Deutsche Bank AG; HSBC Bank USA London Branch; J Aron & Company; JP Morgan Chase Bank; Royal Bank of Canada; Socit Gnrale; and UBS AG.

In recent years the amount of gold cleared per day by the LBMA has fallen (see chart), although it remains the largest OTC market in the world. This decline has been a function of many factors such as the reduction in producer hedging (which is conducted on the OTC market), the declining profitability of bullion banking in the bear market years and the withdrawal of several banks from this business. Recently there has been a small upturn, reflecting the more positive mood in the gold market, although it is too soon to say whether this is a trend that will continue into the future.

6 7 8

See later for a full discussion of the exchange futures contract. Refer to Chapter 3 on gold refining for further information on Good Delivery status and requirements. Market-making bullion banks are those institutions which quote two-way prices of the metal to customers rather then being merely price takers.

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A4.2 THE FUTURES EXCHANGES A gold futures contract is a standard agreement for a fixed amount of gold (usually 100oz), that allows the buyer or seller to establish a price for future receipt/delivery. It is offered by an exchange and provides market participants with a means of minimising transaction costs and maximising profit potential on commodities. The exchanges are non-profit making and self-governing organisations9 that operate under a set of regulations which must be adhered to by their members and by those who buy and sell their contracts. Membership is limited and has to be purchased and renewed annually. The exchanges do not trade in the commodities in which they offer contracts, but instead provide market participants with the facilities and infrastructure to trade. The exchange operates as a clearing-house, playing the role of the buyer when a participant wants to sell and of the seller when he wants to buy. This eliminates the risk of the other side to the transaction failing to meet his/her obligations (known as counterparty risk). The exchange ensures that it is able to meet the obligations by requiring margin deposits from participants and payments which cover a portion of the outstanding obligations. Each futures contract traded has a buyer and seller, and all trades must be matched, processed and offset against each other and with the trading members before dealing can start on the next day of trading. A margin is payable on all open positions on an exchange as a deposit or security against any adverse movement in the gold price during the life of the contract. The exchange reports daily turnover and open interest, which is the total number of futures contracts that have been entered into and are as yet not liquidated by an offsetting transaction, or fulfilled by delivery. As the accompanying chart shows, the largest gold futures trading exchange is the Commodity Exchange in New York (COMEX), which began trading gold in December 1974. COMEX merged with the New York Mercantile Exchange (Nymex) in 1994. The next largest is the Tokyo Commodity Exchange (TOCOM) in Japan. Some other mainly spot-trading exchanges, such as the Shanghai Gold Exchange and the Istanbul Gold Exchange, offer limited futures contracts.

Note: The contract size on TOCOM is 1 kg, whereas on COMEX/Nymex and CBOT it is 100 oz, equivalent to over 3 kg. Hence the equivalent weight in gold of contracts traded is larger for COMEX/Nymex and CBOT than the number of contracts.

As at September 2005 Nymex/COMEX was considering an initial public offering.

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A4.3 GOLD HEDGING AND PRICE PROTECTION Mining companies in South Africa, as elsewhere, may use the futures or forwards markets in their metals (derivatives markets) to hedge prices for future production, often for many years into the future. The primary motivation behind hedging is to manage or reduce risk of unfavourable moves in revenue. By securing the price of its gold production, a company achieves greater certainty of revenue for the company, and avoids the risk of adverse gold price or currency movements. Gold mining companies make use of a range of products provided by bullion banks, including plain forward sales and exotic contracts. The majority of future hedge commitments tend to be plain forward sales. In this, the producer contractually agrees to sell a fixed amount of gold at a fixed price for delivery on a fixed date in the future. In this way, therefore, the miner gains more certainty over future revenues and/or cashflow. Hedging is also put in place by mining companies, when required by a lending bank to reduce risk in the development (and hence project financing) of a new mine or expansion. The practice of hedging is not universal, and often controversial. Many mining companies do not hedge, arguing that their shareholders own gold mining shares for their exposure to the gold price. This argument is strengthened in a bull market (one of rising prices) as hedgings advantage of reducing the risks of a low price also works the other way, reducing the gains from a high price. There have been well-publicised cases (though not in South Africa) where a companys hedge book has increased risk, by extending the companys exposure to credit beyond its capacity to service or manage that credit exposure in times of gold price or interest rate votality. For these reasons and others, the extent of gold hedging globally and in South Africa has reduced significantly in the past four years10. In global terms, total global hedge exposures/commitments decreased from a peak of 3,175t in the third quarter of 2003 (2.2 years of global production) to 1,651t in second quarter of 2005 (1.1 years of production). Similarly, South African miners hedging has declined over the same time period from 848t to 385t.

10

According to data from Virtual Metals/Mitsui Precious Metals/Haliburton Mineral Services

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FACT SHEETS ON MAJOR INDUSTRY PARTICIPANTS

RESEARCH RESEARCH DIRECTORY DIRECTORY


Photograph courtesy: AngloGold Ashanti

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LARGE PUBLICLY LISTED GOLD PRODUCERS AngloGold Ashanti Ltd
MANAGEMENT Chairman Chief Executive Officer P R Edey R M Godsell CONTACT DETAILS Address Physical: 11 Diagonal St. Johannesburg 2001 South Africa Phone Facsimile E-mail Web

LISTINGS JSE Limited, London Stock Exchange, New York Stock Exchange, Australian Stock Exchange, Ghana Stock Exchange, Euronext Brussels, Euronext Paris

Postal: PO Box 62117 Marshalltown 2107 South Africa +27 11 637 6000 +27 11 637 6108 investors@anglogold.com www.anglogoldashanti.com

COMPANY AngloGold Ashanti Limited was formed following the merger of AngloGold Limited and Ashanti Goldfields Limited, which was completed on 26 April 2004. The combined company has 20 operations in 10 countries. AngloGold Limited was formed in June 1998 through the combination of the gold assets of Anglo American Corporation of South Africa and its associated companies. AngloGold Limited then underwent a major phase of restructuring. This involved the sale of more than half of its South African shafts that did not fit in with the companys long-term objectives; it also involved the acquisition of interests offshore - in Australia, North and South America and Africa. The merger with Ashanti Goldfields, a Ghanaian company, allowed AngloGold Limited to further diversify its interests in Africa with substantial ore reserves in sub-Saharan Africa. Ashanti Goldfields operated six mines in Ghana, Guinea, Tanzania and Zimbabwe. Subsequent to the merger, the Freda Rebecca mine in Zimbabwe has been sold. COMPANY OPERATING STATISTICS PRODUCTION 2003 South Africa 3.281 Moz Rest of the world 2.335 Moz Total 5.616 Moz

2004 3.079 Moz 2.973 Moz 6.052 Moz

RESERVES AND RESOURCES as at 31 December 2004 Reserves 79 Moz Resources 218 Moz

Mineral Resources and Ore Reserves are reprinted in accordance with the Australasian Code for reprinting of Mineral Resources and Ore Reserves (JORC 2004) together with the South African Code for the reprinting. COSTS AND EXPENDITURES Total cash costs Exploration expenditure Capital expenditure 2003 $214/oz $38m $449m 2004 $268/oz $44m $585m

Data Source: AngloGold Ashanti FY2004 Annual Report, Human Equity Report

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LARGE PUBLICLY LISTED GOLD PRODUCERS
MINE OPERATING STATISTICS Total cash costs South Africa 2003 $/oz Great Noligwa 213 Kopanang 249 Tau Lekoa 304 Savuka 467 Mponeng 269 TauTona 207 Ergo* 373 *Closed in March 2005 Other operations Argentina 143 Australia 243 Brazil 131 Ghana Guinea Mali 158 Namibia 274 Tanzania 183 USA 223

AngloGold Ashanti Ltd


2004 $/oz 260 317 432 523 386 311 436 Production 2003 oz 812,000 497,000 322,000 187,000 499,000 646,000 203,000 2004 oz 795,000 486,000 293,000 158,000 438,000 568,000 222,000

157 271 130 293 443 211 348 225 225

209,000 432,000 323,000 577,000 73,000 331,000 390,000

211,000 410,000 334,000 485,000 83,000 475,000 67,000 570,000 329,000

DEMOGRAPHIC PROFILE SOUTH AFRICA FY2004 Total Senior management 193 Professionals 981 Technicians 1,979 Clerks 1,373 Craft & related trades workers 3,852 Machinery operators 9,814 Elementary occupations 19,599 Permanent 37,791 Non-permanent 8,328 Total staff 46,119

% HDSA 12 24 42 84 58 99 99 89 89 89

% Female 5 12 21 30 13 4 3 6 2 6

Total numbers employed at AngloGold Ashanti post business combination with Ashanti: 65,400, of which 50,737 are employees and 14,663 are contractors.

