GOLD. in South Africa. Mining Refining Manufacturing Retail Investment

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1 Mining Refining Manufacturing Retail Investment

2 With special thanks to: Paul Walker - GFMS Johan Botha - Rand Refinery Madhu Vythilingam - Chamber of Mines Roger Baxter - Chamber of Mines Lourens Mare - Jewellery Council of SA Lorna Delport - Jewellery Council of SA Gill Hyslop - SA Jewellery News Jessica Cross - Virtual Metals Chris van Rensburg - Studio C Richard Butterfield - Galaxy Cornel Muller - Jenna Clifford Pietro Cijnol - Orpheo Bernie Madden - NWJ Date published: February Researched and compiled by: Ryan Short and Busisiwe Radebe Genesis Analytics (Pty) Ltd Design and layout by: Susan Craig Sonar Universal This book is available online at:

3 FOREWORD In 2004 AngloGold Ashanti and the World Gold Council, together with the Department of Trade and Industry and the Industrial Development Corporation, funded the first study ever undertaken of the entire gold value chain, from mining through to fabrication and retailing. The resulting publication was well received and, for the first time, provided data on gold fabrication industries in South Africa. Since 2004, many changes have occurred in the gold industry. Most significantly, the dollar gold price has increased by almost 58% over two years on the back of a boom in global commodities prices. Though this price increase has brought major economic benefits to South Africa as the world's largest producer of gold and significant exporter of other raw materials and commodities, its impact on other sections of the value chain has not necessarily been as positive. The short term volatility which accompanied recent price increases impacted heavily on gold jewellery offtake. Gold jewellery consumption fell worldwide in volume terms by 16% between 2005 and 2006, with gold usage in some major markets falling off by up to 30%. Though demand has now recovered, South Africa's manufacturers used less gold in jewellery fabrication during this period of volatile prices, meaning that a smaller proportion of South Africa's gold production was beneficiated to value-added product. Other changes in the gold value chain have been significant. New legislation regulating the sector was introduced which cut red tape for jewellery manufacturers, the Jewellery Council of South Africa was restructured and revitalised, and a precious metals regulator appointed. Musuku Beneficiation Systems was closed, leaving only one primary refiner, Rand Refinery Limited, in operation. These changes and others are documented in detail in the research that follows. It is hoped that this book will provide a valuable source of reference to those working in the industry or looking to invest in the industry. G OLD F IELDS 3

4 Gold was funded by AngloGold Ashanti Limited and Gold Fields Limited. This publication is protected by International Copyright Law and all rights are reserved. While the funders and researchers have made all reasonable efforts to ensure that the information is accurate at the time of publication, there may be inadvertent errors and omissions. No representations or warranties, express or implied, as to the accuracy or completeness of the information are made. The funders and researchers and their employees and office bearers accept no liability for any losses (direct, special, indirect or consequential) or damages, resulting from whatever action or cause, through the use of any information obtained directly or indirectly from this publication. The funders and researchers are under no obligation to inform readers of any future revisions or modifications of information contained in this publication.

5 TABLE OF CONTENTS List of Features List of Figures List of Tables Glossary CHAPTER 1: SUMMARY AND KEY FINDINGS 1.1 Background 1.2 An overview of the gold value chain 1.3 Employment along the gold value chain 1.4 Margins along the gold value chain 1.5 Industry developments 1.6 The challenges of collecting data i i ii iii CHAPTER 2: MINING 2.1 Key findings 2.2 Production data 2.3 Structure of the sector 2.4 Employment CHAPTER 3: REFINING AND RECYCLING 3.1 Key findings 3.2 Key characteristics of the sector 3.3 Primary refining 3.4 Recycling 3.5 Mark ups 3.6 Employment CHAPTER 4: JEWELLERY MANUFACTURING 4.1 Key findings 4.2 Number of manufacturers 4.3 Structure of the industry 4.4 Volume of gold used 4.5 Mark ups 4.6 Employment CHAPTER 5: CHAPTER 6: JEWELLERY RETAILING 5.1 Key findings 5.2 Key characteristics of the sector 5.3 Size of the retail market 5.4 Jewellery wholesalers 5.5 Sources of gold 5.6 Mark ups 5.7 Employment COINS, INDUSTRIAL END USES AND INVESTMENT 6.1 Key findings 6.2 The coin industry 6.3 Dental uses 6.4 Industrial uses 6.5 Investment uses APPENDICES Appendix A: Interview list Appendix B: Methodology 57 59

6 LIST OF FEATURES Feature 1 Feature 2 Feature 3 Feature 4 Feature 5 Feature 6 Flows of fine gold in the value chain The development of gold mining in the Witwatersrand The London Bullion Market (LBMA) and the Gold Price Fix The gold refining process Skills development in the jewellery manufacturing industry The Krugerrand: A South African bestseller LIST OF FIGURES Figure 1 South African mining production from 1996 to 2006 Figure 2 Gold Price in US Dollars and South African Rands from 1997 to 2007 Figure 3 Sources of gold refined for 2005 and 2006 Figure 4 Fine gold usage n jewellery manufacturing from 2004 to 2006 Figure 5 Gold price from 2004 to 2007 Figure 6 Global gold jewellery sales from 2004 to 2006 Figure 7 Use of fine gold in jewellery manufacture by product for 2006 Figure 8 South African gold jewellery retail sales by volume for 2005 and 2006 Figure 9 South African gold jewellery retail sales by value for 2005 and 2006 Figure 10 Indicative example of value-add along the value chain Figure 11 Structure of the Diamond and Jewellery Federation Figure 12 South African mining production from 1996 to 2006 Figure 13 South African gold mining production from 1884 to 2006 Figure 14 Sources of gold for 2006 Figure 15 Employment in gold mining from 2000 to 2006 Figure 16 Volume of gold refined and recycled from 2004 to 2006 Figure 17 Incoming raw material to Rand Refinery for 2006 Figure 18 Rand Refinery imports of raw material for 2006 Figure 19 Use of fine gold in jewellery manufacture by process for 2006 Figure 20 South African gold jewellery retail sales by volume for 2005 and 2006 Figure 21 South African gold jewellery retail sales by value for 2005 and 2006 Figure 22 Sources of gold jewellery per supplier source for 2006 Figure 23 View of imported vs local supplied gold jewellery for i

7 LIST OF TABLES Table 1 Refining and recycling product output by volume for 2005 and 2006 Table 2 Refining and recycling product output as a share of total output for 2005 and 2006 Table 3 Table 4 Persons employed in the gold value chain from 2004 to 2006 Share of total employment for each sector in the gold value chain from 2005 to 2006 Table 5 Production of main gold mining houses for 2005 and 2006 Table 6 Share of production of main gold mining houses for 2005 and 2006 Table 7 Table 8 Sources of refined/recycled fine gold for 2005 and 2006 Refining and recycling product output for 2005 and 2006 Table 9 Share of total refining and recycling product output for 2005 and 2006 Table 10 Estimated mark-ups by product in the refining and recycling sector Table 11 Number of gold jewellery manufacturers for 2006 Table 12 Gold jewellery manufacturers for 2006 Table 13 Use of gold from refiners and recyclers, non-bar products, for 2005 and 2006 Table 14 Share of gold use from refiners and recyclers, non-bar products, for 2005 and 2006 Table 15 Use of fine gold in jewellery manufacture by product for 2005 and 2006 Table 16 Share of use of fine gold in jewellery manufacture by product for 2005 and 2006 Table 17 Average indicative mark-ups over cost in jewellery manufacturing for 2006 Table 18 Estimated total jewellery sales by retail group for 2006 Table 19 Indicative mark-ups in gold retail business for 2006 Table 20 Use of fine gold in non-jewellery applications for 2005 and ii

8 GLOSSARY Assaying Cast bar Casting Coin blanks DME Doré DTI ETF Finding Fine gold JCSA JSE LBMA Legal tender LIBOR London good delivery status Minted bars Mintek 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 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 Semi-fabricated stamped gold discs used to manufacture numismatic or legal tender coins Department of Minerals and Energy Impure alloy of gold and silver produced at a mine to be refined to a higher purity, usually consisting of 85% gold on average Department of Trade and Industry Exchange Traded Fund. A gold investment vehicle whose sole asset is physical gold and whose value is fully backed by physical gold A small, value-added 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. Fine gold refers to jewellery of a minimum of 9 carat gold. Jewellery Council of South Africa Johannesburg Securities Exchange London Bullion Market Association Bullion or other coins which are, at least theoretically, 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 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 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 MPRDA Minerals and Petroleum Resources Development Act 28 of 2002 NewGold gold bullion Gold Exchange Traded Fund launched by ABSA bank iii

9 PGMs Plate Ribbon SAMDA Small bars Sweep 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 Plate which has been rolled into a thin strip, usually with a thickness of less than 0.5mm South African Mining Development Association Bars with a weight of less than 1kg, generally of the cast variety Floor sweepings sent to the recycler to recover very low grade gold content VAT South African Value-Added Tax, currently at 14% Washings WGC Wire 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 Unless otherwise stated, all references to volumes of gold are measured in metric tonnes (mt) of fine gold. iv

10 CHAPTER 1: SUMMARY AND KEY FINDINGS 1.1. BACKGROUND The first publication in this series, Gold 2005, was an initial attempt to build a comprehensive picture of the gold value chain, making use of data collected for the 2004 calendar year. In collating this initial study, the researchers found that while the first stage of the value chain, the mining industry, was well documented, there was little information available on the downstream industries. This updated review thus focuses on the sectors of the gold value chain that add value to gold, from refining and recycling to the use of gold in bars, jewellery, coins and other applications. Data gathered on gold usage in the value chain in 2005 and 2006 was analysed along with the 2004 data available from the original study, in order to update information available on the gold industry and start to map longer-term trends in gold production and usage mt mt % % 1.2. AN OVERVIEW OF THE GOLD VALUE CHAIN IN SOUTH AFRICA South African mine production in metric tonnes South African mine production as a percentage of global mine output Figure 1: South African mining production from 1996 to 2006 Source: Chamber of Mines, GFMS There are four legs to the gold value chain: mining refining and recycling fabrication and retail The following is a summary of the key findings which have emerged from the research in each of these areas MINING South Africa remains the world's largest producer of gold although its share of global output has been declining consistently for a decade. In 2006, South Africa accounted for 11.8% of new global mine supply, compared to over 20% a decade ago (Figure 1). 1 CHAPTER 1 : SUMMARY AND KEY FINDINGS

11 From 2004 to 2006 there was a significant drop in mine output. According to the Chamber of Mines, South Africa produced 342mt of fine gold in 2004, mt in 2005 and mt of fine gold in 2006, a total drop of 19.6% from 2004 to The scaling down of production can be attributed to increasing mine depth and declining grades, a relatively strong rand which has dampened the effects of an increasing dollar gold price, as well as higher material input costs, though the most recent surge in the gold price (Figure 2) has prompted deepening projects which should reduce the rate of decline. Gold rpice in USD USD ZAR 175, , , ,000 75,000 50,000 25,000 Gold price in ZAR PRIMARY REFINING AND RECYCLING There are two types of businesses involved in refining gold: primary refiners and secondary recyclers. Primary refiners take virgin-mined material and refine it through a series of chemical processes into pure (fine) gold. By contrast, recyclers refine second-hand gold, old jewellery, off-cuts, washwater and other scrap generated during the manufacturing process. Though recyclers are small suppliers of gold compared to refiners they are vital to the downstream fabrication industries, providing much of the working gold inventory for small- and medium-sized jewellery manufacturers. US Dollar price South African rand price Figure 2: Gold price in US Dollars and South African Rands from 1997 to 2007 Source: Chamber of Mines From 2007 most of South Africa's primary mining output will be sent to the Rand Refinery Limited (Rand Refinery) in Germiston for refining. However, during the review period a second primary refiner, Musuku Beneficiation Systems (Musuku), was in operation and is also included in this review. Musuku stopped refining in June 2006 and closed operations in December The cumulative total of gold refined and recycled fell by 4% from mt in 2004 to mt in 2006 (2005: mt). This constituted about 11% of global mine output and scrap production (which amounted to 3,579mt in 2006). 2 mt In addition to locally-mined gold output, Rand Refinery refines significant and increasing volumes of foreign-mined gold mt of the mt refined in 2006 was sourced overseas, and the volume of overseas mine production refined increased by 44% from 2004 to Foreign-mined ore comes mostly from Ghana, Mali, Zimbabwe and Tanzania (Figure 3). This reflects an increase in mining output from other parts of the continent as well as the international expansion of South African mining houses. There is capacity for more ore to be refined as Rand Refinery operated at only 33% of maximum capacity in SA mine production Non-SA mine production Fabrication scrap and secondary material Figure 3: Sources of gold refined in South Africa for 2005 and 2006 Source: Chamber of Mines The GFMS Gold Survey 2007, which also documents the production of gold, quotes gold production for 2006 at 291.8mt. This includes an estimate of 17mt for stolen gold, based on the estimates of a 2006 study by the Institute for Security Studies. GFMS Gold Survey 2007 In 2006, 65% of refined output was from South African gold; 35% was from foreign-mined ore. CHAPTER 1 : SUMMARY AND KEY FINDINGS 2 3