Data Source: AngloGold Ashanti FY2004 Annual Report, Human Equity Report

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LARGE PUBLICLY LISTED GOLD PRODUCERS DRDGOLD Ltd
MANAGEMENT Non-executive Chairman Chief Executive Officer Paseka Ncholo Mark Wellesley-Wood CONTACT DETAILS Address Physical: EBSCO House 4 299 Pendoring Avenue Blackheath Johannesburg South Africa Phone Facsimile E-mail Web

LISTINGS JSE Limited, London Stock Exchange, New York Stock Exchange, Australian Stock Exchange, Ghana Stock Exchange, Euronext Brussels, Euronext Paris Shareholders (%) 12 2

Postal: PO Box 390 Maraisburg 1700 South Africa

+27 11 219 8700 +27 11 476 2637 Ilja.graulich.za.drdgold.com www.drdgold.com

85

Bank of New York (ADRs) Soges Dewaay SA JP Morgan Chase Other

COMPANY DRDGOLD Limited (formerly Durban Roodepoort Deep Limited) was established in 1895. It owns and operates the Blyvooruitzicht mine in South Africa. The companys NorthWest operations, which comprised the Buffelsfontein and Hartebeestfontein mines, were closed during 2005. The Blyvooruitzicht mine is located in the Carletonville goldfield in the Witwatersrand area and has been in operation since 1942. The company is also involved in a black economic empowerment partnership: it holds a 40% stake in Crown Gold Recoveries and East Rand Proprietary Mines (ERPM) together with Khumo Bathong Holdings (a deal that has been announced gives KBH a 15% stake in DRDGold and DRDGold an 85% stake in ERPM and CGR). Outside South Africa, DRDGold owns the Tolukuma mine and has a 20% interest in the Porgera joint venture with Placer Dome, both of which are located in Papua New Guinea. The company also holds a 45.33% stake in Emperor Mines Ltd which owns and operates the Vatukoula underground mine in Fiji, as well as a number of prospective gold exploration areas. OPERATING STATISTICS PRODUCTION FY2005 South Africa Australasia CGR Total

0.362 Moz 0.317 Moz 0.09 Moz 679 Moz

53% 46% 0.01% 100%

CGR figures represent the Groups 40% attributable portion of Crown Gold Recoveries Ltd. RESERVES AND RESOURCES as at 30 June 2005 Reserves Resources COSTS AND EXPENDITURES Total cash costs Exploration expenditure Capital expenditure FY2005 $379/oz 22.7m FY2004 $349/oz $1.65m $26.9m

6.553 Moz 36.611 Moz

Data Source: DRDGOLD Ltd, FY2004/2005 Annual Report

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LARGE PUBLICLY LISTED GOLD PRODUCERS
MINE OPERATING STATISTICS Total cash costs FY2004 $/oz South Africa Blyvooruitzicht 453 Northwest 400 Crown (40% attributable) 343 ERPM (40% attributable) 367 Other Operations: Australasia Porgera (20% of the joint venture) 196 Tolukuma 259 Emperor (45.33% attributable)

DRDGOLD Ltd
FY2005 $/oz 453 508 395 411 Production FY2004 oz 233,094 341,561 51,982 44,896 FY2005 oz 161,878 199,850 45,424 44,600

Regional production profile (%)

26

186 348 431

147,475 85,715

195,394 76,314 45,426 South Africa Australasia

74

DEMOGRAPHIC PROFILE FY2005 Corporate Crown operations ERPM operations Blyvoor operations Total Staff
Source: DRDGOLD Annual Report 2005

% HDSA 35% 30% 27% 15.6% 28.6%

% Female 25% 4.9% 3.2% 1.6% 2.7%

Data Source: DRDGOLD Ltd, FY2004/2005 Annual Report

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LARGE PUBLICLY LISTED GOLD PRODUCERS Gold Fields Ltd
MANAGEMENT Chairman Chief Executive Officer C Thompson I Cockerill CONTACT DETAILS Address Physical: 24 St Andrews Rd Parktown 2193 South Africa Phone Facsimile E-mail Web

LISTINGS JSE Limited, London Stock Exchange, New York Stock Exchange, Euronext Brussels, Euronext Paris, Swiss Exchange Shareholders (%) 6 5

Postal: Postnet Suite 252 Private Bag X30500 Houghton, 2041 South Africa +27 11 644 2400 +27 11 484 0626 williej@goldfields.co.za www.goldfields.co.za

19 50

20 Norilsk Nickel Bank of New York (unrestricted DRs) Old Mutual Group Public Investment Commissioner Other Shareholders

COMPANY Gold Fields was formed in 1998 following the merger of the assets of Gold Fields South Africa Ltd and Gencor Ltd. The company has operations in Africa and Australia. In South Africa, Gold Fields owns and operates the Driefontein, Kloof and Beatrix mines. Driefontein is Gold Fields largest operation producing more than 1.3 Moz of gold annually, whilst Kloof produces more than 1 Moz of gold annually. Both mines are situated in the western region of the Witwatersrand area. Beatrix is situated in the Free State province on the southern part of the Witwatersrand Basin and produces more than 650,000oz of gold annually. In Ghana, Gold Fields has a 71.1% interest in the Tarkwa and Damang opencast and heap leach operations. Together these low cost operations produce more than 830,000oz of gold annually. Another 650,000 oz of gold are produced in Australia at Gold Fields 100% owned St Ives and Agnew operations.

OPERATING STATISTICS PRODUCTION FY2005 South Africa Rest of world Total

2.804 Moz 1.354 Moz 4.158 Moz

67% 33% 100%

RESERVES AND RESOURCES as at 30 June 2005 Reserves 64.8 Moz Resources 174.5 Moz COSTS AND EXPENDITURES Total cash costs Exploration expenditure Capital expenditure FY2004 $302/oz $29m $419m FY2005 $331/oz $32m $324m

Data Source: Gold Fields Ltd FY2004/2005 Annual Report

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LARGE PUBLICLY LISTED GOLD PRODUCERS
MINE OPERATING STATISTICS Total cash costs FY2004 South Africa $/oz Driefontein 311 Kloof 341 Beatrix 356 Other operations Ghana: Tarkwa Damang Australia: St Ives Agnew DEMOGRAPHIC PROFILE FY2005 Senior management Professionals Technicians Clerks Service & sales Craft & related trades Machinery operators

Gold Fields Ltd


FY2005 $/oz 330 379 406 Production FY2004 oz 1,141,000 1,038,000 625,000 FY2005 oz 1,163,000 1,037,000 642,000 Regional production profile (%) 17

19 194 243 230 222 540,000 299,000 550,000 308,000

64

188 255

297 226

513,000 144,000

543,000 202,000

South Africa Ghana

Australia

% HDSA 15 57 50 96 96 57 100

Total Staff: 43,000

Data Source: Gold Fields Ltd FY2004/2005 Annual Report

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LARGE PUBLICLY LISTED GOLD PRODUCERS Harmony Gold Mining Company Ltd
MANAGEMENT Chairman Chief Executive Officer P Motsepe B Swanepoel CONTACT DETAILS Address Physical: First Floor 4 The High Street Melrose Arch Johannesburg Phone Facsimile E-mail Web

LISTINGS JSE Limited, London Stock Exchange, New York Stock Exchange, Euronext Brussels, Euronext Paris, Berlin Stock Exchange Shareholders (%) 5 2 14

Postal: Suite No. 1 Private Bag X1 Melrose Arch Johannesburg +27 11 684 0140 +27 11 684 0188 corporate@harmony.co.za www.harmonygold.co.za

COMPANY Harmony Gold Mining Company was formed in 1950 as a Rand Mines managed company to exploit the single Harmony mine lease. In 1995, the company was established as a seperate entity following the demise of Rand Mines. 59 Harmonys operations are primarily situated in South Africa in the Free State, Evander, Randfontein and West Rand regions of the Witwatersrand Basin. Harmony also has a number of operations and exploration prospects in Australia and Papua New Guinea. OPERATING STATISTICS PRODUCTION FY2005 South Africa Rest of world Total RESERVES AND RESOURCES as at 30 June 2005 Reserves 54.14 Moz Resources* 521.4 Moz *Reported in FY2005 Annual Report COSTS AND EXPENDITURES Total cash costs Exploration expenditure Capital expenditure FY2005 $412/oz $12m R140.8m FY2004 $360/oz $15m $126.7m

20

African Rainbow Minerals Alan Gray Merrill Lynch Sanlam Other

2.978 Moz 0.338 Moz 2.965 Moz

90% 10% 100%

Data Source: Harmony Gold Mining Limited FY2004/2005 Annual Report

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LARGE PUBLICLY LISTED GOLD PRODUCERS
MINE OPERATING STATISTICS FY2004 Cash costs ($/oz) 215 264 326 376 335 356 363 304 789 374 400 402 353 343 FY2005 Cash costs Prod (oz) ($/oz) 209,847 273 380,695 309 159,981 452 48,764 635 47,093 411 130,009 284 151,936 304 79,101 426 54,441 122 116,300 435 841,280 207,371 52,695 188,904 511 478 512 449

Harmony Gold Mining Company Ltd


Regional production profile (%) 11

Target Tshepong Masimong Evander 2 Evander 5 Evander 7 Evander 8 Cooke 1 Cooke 2 Cooke 3 Leveraged shafts Elandsrand Doornkop Surface operations Australasian operations

Prod (oz) 53,434 390,474 234,307 86,172 48,103 92,505 109,513 104,168 90,761 134,003 1,295,315 250,581 65,234 208,744

89

South Africa Australasia

338,288

327

296,848

337

Note: Leveraged shafts comprise: Bambanani, Evander 9, Joel, Kudu/Sable, West Shaft, Nyala, Eland, DeelKraal, St Helena, Harmony 2, Harmony 4, Merriespruit 1, 3, Unisel, Brand 3, 5, Virginia, Orkney 1, 2, 3, 4, 6, 7, Saaiplaas 3, Welkom 1, 2, 3, 4, 6, 7

DEMOGRAPHIC PROFILE FY2005 Senior management Professionals Technicians Clerks Machinery operators Semi-skilled Total staff

Total 234 1,028 7,165 1,635 17,898 25,032 52,992

% HDSA 18 39 66 93 99 97 92

% Female 8 6 6 32 1 4 4

Data Source: Harmony Gold Mining Limited FY2004/2005 Annual Report

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LARGE PUBLICLY LISTED GOLD PRODUCERS Western Areas Ltd
MANAGEMENT Chief Executive Officer (Acting) LISTINGS JSE Limited Shareholders (%) 20 38 12 CONTACT DETAILS Address Physical: 28 Harrison Street Johannesburg 2001 South Africa Phone Facsimile E-mail Web

JC Lamprecht

Postal: PO Box 61719 Marshalltown 2107 South Africa +27 11 688 5000 +27 11 834 9195 gibson@jci.co.za http://www.westernareas.co.za

COMPANY Western Areas is a South African incorporated mining company with one principal gold mining asset, which is a 50% interest in the South Deep joint venture in the Witwatersrand basin. South Deeps other 50% partner is Placer Dome SA, a South African subsidiary of Canadian miner Placer Dome. OPERATING STATISTICS

30 JCI Gold Ltd Standard Bank Nominees Anglo South Africa (Pty) Ltd Other

PRODUCTION FY2004 South Africa RESERVES AND RESOURCES as at 31 December 2004 Reserves Resources COSTS AND EXPENDITURES Total cash costs Exploration expenditure Capital expenditure DEMOGRAPHIC PROFILE FY2004 Senior management Professionals Technicians Clerks Service & sales Craft & related trades Machine operators Semi skilled Total Staff

0.224 Moz

28.9 Moz 48.5 Moz

FY2004 $301/oz $1.5 m $110.6 m

Total 16 62 154 175 238 404 2,155 1,710 4,914

% HDSA 6% 6% 36% 90% 94% 76% 99% 97% 93%

Data Source: Western Areas Ltd FY2004 Annual Report

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Other Producers (<6t annual production)
BEMA GOLD CORPORATION Address Subsidiary Petrex (Pty) Ltd Grootvlei Mine Grootvlei Road Springs Johannesburg South Africa Phone +27 11 815 5484 Facsimile +27 11 815 6218 E-mail info@bemagold.com Web www.bema.com CEO Operations Listings C Johnson Consolidated Modderfontein Grootvlei Nigel TSX, AMEX, AIM

CALEDONIA MINING CORPORATION Address Toronto registered: Unit 9, 2145 Dunwin Drive Ontario Canada L5L 4L9 Phone Facsimile E-mail Web CEO Operations Listings +905 607 7543 +905 607 9806 info@caledoniamining.com www.caledoniamining.com S Hayden Barbrookes Mines Ltd Eersteling Gold Mining Co. Ltd TSE, NASDAQ, DAX

CENTURION GOLD HOLDINGS INCORPORATED Address West Tower, Second Floor Sandton Square Sandton 2146 South Africa Phone Facsimile E-mail Web Chairman & CEO Operations Listings +27 11 881 5563 +27 11 881 5611 info@centuriongold.com www.centuriongold.com A Johnson Primrose Gold Mine Omaruru Exploration (Pty) Ltd Sallies Gold Mine NASDAQ

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Other Producers (<6t annual production)
CREW GOLD CORPORATION Address Abbey House, Wellington Way Weybridge Surrey KT13 0TT UK Phone Facsimile E-mail Web President & CEO Operations +44 193 226 8755 +44 193 226 8756 enquiries@crewgold.com www.crewgroup.com J Vestrum Barberton Mines: Fairview New Consort Sheba Mines TSE, OSE Private Bag X29 Piet Retief 2380 KwaZulu-Natal South Africa +27 34 413 2013 +27 34 413 2079 Klipwal Gold Mine Metallon House 161 Revonia Road Sandton Johannesburg South Africa +27 11 784 8099 +27 11 784 4601 www.metallongold.com South Africa: Agnes mine Zimbabwe: Arcturus mine How mine Mozawa mine Redwing mine Shamva mine MINE WASTE SOLUTIONS (PTY) LTD Address 2 Sherborne Road Parktown Johannesburg 2193 South Africa Phone Facsimile E-mail Web CEO Operations +27 11 718 7260 +27 11 726 1029 dickp@minewaste.com www.minewaste.com R Plaistowe Chemwes project (Formerly Stilfontein gold plant)

Listings MATT TRADING (PTY) LTD Address

Phone Facsimile Operations METALLON GOLD Address

Phone Facsimile Web Operations

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Other Producers (<6t annual production)
MOGALE GOLD (PTY) LTD Address

14 Tweelopies Road Krugersdorp 1740 South Africa +27 11 660 9638 +27 11 660 8132 info@mogalegold.co.za www.mogalegold.co.za Luipaardsvlei Estates reclaimation Modder Bee Road Benoni Johannesburg 1500 South Africa +27 11 423 1202 +27 11 423 1230 D Salter Gravelotte Mines Ltd

Phone Facsimile E-mail Web Operations SALENE MINING GROUP Address

Phone Facsimile Chairman Operations

SIMMER AND JACK MINES LTD Address 5 Press Avenue Selby 2025 South Africa Phone Facsimile Operations +27 11 880 0390 +27 11 837 3840 Lily Mine Transvaal Gold Mining Estates