12 Fine gold Fine gold used (mt) used (mt) 400oz good delivery bars (export) 400oz good delivery bars (ETF) Kilobars and other bars Coins (including Krugerrands) Jewellery semis Dental products Industrial products Totals Table 1: Refining and recycling product output by volume for 2005 and 2006 Source: Rand Refinery, Musuku, ABSA, recyclers The figure for kilobars in 2006 (2005) does not include 1.25mt (1.32mt) of bars that went to local jewellery fabrication. There are at least seven formal secondary recyclers in the country. Secondary recyclers are characteristically small, family-owned businesses based either in Johannesburg or Cape Town, who primarily serve the local jewellery manufacturing industry. They recycled 2.8mt of gold in 2004, 3.9mt in 2005 and 4.09mt in 2006 (a 46% increase from 2004 to 2006). The growth in 2006 is partially explained by new business following the closure of the Musuku refinery, but is also related to the gold price increase during the period, which led to an increase in the level of gold scrap in the secondary market FABRICATION A high proportion of gold mined and refined goes into the production of cast bars. 4 In 2006, mt (more than 97%) of total refined and recycled output was used in this way; in 2005 the figure was mt. Most cast bars were exported to international bullion banks and federal reserves, with a small portion allocated to underwriting the local NewGold exchange traded fund (3.87mt in 2006) (Table 1). 400oz good delivery bars (export) 400oz good delivery bars (export) % of total % of total fine gold fine gold output output 48.62% 1.41% 56.2% 0.9% Kilobars and other bars Coins (including Krugerrands) Jewellery semis Dental products Industrial products 47.65% 0.45% 1.67% 0.13% 0.02% 40.58% 0.39% 1.39% 1.14% 0.02% Totals 100% 100% Volumes of fine gold consumed by local fabrication industries decreased from 11.24mt in 2004 to 10.2mt in 2005 and to 10.02mt in 2006, a drop of 10.85% from 2004 to Of the 10.02mt going to local fabrication in 2006, 7.18mt went into jewellery manufacturing, 2.16mt went into coin manufacturing, 0.6mt into dental products and 0.08mt into industrial products. A similar split applied in Table 2: Refining and recycling product output as a share of total output for 2005 and 2006 Source: Rand Refinery, Musuku, ABSA, recyclers The figure for kilobars in 2006 (2005) does not include 1.25mt (1.32mt) of bars that went to local jewellery fabrication. 4 Gold bars are either minted or cast. Cast bars are manufactured by the casting of molten gold into a mold, while minted bars are struck from blank templates in the same way that coins are struck, with precise dimensions. In the review period Rand Refinery and Musuku produced no minted bars; all were cast. 3 CHAPTER 1 : SUMMARY AND KEY FINDINGS

13 Jewellery fabrication Jewellery fabrication is the largest gold fabrication industry, as is the case worldwide. There are an estimated 500 gold jewellery manufacturers in the country. The vast majority of these are small enterprises using tiny amounts of gold. Sizeable usage is consolidated in only a dozen or so firms. In fact, in 2006, three firms accounted for 65% of fine gold consumed in jewellery manufacturing, while the top 13 firms accounted for 84%. While refiners and recyclers reported fine gold sales to jewellery manufacturers of 7.52mt in 2005 and 7.18mt in 2006, manufacturers reported actual output to be slightly higher (8.68mt in 2005 and 7.87mt in 2006). In other words, in both of the review years, jewellery manufacturers made use of more fine gold than was made available to them from local sources. This suggests that some manufacturers are importing semi-fabricated gold. It is difficult to say what the precise import figure is as the official import data are 5 inconclusive and not all manufacturers were willing to deal with this question in interviews. Industry estimates put imports of semi-fabricated gold at approximately 0.7mt in Metric tonnes of fine gold Figure 4: Fine gold usage n jewellery manufacturing from 2004 to 2006 Source: Jewellery manufacturers The volume of fine gold used in local jewellery manufacturing increased 6 slightly from 2004 (8.26mt) to 2005 (8.68mt) but fell again in 2006 to 7.87mt (an overall decrease of 4.7% from 2004 to 2006) (Figure 4). This represented 7 less than 0.5% of global gold jewellery output in There are several possible explanations for the fall from 2004 to 2006: From 2004 to 2006, the price of gold increased by nearly 58% (Figure 5). As the biggest input cost for manufacturers is buying (or financing) working gold, the increase in the gold price dampened the ability to expand production by increasing the costs of acquiring and holding working inventory. Gold price in US$/oz Jan 04 Jul 04 Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Figure 5: Gold price from 2004 to 2007 Source: Chamber of Mines See Chapter 4 Important note: Use of fine gold in jewellery manufacture was reported in Gold 2005 at 9.6mt for In comparison, the 2006 figure of 7.87mt fares poorly at first glance (an 18% drop). However, the researchers noticed in interviews that this was not backed by qualitative discussions with large manufacturers, none of whom reported so large a drop in output. A closer look at 2004 data revealed a small error; a production figure for one of the big three producers had been misinterpreted (the given figure reflected 9 carat rather than fine gold used). As a result, the review estimates that the 2004 production figures documented in the last Gold handbook are overstated by 1.38mt (or 14.4%). The corrected jewellery output figure should be 8.26mt for 2004, as reflected. GFMS Gold Survey 2007 estimates global jewellery output for 2006 to be 2,286mt. CHAPTER 1 : SUMMARY AND KEY FINDINGS 4

14 Metric tonnes of fine gold 3,500 3,000 2,500 2,000 1,500 1, The higher gold price reduced demand for gold product, a trend which is borne out by global figures which also show a drop in global gold jewellery sales from 2005 to 2006 (Figure 6). In South Africa, some manufacturers reported an increase in demand for 9 carat gold jewellery over higher-caratage products. This trend was probably also linked to the higher gold price, indicative of a drive to maintain prices at retail level despite an increased gold price. Figure 6: Global gold jewellery sales from 2004 to 2006 Source: The Yellow Book, Virtual Metals/Fortis Bank A number of manufacturers reported a structural shift in local demand away from gold towards platinum-based products. Manufacturers interviewed were asked to name the main obstacles to growth. The results, while anecdotal, shed some light on the issues currently facing the major players. The most commonly cited barriers were: the high cost of financing working gold; a shortage of skilled labour; the small size of the local market; the poor performance of the category at retail level in both the South African market and the major export markets served by South African manufacturers; and an inability to compete on the basis of labour cost with Chinese, Turkish, Thai and Indian producers; and with Italian producers on quality of design. Earrings 7% Pendants 6% Rings 23% Solid Bangle 3% Of the 7.87mt fine gold jewellery produced in 2006, about 3.86mt (or 49%) was exported, with 4.01mt (51%) sold to the local retail market. These figures are skewed somewhat by the activities of the country's largest gold manufacturer who uses more than half of all gold and exports 70% of output. When this producer is removed, the data show that 75% of product sold to the local market while 25% is exported. In other words, the bulk of South African producers aim for the local rather than export market. Chain 51% Of the gold used in jewellery manufacture, just over half was produced as machine-made chain (see Figure 7). Figure 7: Use of fine gold in jewellery manufacture by product for 2006 Source: Interviews with gold jewellery manufacturers 5 CHAPTER 1 : SUMMARY AND KEY FINDINGS

15 Coin fabrication The second largest fabrication industry after jewellery is coin fabrication. Like jewellery fabrication, this sector also saw a drop-off in gold consumed. Coin accounted for 2.93mt of fine gold in 2004, 2.03mt in 2005 and 2.16mt in 2006 (a fall of 26.28% from 2004 to 2006). Dental-use fabrication The use of gold in dentistry remains limited. 0.58mt of fine gold was used in 2005 in dental products and 0.6mt in Dentistry is not regarded as a growth sector for gold use for two reasons: fashion is turning away from the use of gold in dentistry and local medical schemes do not, as a rule, cover the cost of gold in dental treatment. Industrial-use fabrication Gold is used in a variety of industrial applications, though the quantities used are extremely small. No more than 0.09mt of fine gold went into industrial end-use in each of 2005 and Interviews with circuit board manufacturers revealed they are using less gold and more copper in circuit board fabrication. The tables and flowcharts which follow show the data on gold usage in the value chain, from 2004 to 2006 and the flow of fine gold in the value chain in CHAPTER 1 : SUMMARY AND KEY FINDINGS 6

16 Flows of fine gold in the value chain, from 2004 to 2006 All figures in metric tonnes fine gold (contained metal) Note South African Mine production Gold supply to refining - From SA mine production - From non-sa mine production - From fabrication scrap and secondary material Total gold supply to refining/recycling Refined gold production - From primary refiners - From secondary recyclers - From Musuku run-to-empty on closure Total refined gold production Refined gold usage - Good delivery and cast bar exports - Good delivery bars to NewGold Exchange Traded Fund - Refined gold to fabrication industries Total refined gold usage Refined gold usage in fabrication industries - To jewellery fabrication - To coin fabrication - To dental product fabrication - To industrial product fabrication Total refined gold usage in fabrication industries Source: 2004 data from Gold 2005; 2005 and 2006 as stated Gold usage in jewellery fabrication and retail All figures in metric tonnes fine gold (contained metal) Local gold supply to jewellery fabrication - Supply from primary refiners - Supply from secondary recyclers Plus semi-finished jewellery imports Total gold supply to jewellery fabrication Finished jewellery exports Finished jewellery imports Estimated gold jewellery retail sales Note Notes: 1. Data published annually by the Chamber of Mines. 2. This figure differs slightly from the annual production figure published by the Chamber of Mines owing to timing differences between the periods in which data was collected. It is also possible that small quantities of mine production are refined by recycling operations that were not available for participation in this survey. This data was not collected in Unrefined gold sourced by Rand Refinery for processing, primarily from Ghana, Mali, Zimbabwe and Tanzania. 4. This is scrap gold recycled by refiners and recyclers. This data was not collected in The difference of 1600kgs between gold going into the refining process and gold leaving the refining process is accounted for by Musuku's run-toempty on closure (i.e. gold already "locked in" the Musuku plant at the start of the year which should not be included as input for 2006). 6. This data was not collected in Important note: Use of fine gold in jewellery manufacture was reported in Gold 2005 as 9.6mt in A closer look at 2004 data revealed an error. A production figure for one of the big three producers had been misinterpreted (the given figure reflected 9 carat rather than fine gold used). As a result, the 2004 production figure documented in the Gold 2005 handbook was overstated by 1.38mt (or 14.4%). The corrected jewellery figure should be 8.26mt for 2004, as reflected. 8. The large jump from 2004 to 2005 was likely the result of different research methodologies being employed in each year, and not, as suggested by the figures, because significantly more gold is being used in dental and industrial product fabrication. There was no reported increase of this magnitude. 9. This data was not collected in CHAPTER 1 : SUMMARY AND KEY FINDINGS