THE AFRIKANDER LEASE LTD Address Empire Park Block A 55 Empire Road Parktown South Africa Phone Facsimile E-mail Web CEO Operations Listings +27 11 482 3605 +27 11 482 3604 jean@aflease.com www.aflease.com N Froneman East Rand Operation Afrikander Operation JSE, NASDAQ (ADRs)

THISTLE MINING INCORPORATED Address Main Office Block Two Shaft President Steyn Mine Welkom 9460 South Africa Phone Facsimile E-mail Web CEO Operations Listings +27 57 391 9000 +27 57 391 9047 info@thistlemining.com www.thistlemining.com W McLucas President Steyn Gold Mine TSE, AIM

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PRIMARY REFINERS Rand Refinery Ltd
MANAGEMENT Non-Executive Chairman Managing Director Director Global Markets Director Business Services T M L Setiloane A M Muir C J Kenny G L Millet CONTACT DETAILS Address Physical: Refinery road Industries West Germiston 1401 South Africa Phone Facsimile E-mail Web

Postal: PO Box 565 Germiston 1400 South Africa +27 11 418 9000 +27 11 418 9234 marketing@gold.co.za www.gold.co.za

COMPANY Rand Refinery was established in 1921 and is the largest single site gold and silver refinery in the world. The refinery processes newly mined gold ore annually from both local and international sources and treats precious metals scrap from electronic waste, dental alloys, medical waste, jewellery process scrap and recycled jewellery. Rand Refinery markets and generates a number of products primarily bars for the international gold market, jewellery alloys for the local gold jewellery fabricators, and coin blanks for South Africa's legal tender coin programmes. PRODUCT RANGE GOLD BARS Gold bars Mass 400oz 1,000g 100oz 100g 10 tola 5 tola 10 tael 5 tael 10g 50g 100g 1,000 oz Size (mm) Carat/Fineness Other coins/ Medallions Krugerrands Manufactured to order Size (mm) Carat GOLD ALLOY GRAIN Carat Code 9ct 09DD 09J 090A5 09CW 09LX 09RJ 14J 14LX 14RJ 18J 18D 18SW 22J Colour Yellow Yellow Yellow Med. White White Rose Yellow White Rose Yellow Yellow Soft White Yellow 32.77, 27.07, 22.06, 16.55 22 Melting range C 900-950 880-960 980-1000 980-1050 950-1000 960-1000 935-980 980-1020 960-1000 930-980 970-1000 1100-1250 950-980 Hardness Semi-Soft Medium Medium Medium Semi-Soft Medium Medium Semi-Soft Medium Medium Semi-Soft Soft Medium Fineness >995/999.9 >995 >995 999 999 999 9999 9999 999.9 999.9 999.9 999 32.77, 27.07, 22.06, 16.55 9, 18, 22 & 24 999 (pure silver)

GOODS DELIVERY STATUS London Bullion Market Association (LBMA) Good Delivery Status. One of five refineries in the world to have been appointed by the LBMA as a Good Delivery Referee, responsible for the testing of samples from Good Delivery refiners in support of the LBMA's Good Delivery system. SERVICES Refining: uses the Miller Chlorination Process to promote mine gold bullion to London 'Good Delivery' standards. Refining Feed: Dor from gold mines in South Africa, West and East Africa and South America. Smelting: treats primary and secondary low-grade gold bearing by-product material to recover gold, silver and platinum group metals. Electrolytic refining: Rand Refinery is able to produce high purity products using this process. Processes include carbon incineration, silver electro-refining. Other: Rand Refinery offers an assaying service in addition to secure storage facilities and onward freighting of gold and other precious metals and stones. The Rand Refinery quotes Rand-denominated prices for the refinery's gold products to its local customers, set on a twice-daily basis. The Rand Refinery price is used by the secondary recyclers as a benchmark by which the recyclers calculate their own prices to customers.

Minted bars Silver bars COINS Coin blanks

14ct 18ct 22ct

OTHER Wire and plate: manufactured to order from 9 to 24 carat.

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RESEARCH DIRECTORY
PRIMARY REFINERS
CONTACT DETAILS Address Physical: 4 Peltier Drive Sunninghill Park Johannesburg

Musuku Beneficiation systems


Postal: Building 18 Sunninghill Office Park Peltier Drive Sunninghill, Sandton Johannesburg +27 11 461 7800 +27 11 461 7801 info@musuku.com www.musuku.com MANAGEMENT Chief Executive Officer D Young

SHAREHOLDERS Originally jointly owned by Harmony Gold Mining Company and Mintek. Now 100% wholly-owned subsidiary of Harmony. GOODS DELIVERY STATUS Awarded London Bullion Market Association Good Delivery Status in September 2005. SERVICES Refining: The refinery uses the Mintek Minataur refining process. Refining feed: cathode slime. The refinery uses a solvent extraction process which can also treat silver refining anode slimes, dor and jewellery scrap. All feed is sourced from South Africa. Product sales: Musuku offers a range of bars, jewellery alloys, semi-manufactured jewellery products, gold and silver based industrial products, 5 9's gold and an extensive range of dental alloys. Musuku does not produce coin blanks for the striking of South African legal tender coins.

Phone Facsimile E-mail (General enquiries) Web PRODUCT RANGE GOLD BARS Gold bars GOLD ALLOY GRAIN Carat 9ct 10ct 14ct 18ct Mass 100g 1kg Colour Yellow White Red Yellow White Red Yellow Yellow White

Fineness 999 995 Description Casting & Bench Casting & Bench Casting & Bench Casting & Bench Casting & Bench Casting & Bench Casting & Bench Casting & Bench Casting & Bench Thickness (mm) 0.2 to 1.0 0.04 to 0.8 0.2 to 2.0 diam. Description Easy, medium & hard Easy Medium Extra easy, easy, medium, hard Easy, medium, hard Easy, medium, hard Easy, medium, hard Purity 9-24ct 9-24ct 9-24ct

GOLD & SILVER PLATE, WIRE & STRIP Product Width (mm) Plate 10 to 50 Strip 0.6 to 2.6 Wire SOLDER BLOCKS & PASTES Product Silver Gold 9ct Red 9ct White 9ct Yellow

Platinum

14ct yellow 18ct White 18ct Yellow 960, 1020, 1200, 1300, 1400, 1500, 1600 Easy, medium, hard, extra hard 9, 10, 14, 18 ct Yellow Easy, medium (65% & 80% alloy content) Description Casting & Bonding alloys, catering for all dental restoration work Round and half round Wire pieces & reels. Purity 2 % to 92 % gold content. 17 and 20 ct 49 to 74 % gold content

DENTAL RANGE Product Dental Alloys: Star Range Aurex Range Musuku Range Dental Wires Dental Solders

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RESEARCH DIRECTORY
RECYCLERS CAPE PECIOUS METALS
MANAGEMENT Managing Director CONTACT DETAILS Address Physical: Link Close Montague Gardens 7441 Phone Facsimile

S Eades

Postal: PO Box 37128 Chempet 7442 +27 11 551 2066 +27 11 552 1598

BUSINESS DESCRIPTION Cape Precious Metals is an assayer and recycler of all precious metals including silver from x-ray film, gold from the jewellery industry and platinum group metals from industrial waste. The company has a well-established client base among the jewellery manufacturers, and sources material from hospitals in the form of x-ray scrap.

FIRST ASSAY (PETER STANLEY ASSAYS (PTY) LTD)

MANAGEMENT Managing Director CONTACT DETAILS Address Physical: 87 Langerman Dr Kensington South Johannesburg 2094 Phone Facsimile E-mail COMPANY BACKGROUND Date established Number of outlets Number of staff

C Burger

Postal: Postnet Suite 169 Private bag X19 Gardenview 2047 +27 11 616-7210 +27 11 622-8583 firstassay@mweb.co.za

1998 1 4

BUSINESS DESCRIPTION First Assay has two core businesses. The first offers a full assay service on a six-hour turn around time. The second is recycling of precious metals waste, primarily from the jewellery trade and supply to the trade of precious metals in return. The company also refines mine output and dump retreatment material from small mining ventures.

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RESEARCH DIRECTORY
RECYCLERS
MANAGEMENT Managing Director CONTACT DETAILS Address Cape Town PO Box 1142 Milnerton 7435 Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Number of outlets Outlet locations Number of staff Ownership

B Stern

METAL CONCENTRATORS (PTY) Ltd

Johannesburg PO Box 699 Ifafi 0260 +27 12 305 3562 +27 12 305 3574 metcon@mweb.co.za

1990 2 Cape Town /North West Province 45 Private, family-owned

BUSINESS DESCRIPTION Deals only with the jewellery industry. A separate company supplies semimanufactured products, alloys solders, gold potassium cyanide and rhodium plating and solutions. Supplies capital equipment for the manufacture of jewellery. Has the capacity to recycle autocatalysts.

PERKINS METALS RECOVERIES (PTY) LTD


MANAGEMENT Managing Director CONTACT DETAILS Address Physical: 2nd Floor SA Jewellery Centre 225 Main Street Johannesburg Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Number of outlets Outlet locations I Perkins

Postal: PO Box 15637 Doornfontein 2028

+27 11 334 6263/6 +27 11 334 6947 ianperkins@mail.telepac.pt

1990 3 Johannesburg, Cape Town and Durban

BUSINESS DESCRIPTION Perkins is one of the larger secondary refineries with collection networks in Cape Town and Durban sending recycling material to the refinery in Johannesburg. The company takes old jewellery scrap, filings and polishings, jewellery sweepings, wash waters as well as material from dump treatment companies. The company's prices are benchmarked against the Rand Refinery price.

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JEWELLERY MANUFACTURERS (>750KG ANNUAL GOLD USAGE) ALAN MAIR MANUFACTURING JEWELLERS
MANAGEMENT Chief Executive Officer/ Managing Director A Mair CONTACT DETAILS Address Physical: Refinery Road Germiston 1400 South Africa Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Number of retail outlets Distribution channels Number of staff Ownership

EMPLOYMENT DEMOGRAPHIC PROFILE Male/female 40:60 Permanent/temporary 85:15 MANUFACTURING PROCESS Cast Machine-made Hand-made

Postal: PO Box 20 Germiston 1400 South Africa +27 11 418 1660 +27 11 825 4043 bianca@ammj.co.za

25% 70% 5%

None Direct to trade 230-250 51% A Mair

BUSINESS DESCRIPTION One of the big three fabricators in the country producing machine made and mass produced cast and pressed jewellery for both the local and export markets in a ratio of 80:20 local to export. Exports are heavily dependent on the level of the Rand. First manufacturer to move to the Gold Zone adjacent to Rand Refinery. PRODUCT RANGE RINGS Plain bands Signet rings Stone set EARRINGS AND PENDANTS Hoops Studs Others Cross

9 carat yellow gold 9 carat yellow gold 9 carat yellow gold

9 carat yellow gold 9 carat yellow gold 9 carat yellow gold 9 carat yellow gold

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RESEARCH DIRECTORY
JEWELLERY MANUFACTURERS (>750KG ANNUAL GOLD USAGE)
CONTACT DETAILS Address Physical: 170 Buitengracht St. Cape Town 8000 South Africa Phone Facsimile E-mail (General enquiries) Web COMPANY BACKGROUND Date established Number of retail outlets Distribution channels Number of staff Ownership

OROAFRICA (PTY) LTD


Postal: PO Box 16 552 Vlaeberg 8018 MANAGEMENT Chief Executive Officer Managing Director

S Nathan G Nathan

+27 21 480 9860 +27 21 423 5516 oroafrica@oroafrica.co.za www.oroafrica.com

EMPLOYMENT DEMOGRAPHIC PROFILE Permanent/temporary All permanent MANUFACTURING PROCESS Chain and stamped jewellery

100%

1945 None Direct to trade 160 Family 75% AngloGold Ashanti 25%

BUSINESS DESCRIPTION OroAfrica, meaning Gold of Africa, is South Africa's largest mechanised manufacturer of gold chain and stamped gold jewellery. Based in Cape Town, the partnership is the result of a management buyout. Subsequent to this buyout, AngloGold Ashanti (AngloGold at that time) purchased a 25% stake in OroAfrica. OroAfrica manufactures high quality gold chain, the company's largest market being the USA, followed by the UK, Europe, Australia and sub-Saharan Africa. It also supplies a range of jewellery, including earrings, pendants, necklaces, bracelets and rings to the local market. PRODUCTS GOLD CHAINS Caratage Colour Style

9, 10, 14 and 18 Various, including yellow and white Domed, supreme, figaro, marina, Singapore Valentino, Cuban, curb, id bracelets etc.

COMPANY BRANDS OroAfrica has two company brands. The first is the Kwela range of jewellery aimed at connecting the buyer with the spirit of Africa. Kwela is designed and produced in Africa, and shows the continent's environment, animals and people. The second is AU79 Pure Chemistry, a brand focusing on a younger clientele. Its name comes from the chemical symbol of gold (AU) and gold's number (79) in the periodic table. The jewellery range has symbols inserted on each piece; a process that has been patented and all the designs are under copyright.

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JEWELLERY MANUFACTURERS (>750KG ANNUAL GOLD USAGE) SILMAR
EMPLOYMENT DEMOGRAPHIC PROFILE Male/female 25:75 Permanent/temporary All permanent MANUFACTURING PROCESS Machine-made chain MANAGEMENT Managing Director (RSA) CONTACT DETAILS Address Physical: H304, 2nd Floor 10 Melrose Boulevard Melrose Arch Atholl Oaklands Road Melrose North Johannesburg 2001 Phone Facsimile E-mail Web COMPANY BACKGROUND Number of retail outlets Distribution channels Number of staff Ownership

D Merkin

100%

Postal: P.O Box 102 Melrose Arch 2076

+27 11 214 4100 +27 11 214 4104 silmar@icon.co.za www.silmar.it

None - supplier to the business Direct to trade 60 Silmar SpA Italy

BUSINESS DESCRIPTION Silmar Marketing SA is part of the larger Silmar SpA group based in Italy. The South African company is the largest manufacturer of machine-made chain gold chain. The company runs 150 chain-making machines all of which were imported into South Africa. Silmar targets 50% to the local market and 50% for export mainly to the USA under AGOA. All 9 carat chain is sourced to local wholesalers and retailers, supplying all the major retail chain stores. 10 carat and 14 carat is exported to the USA. The company draws its own wire. PRODUCTS Gold chain of various styles and caratage.

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RESEARCH DIRECTORY
JEWELLERY MANUFACTURERS (<750KG ANNUAL GOLD USAGE)
MANAGEMENT Managing Director CONTACT DETAILS Address Physical: Coachmans Crossing Suite 2 33 Peter Place Lyme Park Johannesburg Phone Facsimile E-mail Web COMPANY BACKGROUND Number of staff Ownership

ANDREAS SALVER
A Salver

Postal: P.O BOX 67879 Bryanston 2120 South Africa

+27 11 706 6828 +27 11 706 1129 salver@iafrica.com

6 Family

BUSINESS DESCRIPTION Manufacturer and retailer as a value for money middle income family jeweller. Very strong in engagement and wedding ring market. Works 20% in platinum and the rest in gold, of which 70% is white. Produces primarily gem-set rings, necklaces and bracelets. Most clients commission specific designs.

CREATIVE GOLD
MANAGEMENT Managers A Miller W Akum

CONTACT DETAILS Address Physical: 3 Hope Road Mountain View Johannesburg 2192 Phone Facsimile E-mail Web COMPANY BACKGROUND Number of staff Ownership

Postal: P.O Box 386 Gallo Manor South Africa +27 11 483-2680 +27 11 483-2683 genii@mweb.co.za

14 full time Partnership

BUSINESS DESCRIPTION Creative Gold specialises in cast rings in 9 carat gold set with cubic zirconia or semi-precious stones, termed dress rings. The company does some 18 carat jewellery but only on request. Creative Gold serves the local market with yellow gold, by far the preferred colour, although white and combination of yellow/white metals do feature. Customers will order three or four dress rings simultaneously.