17 Flows of fine gold in the value chain, for 2006 Scrap and other secondary material 8.1mt SA gold production mt Non-SA gold production mt 4.09mt 4.01mt Secondary recyclers 4.09mt Primary refiners mt 1.32mt 412.1mt 2.77mt 7.25mt Cast bar exports mt SA fabrication industries 10.02mt NewGold Exchange Traded Fund 3.87mt Jewellery fabrication 7.18mt Coin fabrication 2.16mt Dental product fabrication 0.6mt Industrial product fabrication 0.08mt Gold usage in jewellery fabrication and retail Supply from primary refining 4.65mt Supply from secondary recyclers 2.53mt Jewellery fabrication 7.18mt Semi-finished jewellery imports 0.69mt 3.83mt Jewellery manufacturing output 7.87mt 0.19mt Finished jewellery exports 3.86mt SA retailers 5.7mt Wholesale 0.75mt 0.94mt Finished jewellery imports 1.69mt Source: Genesis Analytics CHAPTER 1 : SUMMARY AND KEY FINDINGS 8

18 JEWELLERY RETAIL Approximately 5.70mt of fine gold was sold in the local retail jewellery market during 2006 (Figure 8). mt Figure 8: South African gold jewellery retail sales by volume for 2005 and 2006 Source: Interviews with retailers, annual reports, industry estimates While there are thousands of gold jewellery retailers, 83% of product was sold by only 12 large retail chains, being Sterns, American Swiss, Game, Dion, Galaxy & Co, Tourvest, Browns, Arthur Kaplan Jewellers, NWJ, Edgars, Truworths and Foschini. The balance (17%) was sold by smaller, independent businesses. Gold retail sales in 2006 amounted to approximately R1.5bn and to R1.26bn in 2005, during which period the gold price increased by 46.6% (Figure 9). Local retailers source most gold jewellery from local suppliers. About 70% of gold jewellery sold in both 2006 and 2005 was made locally, while about 30% was imported. Retailers reported that they prefer to import jewellery when they require: billions of rands hand-worked jewellery needing a high degree of labour input products requiring high quality design and finish, like complex multistoned products products that display a noticeable point of difference, that is, products that look different to the run-of-the-mill output of local manufacturers. Figure 9: South African gold jewellery retail sales by value for 2005 and 2006 Source: Interviews with retailers, annual reports, industry estimates 9 CHAPTER 1 : SUMMARY AND KEY FINDINGS

19 1.3. EMPLOYMENT ALONGTHE GOLDVALUE CHAIN An estimated 168,547 people were employed in the gold value chain in 2005, and 161,056 in 2006 (Table 3). Sector 2004 Persons 2005 Persons 2006 Persons employed employed employed Gold mining Gold refining and recycling Gold jewellery manufacturing Gold jewellery wholesaling and retailing Gold coin manufacturing and retailing Other* 187, ,680 2, , ,782 4, , ,833 4, Totals 193, , ,956 Table 3: Persons employed in the gold value chain from 2004 to 2006 Source: Chamber of Mines, interviews, annual reports * Other is an estimate of employment in dental and industrial uses, investment, and gold industry suppliers. Some data was not gathered in It is notable that mining employs the most people in the gold value chain (95%), as shown in Table % change Sector % of tota l % of total 2005 to value chain value chain 2006 Gold mining Gold refining and recycling Gold jewellery manufacturing Gold jewellery wholesaling and retailing Gold coin manufacturing and retailing Other 95.31% 0.31% 1.65% 2.55% 0.06% 0.12% 95.25% 0.3% 1.69% 2.59% 0.06% 0.12% -0.40% -6.46% 1.83% 0.95% 1.00% 0.00% Totals 100% 100% -0.35% Table 4: Share of total employment for each sector in the gold value chain from 2005 to 2006 Source: Chamber of Mines, interviews, annual reports The greatest number of job losses occurred in the mining sector, partly as a result of downscaling in production but also due to changes in work patterns. Approximately 60 jobs were lost in the primary refining sector, mainly due to the closure of Musuku, however the numbers employed in secondary recycling increased, probably as the slack created by Musuku s closure was taken up by recyclers. The fabrication sectors of the value chain saw small increases in the numbers 8 employed from 2005 to 2006 ; the total numbers employed in these industries are small in comparison with numbers employed in the mining sector. 8 The data from 2004 captured in the last handbook on employment in fabrication are not directly comparable owing to separate research methodologies. The 2004 study only included numbers of manufacturing and retailing firms actually surveyed without including estimated data for firms who were not. CHAPTER 1 : SUMMARY AND KEY FINDINGS 10

20 The Development of Gold Mining in the Witwatersrand Gold was discovered in the Witwatersrand in 1886, and it soon became evident that the area covered the world's largest and richest gold deposit. Despite the mining of over 50,000mt of gold, approximately one third of the gold in existence on the world's surface, reserves remaining in the Witwatersrand area are estimated to be some 40,000mt, of which between 8,000mt and 10,000mt are thought to be economically recoverable, depending on the gold price and cost scenarios applied. To this day opinions are divided on the identity of the man who first discovered gold in the Witwatersrand. The only fact on which experts agree is that gold was discovered by one of three men, all with the name George. The men were George Walker, George Harrison and George Honeyball. The men are said to have signed a lease with Gerhardus Cornelius Oosthuizen, who granted them the right to prospect for gold on his own portion of Langlaagte. The Australian George Harrison, however, is the member of the trio who is most widely credited with the discovery. The development of gold mining on the Witwatersrand led to burgeoning economic activity in the area and the establishment of institutions to support the nascent industry. The Chamber of Mines was founded in December 1887 to disseminate authoritative statistical information about the Transvaal Gold Fields Limited and to validate prospectuses. The original founding members were the Corner House (later Rand Mines and Randgold and Exploration Limited), Consolidated Gold Fields (later Gold Fields Limited), the Robinson Group and the Johannesburg Consolidated Investment Company (now JCI Limited). Their representatives met in the Central Hotel in Johannesburg prior to the establishment of the modern Chamber of Mines in Other objectives of the Chamber included the promotion and protection of mining interests, the promotion of public discussion on mining industry issues; the promotion of favourable legislative measures and the exchange of information with other public and private mining bodies within and outside of South Africa. Today the Chamber of Mines focuses on the advocacy of major policy positions endorsed by mining employers to government. It provides strategic support and advisory input to its members and facilitates interaction among mine employers to examine policy issues and other matters of mutual concern and define industry-level stances. Consultation and co-operation within the Chamber system occur on a voluntary basis without encroaching on the managerial powers or prerogatives of individual member mines and mining groups. 11

21 The discovery of gold in the Witwatersrand changed the face of mining. No longer could gold be recovered by simple panning, as the gold was embedded in deep level rock and high level technology was needed to be able to extract and recover it. This meant that mining gold required huge sums of capital, and only large-scale mining companies could continue mining under these conditions. Accordingly, the establishment of the Johannesburg Stock Exchange followed swiftly after the discovery of the Witwatersrand gold deposits. The JSE was founded by Benjamin Woollan in 1887 and subsequently became the largest stock exchange on the African continent. South Africa has since become the largest gold exporter worldwide. Despite declining production volumes, the gold mining sector still contributes over 8% of the country's export earnings and 1.1% of GDP. Gold mining has played a major role in the establishment of infrastructure, on foreign exchange and on employment and has led to the establishment of metropolitan centres such as Johannesburg, Welkom, Orkney, Springs, Benoni, Witbank and Klerksdorp. 12

22 1.4. MARGINS ALONGTHE GOLD VALUE CHAIN Mine production 1kg contained gold in doré form Refining Gold price = R /kg (2006 average) Add 1.5% net margin R 133, Margins along the value chain are difficult to assess precisely because this information is guarded closely by players. In fact, many interviewees would not provide even indicative margins. Moreover, margins vary greatly according to a number of factors including the product, the producer, caratage, relationship with client and the terms of sale. Therefore, any attempt to draw an average margin for a sector should be treated with caution. All margins provided here are indicative only and should not be relied upon uncritically. For consistency, margins are given net of any value added to cover labour, overheads and other costs. For example, a retailer may add a mark-up of 300% to a ring, but once costs associated with selling that ring have been accounted for, net margin may be only 70%. The net margins shown represent as closely as possible the value added to gold in each part of the value chain. 1kg fine gold semi-manufactured Compounded value: R 135, Net margins added to gold in the recycling and refining sector range from about 0.1% to 3%. The average net weighted margin for the sector is approximately 1.5%. 9 Jewellery Manufacturing 1kg fine gold manufactured jewellery Jewellery Retailing Add 10% net margin Compounded value: R 149, Add 70% net margin In the jewellery manufacturing sector, net margins range from between 5% and 8% on mechanised 9ct gold to anything between 50% and 100% for handmade pieces. The average net weighted margin for the sector is estimated to be 10%. In the jewellery retailing sector, margins are appreciably higher than in manufacturing, ranging from 40% net margin for sales by discount stores to 90% net margin for dedicated jewellery stores. An average net weighted margin for the sector would be about 70%. 1kg fine gold jewellery sold to consumer Retail Value R 253, Net increase in value R 120, % increase in value 89.8% Figure 10 provides an indicative example of how value is added to 1kg of fine gold on its way from the ground to sale as a piece of jewellery. Figure 10: Indicative example of value-add along the value chain Source: Interviews, Genesis Analytics 9 Average margins are calculated as weighted averages i.e. the margin on a product which consumes more fine gold is given a stronger weighting than the mark-up of rarer products. Average margin estimates were tested positively with industry participants in each particular sector. They are rough indicators only; the purpose here is to calculate an indicative compounded value passing through the value chain, not exact values. 13 CHAPTER 1 : SUMMARY AND KEY FINDINGS

23 1.5. INDUSTRY DEVELOPMENTS LEGISLATIVE DEVELOPMENTS The most significant legislative development in the review period was the passage of the Precious Metals Bill (now the Precious Metals Act No. 35 of 2005). The Act provides for amendments to the Mining Rights Act No. 20 of 1967 and the Diamonds Act No. 56 of 1986, and has the aim of encouraging the beneficiation of precious metals mined in the country. The legislation introduces the following changes: The creation of a new regulatory institution, the South African Diamond and Precious Metals Regulator, one of whose functions will be to issue and monitor all refining, beneficiation and trade licenses, including the issuing of jewellery permits. This body replaces the multi-institutional regulatory framework under the Mining Rights Act, 1967, that included the Department of Minerals and Energy, South African Reserve Bank, South African Revenue Service and the South African Police Services. A new definition of unwrought precious metals. Under the Mining Rights Act, 1967, South African citizens were not allowed to possess unwrought gold without also holding an appropriate licence. This effectively prohibited the ownership of gold in forms other than bullion coin or jewellery. The new Act relieves these restrictions, but stops short of total deregulation of the metal. Unwrought gold was previously considered to be any unmanufactured precious metal (including gold) in the form of bars, ingots, buttons, wire, plate, granules, solution or any other form. The amendment eliminates a whole range of semi-fabricated precious minerals from the definition of unwrought metal, making it easier to hold precious metals for use in industry and jewellery manufacture. Unwrought precious metals, which will continue to be regulated, will now only pertain to gold and platinum-group metals which are unrefined or have not been refined beyond 99.9% purity. Under the new definition, minted bars (the definition of which is subject to ministerial discretion) are no longer defined as unwrought precious metals. The Act also introduces a definition of semi-fabricated precious metal, which refers to gold or platinum-group metal that has been refined to or beyond 99.9% purity and is in the form of sheet, tube, wire, granule, plate, strip, rod, or sponge (including carat gold alloys as prescribed), or such other refined precious metal as may be prescribed. Jewellers are restricted to holding only semi-fabricated precious metals ; however, they are no longer required to keep prescribed registers of all gold movements (the only records they have to keep are financial statements). CHAPTER 1 : SUMMARY AND KEY FINDINGS 14