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RESEARCH DIRECTORY
JEWELLERY MANUFACTURERS (<750KG ANNUAL GOLD USAGE) DABERON
MANAGEMENT Managing Director CONTACT DETAILS Address Physical: Level 2 216 Fox Street Johannesburg Phone Facsimile E-mail COMPANY BACKGROUND Number of staff Ownership

D Ungar

Postal: P.O Box 87671 Houghton 2041 +27 11 334 8841 +27 11 334 6388 untaro@iafrica.com

35 Family

BUSINESS DESCRIPTION Daberon produces for the mass market locally but are also substantial exporters especially to the USA, Australia and the United Kingdom. The company has the capacity to manufacture 3,000 items per day. Daberon's product line is geared to the mass market - 9 carat for the local wholesalers and the UK but also 14 carat for the US market. Lightweight earrings, bangles, rings and pendants predominate, manufactured mainly using casting techniques. The company also produces silver jewellery, having manufacturing capacity in Zimbabwe.

GALAXY & CO
MANAGEMENT Managing Director CONTACT DETAILS Address Physical: Head Office Galaxy House 55 Loop Street Cape Town 8000 Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Number of retail outlets Outlet locations Number of staff Ownership R Butterfield

Postal: PO Box 3282 Cape Town 8000

+27 21 423 0760 +27 21 423 8404 rbutterfield@mrpricegroup.com www.galaxyandco.co.za

1930 90 National 74 (manufacturing), 700 (retailing) Management (MBO from Mr Price Group)

BUSINESS DESCRIPTION Galaxy is the most vertically integrated jeweller in South Africa being a major manufacturer and retailer. The company targets the middle mass market. The company began as a retailer 20 years ago. Galaxy & Co is predominantly a diamond jewellery retailer, more than 95% of whose product is made in its own manufacturing division. The balance of the range is gold chain, gold earrings, silver jewellery and watches.

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RESEARCH DIRECTORY
JEWELLERY MANUFACTURERS (<750KG ANNUAL GOLD USAGE)
MANAGEMENT Managing Director CONTACT DETAILS Address Physical: Shop G87 Fourways Mall Fourways Phone Facsimile E-mail Web COMPANY BACKGROUND Number of retail outlets Outlet locations Number of staff Ownership

MICHAEL'S DESIGNS
M Maack

Postal: P.O Box 68568 Bryanston 2021

+27 11 465 6446 +27 11 465 6448 firstassay@mweb.co.za www.michaelsdesigns.co.za

1 Retail shop in shopping mall 12 Family

BUSINESS DESCRIPTION Combination of manufacturing and retail in a middle to upper income shopping mall and targeting the value for money client base. As a retailer/manufacturer, the company takes back a good proportion of customer-returned old gold scrap. Michael's Designs demonstrate a full range of rings, pendants, earrings and bracelets. The company does not manufacture its own chain but tends to buy final product from the major chain makers when required. MANAGEMENT Managing Director CONTACT DETAILS Address Physical: Head Office 12 Tetford Circle La Lucia Business Park La Lucia Ridge 4051 Durban Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Number of retail outlets Outlet locations Number of staff Ownership

H Rabinowitz

NATAL WHOLESALE JEWELLERS (NWJ)

Postal: PO Box 202 Umhlanga Rocks 4320

+27 31 570 5000 +27 31 570 5055 info@nwjcorp.com www.nwjcorp.com

1980 49 National 66 80% owned by founder

BUSINESS DESCRIPTION Natal Wholesale Jewellers (known as NWJ) is a vertically integrated jewellery manufacturer and retailer supplying final product to 49 franchised stores around South Africa. As NWJ manufactures its own jewellery, the company pass the savings to their customers. In targeting the mass market, the company's policy is to make quality jewellery affordable to everyone. The company offers a full range of linked chain rings, earrings and pendants.

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JEWELLERY MANUFACTURERS (<750KG ANNUAL GOLD USAGE) PICO JEWELLERS
MANAGEMENT Chief Executive Officer/Managing Director CONTACT DETAILS Address Physical: 5 Granistar Building 5 Hope Rd Orange Grove Johannesburg Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Number of retail outlets Distribution channels Number of staff Ownership

P Gurato

Postal: PO Box 92070 Norwood 2117 Johannesburg +27 11 483-3442 +27 11 483-3413 pico1@global.co.za

1974 None Word of mouth and long-standing client base 10 Private

BUSINESS DESCRIPTION Pico Jewellers have been manufacturing exclusive hand made jewellery to order for a long-standing client base for over 30 years. It was originally a partnership between two goldsmiths until four years ago when the partner, Cosimo, passed away. Expatriates visiting South Africa and tourists make up 10% of the company's client base. The company works only in 18 carat and up and uses primarily diamonds although fancy stones such as tanzanite, sapphires, rubies and emeralds and semi-precious stones also feature in their designs.

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RESEARCH DIRECTORY
JEWELLERY MANUFACTURERS (<750KG ANNUAL GOLD USAGE)
MANAGEMENT Sole member CONTACT DETAILS Address Physical: Room 200 North Park C/R 3rd & 7th Ave Parktown North Johannesburg Phone Facsimile E-mail (General enquiries) COMPANY BACKGROUND Date established Distribution channels Number of staff Ownership

PETER SCOTT
P Scott

Postal: PO Box 785 Parklands 2121

+27 11 880 5740 +27 11 880 5651 pscott@mweb.co.za

1980 Word of mouth and longstanding client base 6 Family - single owner

BUSINESS DESCRIPTION Peter Scott specialises in mainly hand-made jewellery for a long-standing client base. Design is driven almost exclusively by the customers who specify the type of jewellery, the caratage and the stones. Peter Scott works with a full range of colourful semi-precious stones such as spessartite, garnets, tourmalines, aquamarines, tzavorite, etc. MANAGEMENT Member (Owner) O CONTACT DETAILS Address Physical: A2 First Floor Crowthorne Shopping Centre Arthur and Main Rd Kyalami Midrand Phone Facsimile E-mail (General enquiries) Web COMPANY BACKGROUND Date established Distribution channels Number of staff Ownership

M Pneuma

PNEUMA JEWELLERS cc

Postal: PO Box 31674 Kyalami 1684

+27 11 702 1462 +27 11 702 1462 pneuma@telkomsa.net

1987 Direct marketing and word of mouth 6 Private

BUSINESS DESCRIPTION Pneuma Jewellers specialise in particularly detailed and unique pieces of jewellery which can take anything up to four months to fabricate. Minimum caratage is 18 and all the jewellery is hand-made. The company also manufactures high quality, current trend jewellery with the clients needs in mind, as well as high quality handcrafted African ethnic tourist jewellery for retail tourist outlets.

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RESEARCH DIRECTORY
JEWELLERY MANUFACTURERS (<750KG ANNUAL GOLD USAGE) ROBS JEWELLERY WORKSHOP
MANAGEMENT Member of close corporation: CONTACT DETAILS Address Physical: Office 3 Cnr Carse O'Gowrie/ Boundary Roads Houghton Johannesburg 2198 Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Distribution channels Number of staff Ownership

R Garrun

Postal: PO Box1395 Houghton Johannesburg 2041

+27 11 643-6011 +27 11 643-6016 rob@rjw.co.za

1989 One major retail client only with 12 retail stores 35 Private

BUSINESS DESCRIPTION Rob's Workshop is predominately a manufacturer and designer with a full product range and service sold to Brown's, a major retailer. Sales are primarily to local consumers but an estimated 20% goes to tourists, especially from stores in Johannesburg.

SCHWARTZ JEWELLERS

MANAGEMENT Chief Executive Officer/Managing Director CONTACT DETAILS Address Physical: Suite 198 Werksmans Attorneys Building 24 A Fredman Drive Sandton Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Number of retail outlets Outlet locations Number of staff Ownership

R Schwartz

Postal: Private Bag X9924 Sandton 2146 +27 11 783-1717 +27 11 783-7543 ris@schwartzjewellers.com www.schwartzjewellers.com 1924 4 Sandton, Sun City, Cullinan and Cape Town 51 Private

BUSINESS DESCRIPTION Manufactures and retails a full range of rings earrings, necklaces, pendants and bracelets.

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RESEARCH DIRECTORY
JEWELLERY MANUFACTURERS (<750KG ANNUAL GOLD USAGE)
MANAGEMENT Chief Executive Officer Managing Director CONTACT DETAILS Address Physical: Suite 530 5th Floor SA Jewellery Centre 225 Main Street Johannesburg 2001 Phone Facsimile E-mail COMPANY BACKGROUND Date established Number of retail outlets Outlet locations Number of staff Ownership

SID FORMAN MANUFACTURING JEWELLERS


S Forman D Forman

Postal: P.O Box 9004 Johannesburg 2000

+27 11 334 6715 +27 11 334 6930 david@sidforman.co.za

1962 3 stores Shopping malls 60 Family

BUSINESS DESCRIPTION Sid Forman is a family business serving upmarket customers via three retail outlets. The company's product is largely gem-set (primarily diamonds), and reveals a high degree of design content which is all done in-house. Of the client base a large proportion is for indirect export, bought by tourists or South Africans by birth who have emigrated and are return visitors. Increasingly, the company is offering platinum jewellery. The product mix includes rings, pendants and earrings as well as bangles. Strong in the engagement and wedding ring market.

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RESEARCH DIRECTORY
JEWELLERY MANUFACTURERS (<750KG ANNUAL GOLD USAGE) STUDIO C
MANAGEMENT Proprietor CONTACT DETAILS Address Physical: 2nd Floor, West Wing 27 Ridge Road Parktown North Johannesburg South Africa Phone Facsimile E-mail COMPANY BACKGROUND Date established Distribution channels Number of staff Ownership

C van Rensburg

Postal: 2nd Floor, West Wing 27 Ridge Road Parktown North 2193

+27 11 642 7826 +27 11 484 0005 studio.c@mweb.co.za

June 2000 Factory to wholesaler 20 Private

BUSINESS DESCRIPTION Studio C Manufacturing Jewellers produces quality platinum and gold jewellery, and is a mass producer for the local market. The company is involved in the design and production of one-off pieces, as well as a branded range, a wholesale range and mass manufacture.

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RESEARCH DIRECTORY
CONTACT DETAILS Address Physical: Old Johannesburg Road Gateway Centurion 0046 Phone Facsimile E-mail Web COMPANY BACKGROUND Date established Number of outlets Outlet locations Number of staff Ownership

Postal: PO Box 8850 Centurion 0046 +27 12 677 2777 +27 12 667 2828 numismatics@samint.co.za www.samint.co.za/coinworld

COIN WORLD AT THE SOUTH AFRICAN MINT COMPANY


MANAGEMENT Managing Director AM Mvinjelwa

EMPLOYMENT DEMOGRAPHIC PROFILE Male/female 28:72 Permanent/temporary 72:28 Managerial & sales/ technical 14:86

1996 1 Gauteng 7 Wholly-owned by the SA Mint

BUSINESS DESCRIPTION Coin World is a retail outlet and museum on the premises of the South African Mint. With a complete display of South African coins, working machinery, works of art, antique furniture and a trained guide, Coin World has become an active tourist attraction. For sale are proof Krugerrands, jewellery, limited edition medallion watches and other proof gold and silver coins. Visitors can strike their own proof coin on one the world's oldest working mint presses called Oom Paul which began operating in 1891 when Paul Kruger, the then President of the old Zuid-Afrikaansche Republiek, ordered two presses from Ludwig Loewe & Co, in Berlin. The press is the only remaining one of its kind in the world. PRODUCT RANGE KRUGERRANDS Size 1oz 1/2oz 1/4oz 1/10thoz

Diameter mm 32.69 27.00 22,00 16.50

Mass (g) 33.931 16.966 8.483 3.393 Mass (g) 31.107 15.553 7.777 3.110 Mass (g) 31.107 3.110 15.00

Gold 22 carat 22 carat 22 carat 22 carat Gold 24 carat 24 carat 24 carat 24 carat Gold 24 carat 24 carat Silver

NATURA COIN SERIES Size Diameter mm 1 oz 32.69 _ oz 27.00 _ oz 22,00 1/10th oz 16.50 THE PROTEA COIN SERIES Face Value Diameter mm R25 32.69 R5 16.50 R1 32.70

THE 2004 PROTEA SERIES CELEBRATING - 10 YEARS OF DEMOCRACY IN SOUTH AFRICA Face value Number Issued Description And Carat R25 24 ct 5,000 Nelson Mandela with Union Building R5 24 ct 1,000 Constitution and Flag R1 silver 6,000 National symbols Proof Set 1,000 3 coin set

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RESEARCH DIRECTORY
GOLD OF AFRICA MUSEUM
MANAGEMENT Museum Manager K Price CONTACT DETAILS Address Physical: 96 Strand Street Cape Town, 8001 Phone Facsimile E-mail Web BACKGROUND Date established Location Number of staff Ownership +27 21 405 1540 +27 21 405 1541 info@goldofafrica.com www.goldofafrica.com

2001 Cape Town 7 AngloGold Ashanti

DESCRIPTION The Gold of Africa Museum was established by AngloGold Ashanti as part of its programme to preserve the artistry of African goldsmithing and inspire modern gold jewellery design. The museum contains a world-renowned collection of West African gold artefacts, originally from the Barbier-Mueller Museum in Geneva, as well as artefacts from the ancient gold civilisations of southern Africa. The power and wealth of the gold-rich kingdoms of Africa is a little easier to comprehend once the museum's artefacts have been viewed. But the collection goes a step beyond the aesthetic; the visitor takes away insights into the values of the people who created these objects through the symbolism surrounding each piece. The setting for the collection is in itself noteworthy. Restored in 2000, Martin Melck House, built in 1783, is believed to be one of the finest remaining examples of old Cape Town domestic architecture. Alongside its permanent collection, the museum showcases temporary exhibitions from countries as diverse as India, Brazil, Mali and Egypt. The museum complex has a two hundred-year-old garden courtyard and wine cellar that offer quality wines and light meals. It houses an auditorium and is available as a venue for hire to both private and corporate clients. A state-of-the-art gold jewellery workshop offers courses and demonstrations and here visitors can see local goldsmiths using South African gold to design and manufacture jewellery. Some of these pieces are sold in the museum shop, which also offers a variety of gifts crafted by local workers. THE HISTORY OF THE MUSEUM COLLECTION The Gold of Africa Museum's collection was originally assembled by the Swiss art lover, Josef Mueller, who collected African artwork and jewellery over a fifty-year period. Josef's daughter and son-in-law, Jean Paul Barbier, continued to build the collection which was displayed in Switzerland's Barbier-Mueller Museum until 2001 when it was returned to the African continent.