24 A new beneficiation licence. The precious metal beneficiation licence, with a potential validity of ten years, will be available to any manufacturer who uses wrought precious metals in the production of consumer products. The licence holder can possess only semi-fabricated precious metal. Special considerations. The act provides that, in considering licence and permit applications, the regulator must have regard to the promotion of equitable access to precious metals and promotion of local beneficiation, as well as the requirements of the broad-based, socio-economic empowerment charter DOWNSTREAM INDUSTRY BODIES There has been significant restructuring of jewellery industry bodies since Gold 2005 was published. The Jewellery Council of South Africa was split into two bodies, the Diamond Council of South Africa and the Jewellery Council of South Africa (JCSA), with the Diamond and Jewellery Federation of South Africa as the umbrella body (see Figure 11).The Diamond Council of South Africa looks after the interests of the diamond industry, while the JCSA serves the interests of members of the gold and precious metals jewellery industry. A strategic business plan has been drawn up for the JCSA and regional offices established. Subsidiary bodies of the JCSA include the Jewellery Manufacturers Association of South Africa, the Jewellery and Watch Distributors Association, which represents the wholesale sector, and the Jewellers Association of South Africa which represents jewellery retailers. The Cape Jewellery Manufacturers Association is in the process of disbanding in favour of joining forces with the Jewellery Manufacturers Association of South Africa. 15 CHAPTER 1 : SUMMARY AND KEY FINDINGS

25 The JCSA provides a number of ongoing services to the jewellery sector including publication of the SA Jewellery News magazine, the official mouthpiece of the Jewellery Council and the industry, and staging Jewellex International, an international trade show focused on making South Africa the trading hub for jewellery in Africa. In addition, the JCSA has undertaken a number of ad hoc projects, including arranging the CIBJO International Conference in Cape Town, a consumer awareness campaign with the aim of building the JCSA brand and educating the public on quality jewellery purchase. Diamond and Jewellery Federation of South Africa Chairman Diamond and Jewellery Industry Secretariat Jewellery Council of South Arica Diamond Council of South Africa Retailers Wholesalers Manufacturers Rough Cutters Polished Small Medium Large Figure 11: Structure of the Diamond and Jewellery Federation Source: The Jewellery Council of South Africa CHAPTER 1 : SUMMARY AND KEY FINDINGS 16

26 1.6. THE CHALLENGES OF COLLECTING DATA In the course of gathering data for this review, it became clear that more accurate and comprehensive official data is needed if the government and gold industry wish to track the performance of the gold value chain, especially the growth of the gold fabrication industries. It is important that official mechanisms are put in place to collect accurate data, in particular with respect to: Volume of gold used in fabrication: At present, the only method available to gather data on the volume of gold used in fabrication is selected interviews and extrapolation to the industry as a whole. This is challenging in a diverse and fragmented industry, and the method will only remain useful for as long as manufacturers are willing to provide information. This is not a long-term solution. If it is important to the longer-term future of the sector to map trends in jewellery fabrication, it will be necessary to put official procedures in place to ensure that all fabricators working with gold adhere to mandatory reporting requirements with respect to the volumes of gold being used from year to year. At the time of writing, the regulations to the new Precious Metals Act, 2005, which include the drafting of a precious metal licence application form, were being drafted. The licence application form could be a useful vehicle to gather hard data about the volume and value of gold usage in the industry. In order to ensure that more accurate data on the jewellery fabrication sector can be made available, it is recommended that the drafters of the regulations are engaged to consider information which might be usefully gathered by the new regulator when issuing licences in terms of the new Act. This would establish a centralised assessment of the volume of gold being used in the downstream jewellery industry. The newly formed JCSA could also look at ways for extracting useful information on gold usage from its members. 17 CHAPTER 1 : SUMMARY AND KEY FINDINGS

27 Import and export data: In order to track the growth of the gold value chain it is necessary to accurately assess levels of imports and exports. Currently, it is difficult to do this. Although Customs and Excise do maintain a database of imports and exports, the code descriptions used (HS codes) do not capture gold jewellery as a standalone item. Rather, finished gold jewellery falls under an HS code including both gold and platinum jewellery. A number of anomalies also exist in the official data. For instance, gold bullion bars, exported and imported, are not captured at all under the appropriate code. Likewise, gold coins should reside under code HS but are recorded instead under HS which includes all coins, regardless of material, making it impossible to split out gold coin figures. If this data is to be tackled effectively in the future the dti and the South African Revenue Services would need to be approached to consider how the HS codes might be realigned to be of more use, or how data could be more accurately captured under the correct code. HS codes would preferably be split out into the following categories: importing and exporting of gold ore; gold semi-processed goods alone; gold jewellery alone; and gold coin alone. Retailer information: It is estimated that total retail sales of gold jewellery for 2006 totalled R1.5bn. This figure is calculated by mixing the latest official data with data gathered in face-to-face interviews with retailers, supplemented with the estimates of industry players and experts, and extrapolations from annual reports. This method creates room for error. Statistics SA last collected data on local jewellery retail sales in It is not clear why this practice stopped. The review recommends that Statistics SA be engaged to reinstate not only the gathering of retailer reporting for jewellery sales, but that it also splits out reporting requirements to include a separate category for gold jewellery sales. CHAPTER 1 : SUMMARY AND KEY FINDINGS 18

28 CHAPTER 2: MINING 2.1. KEY FINDINGS Production of gold as a share of global output has been declining consistently for a decade (Figure 12). According to the Chamber of Mines, South African mines produced 275.1mt 10 of fine gold in 2006 and 297.3mt of gold in Mining accounts for the largest proportion of employees (95.31% in 2005 and 95.05% in 2006) in the gold value chain, employing 160,634 people in 2005 and 159,984 people in 2006 earning R12.6billion in wages PRODUCTION DATA mt % mt South African mine production in metric tonnes South African mine production as a percentage of global mine output Figure 12: South African mining production from 1996 to 2006 Source: Chamber of Mines, GFMS % South Africa has dominated the global gold mining industry for over 120 years and is still the world's leading gold producer. From 1884, when records of production were first collected, to 2006, the gold mining sector produced 50,627mt of gold, which accounts for 32% of all gold estimated to be above the world's surface. 12 However, the gold mining industry is reaching a mature stage and new areas of competitive production have emerged in China, Russia, Indonesia, Uzbekistan, Peru, Papua New Guinea, Mali and Tanzania. Production peaked at 1,000mt in 1970 and has declined since. South Africa's share of global gold output has decreased consistently over the last decade, declining on average by 5.6% per year (see Figure 12). In 2006 South Africa accounted for 11.8% of new global mine supply compared to over 20% a decade ago and approximately 70% in For 2006, the Chamber of Mines figure of 275.1mt differs slightly from the figure given by the refineries for gold production. This is likely a timing difference. It is also possible that small quantities of mine production are refined by recycling operations that were not available to participate in this survey. While the Chamber figure is stated here, the refineries figure is used to reconcile the rest of the value chain. Chamber of Mines, Facts and Figures Report 2005; Genesis calculations. Chamber of Mines GFMS 19 CHAPTER 2 : MINING

29 In 2005, South Africa produced 297.3mt of fine gold, which declined to 275.1mt in the lowest level of production in 84 years. The non-gold mining sector also experienced a decline (0.3%) in production volume in mt Figure 13: South African gold mining production from 1884 to 2006 Source: Chamber of Mines Factors that have led to the scaling down of production in the last two years include increasing mine depth and declining grades, as well as higher material input costs. Under normal circumstances an increasing dollar gold price would mitigate these trends and enable more projects to be brought on line, and this is now taking place as the strong gold price is prompting deepening projects which will reduce the rate of decline in production Nonetheless, the gold mining industry continues to be an important player in the South African economy. Gold is South Africa s second largest export after platinum group metals, accounting for 8.4% of the country s export earnings and % of GDP (3% if indirect multipliers are added). 159,984 people were employed in the industry in 2006, and were paid some R12.6 billion in wages Chamber of Mines Chamber of Mines Chamber of Mines CHAPTER 2 : MINING 3 20

30 2.3. STRUCTURE OFTHE SECTOR Company Production Production Numbers (mt) (mt) employed AngloGold Ashanti Gold Fields Harmony Gold DRD Gold Western Areas ,968 48,467 48,570 7,693 5,636 Totals ,334 Table 5: Production of main gold mining houses in South Africa for 2005 and 2006 Source: Chamber of Mines, company annual reports, interviews % of total Company % of total % of total numbers production production employed AngloGold Ashanti 27.99% 28.87% 24.58% Gold Fields 28.69% 29.30% 33.12% Harmony Gold 24.36% 23.84% 33.19% DRD Gold 4.57% 4.02% 5.26% Western Areas 4.82% 3.42% 3.85% Totals 90.43% 89.45% 100% Production in 2005 and 2006 was dominated by five publicly listed gold mining entities, namely Anglogold Ashanti, Gold Fields, Harmony, DRDGOLD and Western Areas. (Table 5 and 6). In 2006, these large public gold mining companies accounted for 89.45% of gold produced. The balance came from companies producing gold as a by-product of other mining activity (2.8%), from other smaller-scale miners and from the 17 treatment of existing mine dumps (7.7%) (Figure 14). In 2005, the breakdown was similar, with the primary gold mining companies accounting for 89.1% of the gold produced, companies producing gold as a byproduct 2.51% and 8.36% of production originating from other smaller-scale miners and the treatment of existing mine dumps. Informal gold mining also occurs. Informal sector miners tend to be one-man operations eking out a living from abandoned mine sites and dumps. It is not known how many miners operate informally - by nature they are unregistered and transitory. However, this review estimates that collectively these miners produce less than 1mt of gold annually. 18 Table 6: Share of production of main gold mining houses for 2005 and 2006 Source: Chamber of Mines, company annual reports, interviews 3% 8% 89% Primary gold and uranium producers By-product gold producers Small-scale producers and dump re-treatment Figure 14: Sources of gold for 2006 Source: Chamber of Mines Chamber of Mines Chamber of Mines 21 CHAPTER 2 : MINING

31 2.4. EMPLOYMENT The South African gold mining industry employs substantially more people than in other gold mining countries because it is engaged in deep-level, hard rock, underground mining which is labour intensive. Even so, there have been considerable job losses in mining as a result of mine closures and changing work patterns in the sector. In the last five years, numbers employed in the gold mining industry fell by around 8% per year on average. Job losses have been specific to gold mining and have not occurred to the same extent in other extractive mineral industries. Employment in the gold mining sector declined from 180,039 employees in 2004, to 160,634 in 2005, and then to 159,984 in 2006 (Figure 15). This is in comparison with a high of 530,622 reached in Despite the declining employment levels, gold mining still accounts for the largest proportion of employees by far in the gold value chain (95.33%). 250,000 Number of employees 200, , ,000 50, Figure 15: Employment in gold mining in South Africa from 2000 to 2006 Source: Chamber of Mines, DME CHAPTER 2 : MINING 22

32 CHAPTER 3: REFINING AND RECYCLING 3.1. KEY FINDINGS The volume of gold refined and recycled fell by 4% over the review period, from mt in 2004 to mt in In 2005, refiners and recyclers together produced 451.5mt of fine gold (Figure 16). This decrease was however smaller than the drop in mining output, as an increasing amount of foreign-mined production was refined over the period. mt Figure 16: Volume of gold refined and recycled in South Africa from 2004 to 2006 Source: Rand Refinery The bulk of gold refined or recycled in 2006 was sourced from local mine production (63.03%) with the balance coming from foreign mine production (33.85%), dump treatment (1.12%) and recycling (1.99%). The majority of this gold went into producing gold cast bars (97.65%). The rest went into semi-manufactured products for the jewellery industry (1.68%), coin blanks (0.51%), dental product semis (0.14%) and industrial product semis (0.02%). The refining and recycling sectors together employed 492 persons in 2006 and 526 persons in 2005, representing 0.3% of the total persons employed in the gold value chain in each year. Following the closure of Musuku Beneficiation Systems at the end of 2006, primary refining is concentrated in the hands of one primary refiner, Rand Refinery Limited. At least seven smaller, secondary recyclers were active in South Africa during the review period. Net mark-ups in the refining and recycling sector are low, with only the highest value-add products commanding mark-ups of up to 5%. The weighted average mark-up in the sector is approximately 1.5%. 23 CHAPTER 3 : REFINING AND RECYCLING