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START GLOSSERY OF TERMS HERE

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GLOSSARY OF TERMS AND ACRONYMS

Photograph courtesy: AngloGold Ashanti

GLOSSARY OF TERMS AND ACRONYMS GLOSSARY OF TERMS AND ACRONYMS


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GLOSSARY OF TERMS AND ACRONYMS


A ABET ACPs Adult Basic Education & Training African, Caribbean and Pacific countries (referred to in terms of the Lom Convention) Airports Company of South Africa African Growth and Opportunity Act of the USA Gold granules of varying caratage usually destined for the jewellery industry African Rainbow Minerals, a BEE mining company formed in 1997 and recently involved in a merger with Harmony Gold Mining In chemical analysis, the process of determining proportions of metal, particularly precious metal, in ores and beneficiated metal. The method known as Fire Assay is the oldest known method of assaying gold and continues to be the most accurate and economical method of determining the purity of gold Artisinal Small Scale Mining project initiated by Mintek

ACSA AGOA Alloy Grain

ARM

Assaying

ASSMs B BBC BBSDP BEE BEE Codes of Good Practice

Black Business Council Black Business Supplier Development Programme Black Economic Empowerment Published by the Department of Trade and Industry to inform companies and organisations on how best to meet BEE targets Black Economic Empowerment Commission Formerly Warmbaths in Limpopo Province A process developed in South Africa for the recovery of gold from certain ores. It employs the use of naturally occurring bio-organisms in a contained environment, with a specific temperature, acidity and oxygen level, to recover gold from sulphide rock See Coin Blanks Bilateral Trade Relations Business Unity South Africa

BEECom Bela-Bela Bioxidation

Blanks BTR BUSA

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GLOSSARY OF TERMS AND ACRONYMS


C Cast Bar A cast bar is made by the basic process of forming a bar in a mould (Contrast minted bar) Jewellery manufacturing process in which gold and alloys are extruded into moulds under vacuum Community Based Organisation Employers organisation serving the interests of the South African mining industry International Confederation of Jewellery, Silverware, Diamonds, Pearls and Stones Cape Jewellery Manufacturers Association Initiatives launched as a process of accelerating expansion of production capacities in certain sectors of industry (e.g. agriculture, tourism, jewellery manufacturing) Common Monetary Area (an alliance between South Africa, Lesotho, Swaziland and Namibia) which replaced the RMA (Rand Monetary Area) in 1986 Semi-fabricated stamped gold discs used to manufacture numismatic or legal tender coins Congress of South African Trade Unions Graph of total cost of production as a function of the total quantity produced

Casting

CBO Chamber of Mines of SA CIBJO

CJMA Cluster Studies

CMA

Coin Blanks

COSATU Cost Curve

D DDG DEAT Derivative Deputy Director General Department of Environmental Affairs and Tourism Highly leveraged financial instrument the value of which is based on an underlying asset, for example gold exchange traded futures or options The Dubai Metals and Commodities centre is an industrial Development Zone offering one-stop refining and trading facilities for the precious metals and diamond industries. Department of Minerals and Energy Department of Labour Impure alloy of gold and silver produced at a mine to be refined to a higher purity, usually consists of 85% gold on average Durban Roodepoort Deep (now known as DRDGOLD) Department of Trade & Industry

DMCC

DME DOL Dor

DRD DTI

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E EEA ETF Employment Equity Act (of 1998) Exchange Traded Fund. Gold ETFs are funds whose sole asset is physical gold and whose value is fully backed by physical gold European Free Trade Area East London Industrial Development Zone Education and Training Quality Assayers Export Marketing and Investment Assistance

EFTA ELIDZ ETQA EMIA F FTA Finding

Free Trade Area A value-added small component (a clasp, clip or hook) that forms part of the overall jewellery piece assembly Pure gold of at least 995 parts per 1,000 gold. Distinguish between fine gold and fine gold jewellery which refers to carat jewellery of a minimum of 9 carat to differentiate it from costume jewellery which does not contain carat gold An international term for a coin that is produced with no blemishes and of the highest quality e.g. a proof Krugerrand Fund for Research in Industrial Development Growth and Equity

Fine Gold

Fleur de Coin

FRIDGE

G GATT GEAR GPC GSP H Hallmark Marking finished product of jewellery with a caratage stamp or manufacturers insignia Historically Disadvantaged Individual Higher Education and Training Institutions Historically Disadvantaged South African Co-operative associations of manufacturers of similar products operating collectively and usually cost-effectively via the sharing of overheads and other fixed costs Harmonised Commodity Description and Coding System General Agreement on Tariffs and Trade Growth, Employment and Redistribution Gold Producers Committee of the Chamber of Mines Generalised System of Preferences

HDI HETs HDSA Hives

HCDCS

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GLOSSARY OF TERMS AND ACRONYMS


I IDC IDZ IMF ISO J JASA JAWDA JCSA JIAIDZ Jewellery Association of South Africa Jewellery and Watch Distributors Association Jewellery Council of South Africa Johannesburg International Airport Industrial Development Zone Jewellery Manufacturers Association Johannesburg Securities Exchange Industrial Development Corporation of South Africa Limited Industrial Development Zone International Monetary Fund International Standards Organisation

JMA JSE

L LBMA Legal Tender London Bullion Market Association (Coins) Bullion or other coins which are accepted for the purchase of goods and services e.g. Krugerrand London Inter Bank Offered Rate, based on rates that contributor banks in London offer each other for inter-bank deposits Refinery appointed by the LBMA, to monitor quality and purity of refinery output Awarded by the London Bullion Market Association to refiners that meet certain criteria with respect to their refining standards. This status gives refiners international recognition for the quality and purity of their products. (Termed London Good Delivery status accreditation).

LIBOR

London Good Delivery Referee London Good Delivery Status

M Makhoda Minted Bars Formerly Louis Trichardt in Limpopo Province A bar punched out of a strip of gold which has been produced by continuous casting. The punched out bar is then minted in a purpose-designed minting press, similar to the process used to make coins. (Contrast cast bars) Provider of minerals processing and metallurgical engineering products and services to industry Formerly Potgietersrus in Limpopo Province Formerly Naboomspruit in Limpopo Province

Mintek

Mokopane Mookgophong

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GLOSSARY OF TERMS AND ACRONYMS


MPRDA Minerals and Petroleum Resources Development Act 28 of 2002 Mining Qualification Authority Sector Education Training Authority

MQA - SETA

N NAFTA NEDLAC NEPAD NSF NEWGOLD Gold Bullion NGOs NQF NSBs North American Free Trade Agreement National Economic Development and Labour Council New Partnerships for Africas Development National Skills Fund Gold Exchange Traded Fund launched by Absa Bank

Non-Governmental Organisations National Qualifications Framework National Standards Bodies set standards in education in particular sectors or fields National Skills Fund National Union of Mineworkers New York Mercantile Exchange

NSF NUM NYMEX P PGMs Plate

Platinum Group Metals Product created by the process of continuous casting which allows a constant rectangular shape to be withdrawn from the bottom of a mould. Solidifies into a long strip of metal which can be rolled and reworked into different dimensions Formerly Pietersburg in Limpopo Province

Polokwane R Ribbon

Plate which has been rolled into a thin strip, usually with a thickness of less than 0.5mm Rand Monetary Area replaced by CMA (Common Monetary Area) in 1986

RMA

S SACOB SAMDA SARS South African Chamber of Business South African Mining Development Association South African Revenue Services

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SAQA SDF SDFs SDL SDRs South African Qualifications Authority Skills Development Fund Skills Development Facilitators Skills Development Levy Special Drawing Rights are a form of international reserve whose creation was authorised by amendment to the Articles of Agreement of the IMF A company registered in South Africa in terms of Section 21 of the Companies Act. Such companies are registered to provide a service and do not intend to make or to be judged by the profits they make. As such, they are Not for Gain companies and are often funded by local and/or international donations Sector Education and Training Authority Bars with a weight of less than 1kg generally of the cast variety Small and Medium Enterprises Small and Medium Enterprise Development Programme Small, Micro and Medium Enterprises Support Services Group Skills Support Programme (Jewellers) Floor sweepings sent to the recycler to recover very low grade gold content

Section 21 Company

SETA Small Bars

SME SMEDP SMME SSG SSP Sweep

T TEBA TDCS The Employment Bureau of Africa The South African/European Trade Development & Co-operation Fund Trade and Investment South Africa Tokyo Commodities Exchange Formerly Pretoria, the administrative capital of South Africa

TISA TOCOM Tshwane U USGS V VAT

United States Geological Survey

Value Added Tax (14%)

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W Washings The wash water from the jewellery manufacturing process which can contain anything from 4% - 5% gold (in weight) which is sent for recycling World Gold Council Gold in wire form of varying diameter and alloy destined to be manufactured into chain

WGC Wire

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