33 3.2. KEY CHARACTERISTICS OFTHE SECTOR Refiners and recyclers are grouped together in this chapter because their processes are similar and because they supply similar products into the value chain, although it should be noted that refiners produce vastly more fine gold than secondary recyclers. Refiners process raw material, primarily from mining, to separate the impurities and create fine gold in the form of gold bars or semi-fabricated products (like grain, sheet and wire) which is used in jewellery and coin manufacture or dental and industrial use. Grain is widely used by jewellery manufacturers since it can be bought in small quantities and is applied to casting techniques, while sheet is applied to stamping, and wire to chain-making. Primary refineries also process smaller quantities of scrap from local fabrication industries. Recyclers process existing product like old jewellery, off-cuts, wash-water and other scrap generated during the jewellery manufacturing process, as well as medical, dental and industrial waste which contains recoverable precious metals, recycling these back into useable semi-fabricated products. Gold refining is now concentrated in the hands of one primary refiner, namely, the Rand Refinery Ltd (Rand Refinery), based in Germiston. Musuku Beneficiation Systems (Musuku), a refinery set up by Harmony Gold Mine Ltd in the Free State, was active in the review period but closed at the end of In the gold recycling sector there are seven known legal recyclers. A list of those interviewed is provided in Appendix A. Interviews with industry players suggest that there are also a number of illegal smelting houses operating in the country; they have not been included in the review. CHAPTER 3 : REFINING AND RECYCLING 24

34 The London Bullion Market Association (LBMA) and the Gold Price Fix The gold mining sector has been a major contributor to the South African economy since commercial mining began on the Witwatersrand gold fields in the 1880's. Since 1884, when production records were first collected, the gold mining sector has produced some 50,627 metric tonnes of gold, 32% of the gold estimated to be above the world's surface. Between 1950 and 2006, gold accounted for an average of 6.9% of GDP (reaching a peak of 16.7% in 1980) and 31.8% of merchandise exports. News bulletins record the prices of major, internationally-traded commodities, including the gold price, on an hourly basis. But how is the gold price, which has had such a major impact on the South African economy, determined? The Process of Fixing the Gold Price Representatives of five major banks, the gold fixing members of the London Bullion Market Association (the LBMA), meet together twice daily to determine the gold price fix. At the time of this publication, the banks involved in this process were the Bank of Nova Scotia-ScotiaMocatta, Barclays Bank Plc, Deutsche Bank AG, HSBC Bank USA NA and Société Générale. Gold fixing is conducted twice a day, at approximately 10am and 3pm London time. The dealing unit is a Good Delivery Bar, which must contain between 350 and 430oz of gold and must conform to the specifications for Good Delivery Bars laid down by the LBMA. The minimum required level of purity of a Good Delivery Bar is 99.5%. Only certain refineries are recognised as producers of Good Delivery Bars by the LBMA and qualification standards are rigorous. Gold price/oz US$ Annual average gold price (US$ and ) from 1900 to 2006 Source: WGC, Global Insight 25

35 In practice, the process of fixing the gold price works as follows: The chairman of the gold fixing (a function which rotates annually through the members) suggests an opening price, which is reported by the representatives by phone to their dealing rooms; The chairman then invites clients to place orders with the dealing rooms of fixing members, who nets all orders before communicating their interest to their representative at the fixing. The metal price is adjusted to reflect whether there are more buyers or sellers at a given price until such time as supply and demand is seen to be balanced. Throughout the proceedings customers may change their orders, at which point the fixing member will raise a small flag to convey visually to the other members that they are changing their order. The price will not be fixed until all flags are down. The gold fix has been used since 1919 to arrive at an internationally published benchmark for gold and therefore creates a convenient and transparent reference point for buyers or sellers trading in large amounts of the metal. Where gold is sold to end users as semi-fabricated goods, for example kilobars, granules or alloys for jewellery manufacture, the prices charged for these products are based on the gold price fix, plus a premium which varies according to the product and the market conditions. In South Africa, prices published by Rand Refinery on a twice daily basis are used as a reference point for purchases of semi-fabricated products by jewellery manufacturers and other end users. Jewellery manufacturers can purchase gold either directly from Rand refinery or one of the secondary recyclers or indirectly, via an agency trading in semi-fabricated products. 26

36 3.3. PRIMARY REFINING In 2006 Rand Refinery, Musuku and the recyclers cumulatively produced mt of fine gold (this includes South African and foreign-sourced output). In 2005, Rand Refinery, Musuku and the recyclers cumulatively treated mt of fine gold (this includes all South African and foreign-sourced raw material). Sources of gold are broken down in Table Fine gold (mt) 2006 Fine gold (mt) Refiners (Rand Refinery and Musuku) South African mine output Other mine output (non-rsa) Dump treatment Secondary recycling Recyclers Total fine gold refined/recycled in oz good delivery bars Kilobars and other bars* Coins (including Krugerrands) Jewellery semis Dental products Industrial products Fine gold Fine gold used (mt) used (mt) Totals Table 7: Sources of refined/recycled fine gold for 2005 and 2006 Source: Rand Refinery, Musuku, interviews with recyclers Of the mt of fine gold produced by refiners and recyclers in 2006, mt or went into the manufacturer of 400oz bars, mt went into the 20 manufacture of kilo bars or smaller, 2.16mt went into coinage including Krugerrands, 7.18mt went into manufacture of jewellery semis, 0.08mt went into industrial end use applications, and 0.6mt went into dental products (Table 8 and 9). Table 8: Refining and recycling product output for 2005 and 2006 Source: Rand Refinery, Musuku, recyclers. 400oz good delivery bars Kilobars and other bars* Coins (including Krugerrands) Jewellery semis Dental products Industrial products Totals % of total % of total fine gold fine gold output output 50.04% 57.18% 47.61% 40.58% 0.45% 0.39% 1.75% 1.39% 0.13% 0.14% 0.02% 0.02% 100% 100% Table 9: Share of total refining and recycling product output for 2005 and 2006 Source: Rand Refinery, Musuku, recyclers. * The figures for kilobars do not include bars that went to local jewellery fabrication. In mt was sold in this way; in 2006, 1.25mt. 20 Bars are either minted or cast. Cast bars are manufactured by the casting of molten gold into a mould, while minted bars are struck from blank templates in the same way that coins are struck, with precise dimensions. In the review period neither Rand nor Musuku produced any minted bars; all were cast. 27 CHAPTER 3 : REFINING AND RECYCLING

37 Rand Refinery has been in existence since 1921 as a collaborative effort of the major South African gold producers. It is an unlisted public company owned by AngloGold Ashanti (53%), Gold Fields (33%), DRDGOLD (10%), AvGold (2%), and Western Areas (2%). 37% Rand Refinery processed 450mt of raw material in 2006 and 460mt in Most of this (63% in 2006 and 61% in 2005) was sourced locally, with the lion's share coming from South African mines. Small amounts were sourced from dump treatment and recycling of scrap (see Figure 17). 1% 1% 61% Raw material from non-south African sources came primarily from Ghana, Mali, Zimbabwe and Tanzania (Figure 18). The custodianship of gold in the refining pipeline is normally as follows. Longterm refining contracts are entered into with mining clients wherein treatment terms are agreed. The metal content of the doré from a particular mine can be expected to remain broadly constant over time. As doré arrives at the refinery, the material is weighed and assayed, and the customer's account credited with the value of the anticipated contained metal. Payment from the bank usually takes two working days to clear. Once refined, the gold is assayed again 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 customer. The refined gold is then sent on to buyers directly from the refinery or according to the customer's specific instructions. At no stage during this process does the refinery take ownership of the gold being refined. From South African mines From dump treatment in SA, ie. reprocessing of previously mined waste From recycling in SA, ie. reprocessing of scrap Non SA mine imports Figure 17: Incoming raw material to Rand Refinery for 2006 Source: Rand Refinery Zimbabwe 9% Other countries 8% Guinea 6% Incoming raw material was refined to 394,053kg of fine gold in 2006 and 384,811kg in This represented roughly 33% of potential capacity. Tanzania 8% Ghana 51% Most of the fine gold (98.7%) produced by Rand Refinery went into gold bars, either 400oz good delivery bars (which were all exported), or kilo bars or smaller, which were almost all (99.28%) exported to India, Turkey, Italy and the Middle East, with the balance going into local jewellery manufacture. 1.23% of fine gold production went into non-bar products like Krugerrands or jewellery semis like grain and bangle washers. Mali 18% Figure 18: Rand Refinery imports of raw material for 2006 Source: Rand Refinery CHAPTER 3 : REFINING AND RECYCLING 28

38 Musuku Beneficiation Systems was formed by Harmony Gold Ltd in 1997 as a dedicated refiner located in Virginia in the Free State. The Musuku refinery produced gold bars, jewellery alloys, and industrial gold and dental alloys. In 2006 Musuku produced 29.17mt of fine gold and 62.82mt in 2005, the drop being explained by the fact that Musuku stopped operations halfway through the year. 100% of raw material input was locally-sourced with 93.59% coming from South African mine output in 2006 and 6.41% coming from the reprocessing of scrap. The majority of the gold refined by Musuku went into 400 oz good delivery bars (97.76%), all of which were exported. The rest of gold output went into coin blanks (0.04%), jewellery semis (0.69%), dental products (1.50%) and industrial alloys (0.01%). Musuku employed 64 people prior to closure. The Musuku refinery was closed in December 2006, leaving Rand Refinery as the remaining primary refiner RECYCLING In addition to the two primary refiners mentioned above, there are seven known recyclers operating formally, of which five were interviewed for the review. Recyclers are characteristically small, family-owned businesses based either in Johannesburg or Cape Town, who primarily service the local jewellery manufacturing industry. In 2006, these recyclers refined 4.09mt of fine gold. In 2005 they refined 3.90mt of fine gold. In both years, between 59% and 61% of fine gold output was destined for the local jewellery manufacturing industry. In other words, although recyclers are small producers of fine gold in comparison to the refiners, they are important suppliers to the fabrication industry, especially smaller fabricators. The recyclers operated in 2005 and 2006 at an average capacity of 70%. 29 CHAPTER 3 : REFINING AND RECYCLING

39 The recyclers sourced almost all raw material (98%) from local jewellery manufacturers in the form of scrap, old gold jewellery, jewellery sweepings, wash water, and other scrap generated during the jewellery manufacturing process, while 2% came from mine production. Two recyclers also refined medical, dental and industrial waste which contained recoverable precious metals. No recycler sourced raw material from non-south African sources, except in one case where very small amounts of raw material came from Namibia (roughly 20kgs per year). The recyclers focus mainly on the production of commonly used jewellery semifabricated products (grain, wire and plate) and alloys. These products are sold entirely into the local market. No recycler exports product, although one did sell ingots (low quality bars made from refining scrap and gold waste) to the local arm of an international company who reportedly then exported the ingots to Europe MARK-UPS Refining is a low margin business that relies on massive volumes of processing to be cost-effective. Net mark-ups over gold are low, the weighted average in the sector being approximately 1.5%. Only higher value-added products command mark-ups of up to 5% over gold (Table 10). Recyclers also operate at very low margins, but make some return on value-add services like delivering to customers. Product Bars Jewellery semis Coins Dental use semis Industrial use semis Net mark-up over gold Up to 1% 1% to 4% 0.7% to 3% 1.5% to 4.5% 2% to 5% 3.6. EMPLOYMENT Table 10: Estimated mark-ups by product in the refining and recycling sector Source: Interviews with refiners and recyclers, industry estimates The refining and recycling sectors combined employed 492 persons in 2006 and 526 persons in 2005, representing 0.31% of the total persons employed in the gold value chain in both years. CHAPTER 3 : REFINING AND RECYCLING 30

40 The Gold Refining Process Primary refining has employed two very different gold refining processes, both of which are described in brief below. The Miller Chlorination process is one of the most widely-used processes in the large-scale refining of gold internationally and is usually employed in conjunction with Wohlwill Electrolysis, in order to produce gold of purity greater than 99.5%. The Minataur process was developed by Mintek and, prior to the closure of this refinery, was pioneered by Musuku Beneficiation Systems at its refinery in Virginia. The Miller Chlorination Process The Miller Chlorination Process was first developed by Dr F B Miller at the Sydney Mint. It is a pyrometallurgical process whereby gold doré, partially-refined gold received from the mines, 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. The Miller Chlorination Process, which takes 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. Wohlwill Electrolysis 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 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. 31

41 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 of purity of up to parts per thousand, with further treatment bringing it up to 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. Where gold of 999 or parts per thousand is required, electrolytic facilities at many refineries have been added. 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 stripped to produce a purified, concentrated gold solution, from which high-purity gold powder is precipitated by reduction. 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, doré 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 percent or higher purity gold granules. The first Minataur plant was constructed in 1997 for Harmony in Virginia, in the Free State. 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 smaller, with a capacity of 1t to 3t per annum. 32

42 CHAPTER 4: JEWELLERY MANUFACTURING 4.1. KEY FINDINGS There are an estimated 500 gold jewellery manufacturers. In terms of gold usage, however, the industry is very consolidated - in 2006 just three firms accounted for 65% of fine gold used. 7.18mt of fine gold was sold by refiners and recyclers to gold jewellery manufacturers in However, gold jewellery manufacturers report that they produced 7.87mt of fine gold in The balance of 0.69mt is accounted for by imports of jewellery semis. Jewellery manufacturing fell from the 2004 review, which recorded usage of fine gold of 9.64mt. It should be noted, however, that this figure was overstated by 1.38mt due to an error in data collection that year. The corrected 2004 usage figure should be 8.26mt. Thus jewellery production declined from 8.26mt in 2004 to 7.87mt in About 3.86mt or 49% of jewellery produced is exported, with 4.01mt or 51% sold into the local market. Mark-ups vary considerably within fabrication but tend to fall within a range of 5% to 20% over cost on mechanised product, and 50% to 100% on handmade product. Despite the decline noted in jewellery production, the gold jewellery manufacturing industry employed more people in 2006 (2,833) than in 2005 (2,782). In each year the industry employed just less than 2% of total employees in the gold value chain. 33 CHAPTER 4 : JEWELLERY MANUFACTURING

43 4.2. NUMBER OF MANUFACTURERS The exact number of jewellery manufacturers is not captured in a central database. The Jewellery Council reportedly has 200 manufacturer members but while this membership accounts for most of the manufacturers using high volumes of gold, it does not account for all the jewellery manufacturers. A more comprehensive picture can be drawn by looking at the number of jewellery permits issued in terms of the Mining Rights Act of 1967 (to be replaced in 2007 by the Precious Metals Act of 2005). Under this act, it is an offence to possess or trade in unwrought gold, and in order to fabricate precious metal jewellery, individuals are obliged to hold a valid jewellery permit. According to the Precious Metals and Diamonds Unit of the South African Police Services, 2322 jewellery permits were issued in However, only a small percentage of these are held by commercial gold jewellery manufacturers. Some permit-holders do not use any gold at all, for example, silversmiths. Others hold dormant permits, or permits for purposes other than commercial jewellery manufacturing, or for use only as hobbyists. Hobbyists are individuals who practise jewellery fabrication as a leisure pursuit and not as a primary source of income. It is not known exactly how many hobbyists there are, although industry estimates put the number at over 1000 people This review estimates that there are 500 active commercial jewellery manufacturers i.e. manufacturers who rely on the fabrication of jewellery using gold, as a primary source of income (Table 11). This estimate has been tested and confirmed with many industry players, including the Jewellery Council of South Africa, refiners and recyclers who supply gold to the industry, and two goldsmith suppliers who provide tools to the manufacturing industry and are thus well-placed to assess the number of operational manufacturers. Jewellery Manufacturers Number Source Number of jewellery permits issued in 2006 Less: those not using gold ie. using other precious metals Less: dormant licences Less: hobbyists Less: those holding gold for purposes other than commercial jewellery manufacture (eg. Dental technicians, students) 2, , SAPS Estimate based on industry views Estimate of SAPS Estimate based on industry views Estimate based on industry views Active commercial jewellers using gold Estimate confirmed positively with the Jewellery Council, industry experts and two equipment suppliers to the manufacturing industry Table 11: Number of gold jewellery manufacturers for Interview with Superintendent Fourie of Precious Metals and Diamonds Unit, SAPS on 13 March Figures were not available for Hobbyists fall outside of the scope of this review. CHAPTER 4 : JEWELLERY MANUFACTURING 34

44 4.3. STRUCTURE OFTHE INDUSTRY Gold jewellery manufacturing is concentrated in and around Johannesburg and Cape Town. Industry players estimate that Gauteng and the Western Cape are home to about 70% of South Africa's gold jewellery manufacturers. While the jewellery manufacturing industry is composed of about 500 participants, it is highly consolidated in terms of volume of gold used. Just three large manufacturers (Oro Africa, Silmar and Alan Mair) accounted for 65% of the fine gold consumed in jewellery fabrication in The three large manufacturers are followed by a second tier of about ten manufacturers who accounted for another 19% of gold used. In other words, about 13 producers account for 84% of the fine gold consumed in jewellery manufacturing. A third segment made up of small producers and one-man businesses account for the other 16% of total fine gold used. While the greatest volume of fine gold is used by the 13 large- and medium-sized manufacturers, it should be noted that in terms of number of manufacturers operating in the market, the dominant model is the medium and small enterprise (Table 12). Segment Large producers Medium producers Small producers Estimated numbers Fine gold used p.a. More than 1mt Less than 1mt, more than 50kgs Less than 50kg Estimated Use of total fine gold 65% 19% 16% Average number of employees Over 150 Less than 150 Less than 10 Table 12: Gold jewellery manufacturers for 2006 Source: Interviews, industry estimates, Jewellery Council estimates, supplier estimates The research focused on ten of the thirteen large manufacturers who were available for interviews and a sample of smaller producers. A research directory is provided in Appendix A. Although the dti import data does reflect that some semi-fabricated products are imported, the import code (H ) is defined broadly and includes 'gold (including gold plated with platinum) unwrought or in semi-manufactured forms, or in powder form - non-monetary and other semi-manufactured forms'. It is thus not possible to accurately assess how much, if any, semi-manufactured jewellery was imported. 23 One of these manufacturers declined to participate fully in the study, leaving a gap in the data that was filled by estimates and industry opinion. 35 CHAPTER 4 : JEWELLERY MANUFACTURING

45 It is likely that imports are minimal, as interviews with all major gold jewellery manufacturers indicated. Not one manufacturer interviewed reported the importing of unwrought gold from abroad (although one did decline to say where it sourced gold). Domestically, gold is sourced either from Rand Refinery or, before it closed in 2006, Musuku, or one of the seven recyclers. Large manufacturers acquire the 24 majority of their gold (80% to 100%) from a refinery. By contrast, second-tier manufacturers, who have smaller needs, obtain 70% to 90% of gold from recyclers, and small manufacturers acquire nearly all gold (95%) from recyclers. In other words, the refineries tend to serve the big fabricators, while the recyclers tend to serve the medium and small fabricators. With the exception of the large manufacturers, local jewellery fabricators have to buy working metal outright and they calculate their margins on the basis of the price paid for the gold from their suppliers. These manufacturers either borrow to fund working capital or finance the purchase of their gold out of working capital. 24 Although one large manufacturer preferred not to say where it sourced gold. CHAPTER 4 : JEWELLERY MANUFACTURING 36

46 4.4. VOLUME OF GOLD USED Most gold going to downstream industry goes into jewellery manufacturing, with smaller volumes used in production of coins, dental end-use products and industrial end-use products (Table 13 and 14) Volume of Volume of fine gold fine gold (mt) (mt) Jewellery fabrication Coin fabrication Dental product fabrication Industrial product fabrication Totals Volume of fine gold (mt) Table 13: Use of gold from refiners and recyclers, non-bar products, for 2005 and 2006 Source: Interviews with Rand Refinery, Musuku Beneficiation Systems, recyclers, 2004 data from Gold in South Afica Handbook % of total Jewellery fabrication 73.49% Coin fabrication 26.07% Dental product fabrication 0.36% Industrial product fabrication 0.09% Totals 100% % of total % of total 73.67% 71.64% 19.83% 21.56% 5.66% 5.99% 0.83% 0.82% 100% 100% Table 14: Share of gold use from refiners and recyclers, non-bar products, for 2005 and 2006 Source: Interviews with Rand Refinery, Musuku Beneficiation Systems, recyclers, 2004 data from Gold 2% in South Afica Handbook % 11% 50% The greatest portion of fine gold used in jewellery manufacturing is used in massproduced, 9 carat gold jewellery either in the form of machine-made chain or cast and stamped product. The production of the three largest manufacturers is almost entirely mechanised, either partially or totally. Silmar focuses on chainmaking, Alan Mair Manufacturing Jewellers focuses on stamping and casting, while Oro Africa combines both casting and machine-made chain. The dominance of these three manufacturers in volume terms skews the weighted average for the collective industry towards mechanised processes (Figure 19). Machine chain (necklaces and bracelets) Solid bangles and wedding rings Cast Hand-made Figure 19: Use of fine gold in jewellery manufacture by process for 2006 Source: Interviews with gold jewellery manufacturers 37 CHAPTER 4 : JEWELLERY MANUFACTURING

47 Fine gold is used to make a variety of finished jewellery products, including chain, bracelet, bangles, rings, earrings, and pendants. Interviews with jewellery manufacturers give a good indication of the products manufactured by the jewellery sector, with chain being by far the largest product category (see Table 15 and 16). In 2006, about 3.86mt or 49% of jewellery produced was exported, with 4.01mt or 51% sold into the local market. These figures were skewed by the activities of the largest gold manufacturer in the country, who uses more than half the volume of gold used by the whole sector and exports 70% of product. When that producer is removed, the data show that 75% of product is sold to the local retail market, while 25% is exported. Product Chain Rings Earrings Pendants Solid bangles Other 2005 Volume of gold (mt) Volume of gold (mt) Totals Table 15: Use of fine gold in jewellery manufacture by product for 2005 and 2006 Source: Interviews with gold jewellery manufacturers Products sold into the local retail market are machine chain, rings, bangles, earrings and pendants, mostly in 9 carat. The main export markets are the United States, Europe, England and Australia, which are served by similar products Product % of total % of total Chain Rings Earrings Pendants Solid bangles Other 50.54% 22.88% 16.80% 5.60% 4.08% 0.07% 50.48% 23.43% 16.89% 5.96% 3.17% 0.07% Totals 100% 100% Table 16: Share of use of fine gold in jewellery manufacture by product for 2005 and 2006 Source: Interviews with gold jewellery manufacturers CHAPTER 4 : JEWELLERY MANUFACTURING 38

48 4.5. MARK-UPS Given the diversity of business practices, client bases and product lines, the manufacturing sector applies a wide-range of mark-ups to manufactured jewellery. Also, mark-ups vary according to the size of an order (the larger the order the higher the discount), the frequency of business (manufacturers will adjust terms in favour of regular customers) and terms of payment (the longer the time to payment, the higher the mark-up). In addition, interviewees were generally unwilling to provide much information regarding mark-up. Thus information provided on average mark-up should be treated with caution. However, interviews with willing market participants did yield the following indicative average mark-ups over cost (Table 17). Process Machine chain (necklace and bracelet) Solid bangles and wedding rings Cast Handmade Average mark-up over cost 5% to 8% 7% to 12% 10% to 20% 50% to 100% Table 17: Average indicative mark-ups over cost in jewellery manufacturing for 2006 Source: Interviews and industry estimates Generally speaking, mechanically-produced jewellery attracts the lowest markup, while handmade jewellery attracts the highest. For machine-made chain, the largest production category, interviews revealed that an average net mark-up of around 5% to 8% over cost is applied. Cast jewellery attracts a net mark-up of between 10% and 20%. For items of higher caratage, handmade items or gemset items, 50% net mark-up can be achieved. In the case of individually commissioned items of jewellery, designed to a client's exact requirements, higher mark-ups can be levied. In these instances, where a piece of jewellery requires a good deal of design time and craftsmanship, net mark-ups of 100% and over were cited. As the greater share of gold (50%) is used in mechanised chain and only a tiny amount in handmade pieces (2%) the average net weighted mark-up for the sector would be about 10%. 39 CHAPTER 4 : JEWELLERY MANUFACTURING

49 4.6. EMPLOYMENT The gold jewellery manufacturing industry employed 2833 persons in 2006 and 2782 persons in 2005 accounting for approximately 1.76% of those employed in the value chain in each year. On average, 85% of employees are involved in production, roughly 10% are administrative, sales and marketing staff, and 5% are in management roles. CHAPTER 4 : JEWELLERY MANUFACTURING 40

50 Skills Development in the Jewellery Manufacturing Industry Although the South African jewellery manufacturing industry is a relatively small employer (an estimated 2833 people employed in 2006), the question of skills training in the industry is one that emerges frequently in discussions with jewellery manufacturers and training institutions alike. It is also the subject of a new initiative in the Jewellery Council of South Africa, designed to match the curricula of the major learning institutions more closely to the skill requirements of the industry. Jewellery manufacturing skills are taught both at some of the country's major technikons and universities and also by a number of non-governmental organisations (NGOs), established with the aim of training previously disadvantaged individuals in goldsmithing techniques. The Soweto Jewellery School in Dube, Soweto, is an example of one of such project. The Soweto Jewellery School is an initiative of the Imfundiso Skills Development project, a non-profit organisation that has already established five schools in previously disadvantaged areas such as Soweto. The school offers a two-year learnership in jewellery design and manufacture and is accredited by the Mining Qualifications Authority (MQA). According to the school's project manager, Mr Isaac Nkwe, four students from the first group of 12 learners graduating from the school in 2006 have already found employment in the jewellery sector. The school also boasts a number of successes, including the winning designs produced by some of its students in jewellery design competitions held, including AngloGold Ashanti AuDITIONS and the SA Mint African Gold Coin jewellery design competition. While initiatives like the Soweto Jewellery School have been put into place to close the skills gap and create employment for the previously disadvantaged groups, there is still a marked shortage of skills in the industry and it is undoubtedly the case that increased cooperation among manufacturers and training institutions is required in order to provide skills which would be required if the jewellery sector is to grow significantly. 41

51 However, despite the pool of graduates produced every year by these institutions, many manufacturers complain about the lack of appropriately skilled individuals in the industry. One industry player who wished not to be named quoted the following reasons as the main issues that inhibit skills development in the industry: The lack of commitment to mentoring and developing new talent The generally fragmented nature of the industry and an unwillingness among players in the industry to cooperate The fact that students from some institutions do not receive on-the-bench training, but rather training of a more theoretical nature. This is viewed as a weakness as most jewellers would prefer a candidate with practical as well as theoretical skills The inability of institutions to match their training with the skills that are lacking in the industry. For example there is currently a huge shortage of setters in the country, but there is currently no training provided for setters. Mr Nkwe is however of a different opinion as he believes that schools such as the Soweto Jewellery School are able to equip graduates with the suitable skills to fill the gap in the industry as they are closely monitored and accredited by the MQA. The MQA, however, does not see its role in this area as requiring hands-on intervention. Ms Phindani Malowa of the MQA states that the process of getting MQA accreditation starts with the trainer approaching the MQA for accreditation. From then on the MQA will check how it rates on their scorecard and whether it meets all the criteria for accreditation. According to Ms Malowa they may offer the trainer advice on the training they could provide or the gaps they can fill in the industry but that these are not the major issue in determining whether a school obtains accreditation. 42

52 CHAPTER 5: JEWELLERY RETAILING 5.1. KEY FINDINGS There are thousands of gold jewellery retailers. However, the industry is consolidated with between 80% to 85% of gold jewellery being sold by just 12 large retail chains. Gold jewellery retail sales in 2006 amounted to approximately R1.53 billion (Figures 20 and 21). 8 6 In aggregate, approximately 70% 2006 was made locally, while 30% was imported. 25 of gold jewellery sold in 26 mt Figure 20: South African gold jewellery retail sales by volume for 2005 and 2006 Source: Interviews with retailers, annual reports, industry estimates, Genesis calculations In total, the wholesale and retail sector provided jobs, whether full-time, temporary or part-time, to 4,346 people in 2006, and 4,305 in In 2006 this accounted for 2.70% of employment in the gold value chain, and in 2005, 2.55% KEY CHARACTERISTICS OFTHE SECTOR The gold jewellery retail sector is large and diversified with thousands of retail outlets across the country. These can be split into two categories: billions of rands Figure 21: South African gold jewellery retail sales by value for 2005 and 2006 Source: Interviews with retailers, annual reports, industry estimates, Genesis calculations 12 leading large chain retailers a large number of smaller independent retailers The 12 large chain retailers are Sterns, American Swiss, Game, Dion, Galaxy & Co, Tourvest, 27 Browns, Arthur Kaplan Jewellers, Natal Wholesale Jewellers (NWJ), Edgars Consolidated Stores, Truworths and Foschini, who together account for about 80% to 85% of gold jewellery sold. They also accounted for 1,055 outlets offering gold jewellery in 2006, and 1,011 in Among the 12, the Foschini Group (including Foschini Stores, American Swiss and Sterns) accounts for 45% of outlets Direct imports, plus 80% of wholesalers' products, which are also imported. Local manufacturers, plus vertically integrated suppliers, plus 20% of wholesalers' product. The Tourvest group owns five retail brand outlets, namely, Forma Viva, Tanur, Pinns, Murdock and Diamond Works. 43 CHAPTER 5 : JEWELLERY RETAILING

53 The 12 chain retailers differ considerably in their business models but can be split into the following broad categories: Dedicated jewellery retail chains: Sterns, American Swiss, Arthur Kaplan Jewellers, Browns, Galaxy & Co, Tourvest and NWJ are dedicated jewellery retail chains i.e. they sell jewellery and watches. Their target market is the middle to higher income market, with at least 85% of their customers being local. The exception to this is Tourvest, whose customer base is 85% touristbased. Galaxy & Co is not only a retailer but also a manufacturer and wholesaler. Likewise, NWJ is a manufacturer that franchises retail outlets throughout the country. The franchises run independently but provide a secured destination for NWJ's manufactured output. Mixed-business retail chains: Truworths, Foschini and Edgars sell gold jewellery as well as a range of non-jewellery product like clothing, cosmetics and fashion accessories. Jewellery sales account for only a fraction of turnover of these groups. Gold jewellery is sold at jewellery counters in-store, usually staffed by one or two dedicated jewellery sales staff. The target market for these stores is 25 to 35 year olds, primarily women, in the lower to middle income local market. Mass discount stores: Game and Dion are mass retailer stores offering a very broad range of consumer goods at competitive prices. The value of gold jewellery sales accounts for a small portion of total turnover. The companies have jewellery counters in store selling mostly lightweight and massproduced 9 carat gold jewellery at discounted prices. Their target market is the first time gold buyer from the lower-income mass market. (Another discount chain, Makro, also sold gold jewellery until the end of 2004 but has phased out gold jewellery in all stores.) Independent jewellers: In addition to the 12 big retailers, gold jewellery is sold by independent jewellers. These are small, individually-owned, usually familyrun companies or sole-proprietorships catering to the local community, who operate one or two local retail outlets independently of the big retail chains. Independent jewellers usually double-up as a retail store and basic repair workshop, and serve a wide target market from the middle-income consumers off the street to wealthier private clients ordering bespoke pieces. No aggregated data exists for independent jewellers, though this review estimates, based on a wide range of industry views, that independents account for no more than 17% of gold jewellery sales. Yet independent jewellers are important players in the retail sector and probably account for close to 700 retail outlets nationwide, employing about 2,100 people. CHAPTER 5 : JEWELLERY RETAILING 44 3

54 5.3. SIZE OFTHE RETAIL MARKET There is no accurate official data available on sales in the gold jewellery retail sector. Statistics South Africa last collected data on local jewellery retail sales in In that year, sales of all jewellery (which included silverware, watches and precious stones) were reported as R2.39bn, equivalent to 1% of total retail sales of the country. However, this was the last occasion on which the data was collected, and without it, it is difficult to assess jewellery retail sales accurately. In place of official figures, this review sought to gather sales and retail information directly from retail interviewees, which proved a difficult exercise. Many retailers were reluctant to offer information on sales and mark-ups even under the promise of strict confidentiality, and three of the major 12 retailers declined to take part in the study at all. Annual reports tend to show aggregate jewellery and watch sales figures, not itemised jewelley sales in isolation, making it difficult to determine the value of gold sales alone. Based, therefore, on a research approach which mixed the last official data available with data gathered in face-to-face interviews with willing retailers, supplemented with the estimates of industry players and experts and extrapolations from annual reports, the review estimates that gold retail sales in the country in 2006 amounted to approximately R1.53 billion. This is broken down between types of retail groups in Table 18. Group Dedicated jewellery retail chains Mixed-business retail chains Mass discount stores Dedicated tourist retailers Independent jewellers Totals Total gold jewellery sales 2006 (R 000) % of total gold jewellery sales 1,000, % 160, % 99, % 14, % 253, % * 1,528, % Table 18: Estimated total jewellery sales by retail group for 2006 Source: 2003 DTI data, interviews with retailers, annual reports, industry estimates * It is difficult to assess the sales of independent jewellers as the group is numerous and diverse and there is no official data available. Some industry estimates put % of gold jewellery sales for independent jewellers higher than 16.58% and closer to 20%. 45 CHAPTER 5 : JEWELLERY RETAILING

55 5.4. JEWELLERYWHOLESALERS Wholesalers are differentiated from retailers in that they tend to buy bulk quantities of product at discounted prices, and sell to retailers rather than directly to consumers. The jewellery wholesale market has diminished in the last five years but still remains an important source of gold jewellery. There are approximately 12 major wholesalers. They purchase finished jewellery products from both abroad and local manufacturers and then sell on to local retailers. Wholesalers generally do not export goods and almost all purchases are intended for sale in the local market. Based on interviews with a sample of wholesalers, supplemented by industry views, the review estimates that wholesalers import about 80% of their merchandise and source about 20% from local manufacturers. They tend to source goods from abroad that are handmade at competitive prices as well as fresher designs than cannot be provided by local manufacturers. Mechanised goods that require less labour input from local manufacturers are more likely to be sourced locally. Wholesalers import goods from Thailand, Turkey, India, China (especially labour intensive product) and Italy (especially design-intensive product). In 2006, the top 12 retailers sourced about 16% of gold jewellery purchases from wholesalers, and in 2005, 14%. CHAPTER 5 : JEWELLERY RETAILING 46

56 13% 5.5. SOURCES OF GOLD Retailers report that gold jewellery is sourced from a mix of four sources, namely: 16% 17% 54% local manufacturers direct imports local wholesalers (who source partly from local manufacturers and partly from direct imports) vertically integrated in-house suppliers Local manufacturers Direct imports From local wholesaler From vertically integrated supplier Figure 22:: Sources of gold jewellery per supplier source (average taken across 9 of the 12 largest suppliers) for 2006 Data gathered from most of the 12 large retailers and a sample of independents on patterns of sourcing indicate that in 2006 approximately 54% of gold jewellery product sold was sourced from local manufacturers, while 17% came from direct imports. Of the balance, 16% came from local wholesalers, and 13% came from a vertically integrated supplier (Figure 22). Of the product supplied by local wholesalers, 20% was brought from local manufacturers and 80% was imported. In other words, in aggregate, 70% of gold jewellery sold by the major chains in South Africa in 2006 was made locally, while 30% was imported. This breakdown is depicted in Figure 23. Vertically integrated suppliers Local manufacturers Direct imports Local wholesalers 13% 54% 3% 13% 17% Consumer retail sector (100%) Figure 23:View of imported vs locally supplied gold jewellery for 2006 Source: Interviews, Genesis calculations 47 CHAPTER 5 : JEWELLERY RETAILING

57 Interestingly, this is not the view commonly held by local manufacturers who are convinced that higher levels of gold jewellery are imported. This is also not the picture emerging from the data provided by the 12 largest retailers, who tend to import as the exception rather than the rule. Retailers reported that they choose to import where they require: hand-worked products including a high labour input, which are generally cheaper than South African equivalents products with high quality design and finish, like complex multi-stoned products products that display a noticeable point of difference, that is, products that look different to the run-of-the-mill output of local manufacturers; and also possibly in peak periods when local industry cannot supply needed volumes. The major import markets were reported as China, Turkey, Italy, and Thailand. CHAPTER 5 : JEWELLERY RETAILING 48

58 5.6. MARK-UPS In addition to mark-ups on gold added by the refiners and manufacturers, retailers apply a mark-up to the final product. It is difficult to generalise about mark-ups in the retail sector as significant variations between retail categories occur depending on the type of retailer and the product in question, and also whether the product is a standard, core product or part of a specialised range or promotional range. However, the following broad statements can be made about mark-ups: The largest mark-ups in the gold value chain occur in the retail sector. The mark-ups applied by the tourist retail market are the highest: gross markups can exceed 350% if high quality stones, especially diamonds, are included with the gold. Indicative net average margin over cost is 90%. The mark-ups applied by the dedicated local jewellery and mixed-business retail chains are also high, ranging from 300% to 320% (gross mark-up on the cost price of the product). An average net weighted mark-up for the sector would be about 70% over cost. Discount stores achieve lower indicative net mark-ups of about 40% (Table 19). Group Dedicated tourist retailers Dedicated jewellery retail chains Mixed-business retail chains Mass discount stores Indicative gross retail mark-up over cost 300% to 350% 300% to 320% 300% to 320% 50% to 150% Indicative net margin over cost 90% 70% 70% 40% Table 19: Indicative mark-ups in gold retail business for 2006 Source: Interviews with retailers, industry estimates A quick comparison between mark-ups achieved by the manufacturers and the retailers reveal a large differential in the retailers' favour. This does not necessarily imply that the retailers' profits are proportionately higher. For retailers applying a 300% mark-up, the net profit margin achieved for very basic 9 carat product is around 70%. 49 CHAPTER 5 : JEWELLERY RETAILING

59 5.7. EMPLOYMENT In total, the wholesale and retail jewellery sector provided jobs to 4,346 people in 2006, and 4,305 people in In 2006 this accounted for 2.6% of employment in the gold value chain, and 2.55% in However, numbers employed in the gold retail sector are fluid because of the seasonal nature of demand for jewellery. During busy periods like Valentine s Day and Christmas retail stores take on casual and temporary staff, and it is therefore possible that this figure is an underestimate. Interviews indicated that about 70% of staff work in sales, 15% in administration, 5% in buying, 5% in management and 5% in other roles. CHAPTER 5 : JEWELLERY RETAILING 50

60 CHAPTER 6: COINS, INDUSTRIAL END USES & INVESTMENT 6.1. KEY FINDINGS Gold is used in the fabrication of gold coins, dental products and industrial components. Total usage in coin, dental and industrial applications is small (see Table 20). Coins, medal fabrication (incl. Krugerrands) Dental products Industrial products Totals Volume of Volume of fine gold fine gold (mt) (mt) ,84 Table 20: Use of fine gold in non-jewellery applications for 2005 and 2006 Source: Rand Refinery, recyclers, interviews The coin manufacturing and retailing industry employed an estimated 101 people in 2006 and an estimated 100 people in 2005, representing 0.06% of all those employed in the gold value chain THE COIN INDUSTRY There are five main producers of gold coin: the Rand Refinery Limited, the South African Mint Company (Pty) Ltd (Coin World), the Gold Reef City Mint (Pty) Ltd, Universal Mint (Pty) Ltd and the Cape Mint (Pty) Ltd. 51 CHAPTER 6 : COINS, INDUSTRIAL END USES & INVESTMENT

61 Rand Refinery is described in the chapter on refining. The South African Mint Company is a wholly-owned subsidiary of the South African Reserve Bank. Its function is to mint coinage of all description in terms of the Reserve Bank Act of It produces both legal tender and commemorative gold coins. Coin World is the retail outlet of the South African Mint Company and is located on the same premises. The Universal Mint and the Cape Mint, both located in Cape Town, strike gold commemorative coins to order for other countries. The Gold Reef City Mint in Johannesburg also strikes gold medals, medallions and commemorative coins. In 2006, fabrication of gold coins and medals used 2.16mt of fine gold, and in 2005, 2.03mt of fine gold. Overall, about 13% of the local coin output is exported, with the main export markets being Germany, USA, Scandinavia and the Ukraine. 87% of output is distributed locally for sale via Coin World, the Rand Refinery, Gold Reef City Mint and ten or so local dealers. Buyers tend to be either investors or collectors. Coin manufacturers source 100% of their fine gold requirements from the Rand Refinery in the form of coin blanks. Mark-ups on coins vary depending on the product. Bullion Krugerrands attract a net mark-up of around 3% for a one ounce coin to about 9% for one tenth of an ounce coin. Proof one ounce Krugerrands attract a net mark-up of 8% to 12% net mark-up over cost. Commemorative coins attract an average net mark-up of 8% to 12% net over cost. The retailing of proof Krugerrands and commemorative coins attracts an average net mark-up of about 25%. The coin manufacturing and retailing industry employed an estimated 101 people in 2006 and 100 people in 2005, representing 0.06% of all those employed in the gold value chain. CHAPTER 6 : COINS, INDUSTRIAL END USES & INVESTMENT 52

62 The Krugerrand : A South African Bestseller Brainchild of the Chamber of Mines of South Africa, the Krugerrand was the world's first mass-produced gold bullion coin and remains one of a handful of South African brands which can be said to have attained recognition worldwide. The Krugerrand was first introduced in 1967 as a vehicle to promote gold as an investment vehicle in international markets. The gold standard, under pressure in the 1960's and eventually scrapped in 1971, had ensured that central banks would readily absorb the large quantities of newly-mined gold produced in South Africa. With the gold standard under threat and a steady process of deregulation of the gold market underway, the Chamber of Mines recognised the need to build gold investment opportunities for the man on the street. The concept behind the Krugerrand was to introduce a coin which was specifically designed for gold investors, which contained exactly one ounce of gold or a fraction thereof, which was legal tender in its country of issue and which was mass produced, ensuring that it was accessible and could be sold at a relatively low premium over the gold price. The coin was a phenomenal success. In 1978, sales peaked at 187mt per annum. The Krugerrand remains the world's most widely distributed gold bullion coin by a significant margin, with sales of over 46 million coins worldwide to date. For the first nine years of issue, the Krugerrand was the only gold bullion coin available worldwide. However, its success soon induced mints elsewhere to issue their own bullion coins, particularly when sanctions against the South African government were applied from the mid 1980's. Canada introduced the Gold Maple Leaf in 1979, Mexico followed suit with the Gold Libertad in 1981 and China launched the Gold Panda in Thereafter followed the Gold American Eagle, the Kangaroo Nugget, the Gold Britannia, the Vienna Philharmoniker and the Singapore Lion. Some of these coins were launched in 24 carat (the Krugerrand is a 22 carat coin) but all shared with the Krugerrand the concept of being legal tender and being sold in one ounce units or fractions thereof in order to ensure that investors could accurately track their performance and value. 53

63 The imposition of sanctions on South Africa and the introduction of these competitive products in major markets saw Krugerrand sales overseas falter. A brief resurgence in sales volumes took place in 1993 and 1994, but this was largely driven by domestic buying. Sales volumes today are just over 2mt per annum, and demand remains highly dependent on the gold price and on the Rand/US Dollar exchange rate. Worldwide, gold coins have lost ground as a retail investment product both to gold bars, which have become the favoured vehicle for retail investment in most major markets, and to the recently-established Exchange Traded Funds (ETFs) which provide a means for investors to gain exposure to gold in a cost-effective manner and without incurring the security risk that goes with holding physical gold products. Management fees for ABSA's GoldPlus Exchange Traded Fund, for example, are approximately 0.04% per annum. This compares to a minimum premium of around 3% for purchases of gold coins or bars. In South Africa, more than 11mt of gold has been invested in the ABSA GoldPlus ETF since its inception in At the end of 2006, there were seven such funds in operation, listed across nine stock exchanges worldwide, with the largest such fund, the New York Stock Exchange-listed StreetTRACKS Gold Shares product, holding over 450mt of gold by the end of

64 6.3. DENTAL USES There are 4,937 registered dentists, some of whom use gold in dentistry work. They do not source gold themselves and are not required to hold a gold jewellery permit. They generally obtain their gold from independent dental laboratories. 31 Interviews suggested that the use of gold in dental work is minimal, and that no more than 0.6mt (or 0.14% of total fine gold output) goes into dental use each year. The modest use can be explained by the fact that only small amounts of gold are used in dentistry, that the use of gold in dentistry is less fashionable than it once was, and because medical aid schemes no longer pay for the use of gold in dentistry. Owing to the downturn worldwide in the usage of gold in dentistry, dental treatment cannot be said to be a growth sector for gold use INDUSTRIAL USES Gold is used in small quantities in a variety of industrial applications like catalytic processes, satellite technology and advanced computer circuit boards. However,, the use of gold in industry is minimal. This review estimates that no more that 0.08mt of gold was used in 2006 in industrial products, representing only 0.02% of total fine gold output for the year. Printed circuit boards (PCBs) are manufactured but discussions with the industry revealed that these PCBs do not contain gold (but probably copper). Where high performance PCBs which do require gold are needed, they are imported. An initiative has been undertaken by mining research body Mintek and three mining houses, AngloGold Ashanti, Gold Fields and Harmony to increase the use of gold in industrial applications. Project AuTEK has as its main aim the development of gold usage in novel industrial applications such as in catalysis, materials and biochemical uses (e.g. pacemakers, drug delivery microchips, and cancer treatment). 31 Health Professionals Council of South Africa, CHAPTER 6 : COINS, INDUSTRIAL END USES & INVESTMENT

65 6.5. INVESTMENT USES Investors favour gold as a low-risk investment that offers long-term inflation protection. The return on gold is also three to four times less volatile than the return on gold equities. Historically, owing to laws restricting the holding of unwrought gold, South Africans could not invest in gold except by purchasing gold company equities or holding Krugerrands. The options for investing in gold have increased with the introduction of exchange traded gold funds and the JSE Krugerrand futures contract. A gold exchange traded fund (ETF) is a fund whose sole asset is physical gold and whose value is fully backed by physical gold. ETFs provide a means for investors to own gold without actually holding it. ABSA Bank, together with the World Gold Council, obtained special dispensation in terms of the South African gold laws to develop the NewGold Gold Bullion Fund. This vehicle issues securities to investors backed by actual physical gold bullion held in the custody of Rand Refinery. According to ABSA, the uptake of the NewGold fund in South Africa has been positive, with 11.35mt underlying gold being held by the fund at the time of writing. In 2006, 3.87mt of fine gold was allocated to the fund. The fund is mainly accessed by institutional investors and those with a long-term investment horizon. The JSE offers a rand-denominated futures contract based on the Krugerrand through which the public and institutions can take an investment exposure to gold. However, the contract has not been actively traded. The reason for this is not clear, but it may be that investors simply prefer to hold Krugerrands. CHAPTER 6 : COINS, INDUSTRIAL END USES & INVESTMENT 56

66 APPENDIX A Section Institution Name Position Overview Nine Dots Melissa Poole General Manager Overview Jewellery Council Lourens Mare Chief Executive Officer Overview Jewellery Council Lorna Delport Chief Operating Officer Overview Chamber of Mines Roger Baxter Chief Economist Overview Department of Minerals and Energy Sindiswa Gaven Director: Beneficiation Economics Overview Department of Trade and Industry Hilda de Jager Assistant Director: Metals Customised Sector Programme Overview South African Police Services Ben Fourie Superintendent Overview Gold Fields Mineral Services Paul Walker Chief Executive Officer Overview Goldsmith Jewellery Supplies Julian Edelstein Managing Director Overview Unioro Tony Daymond Managing Director Overview Anglogold Ashanti Joanne Jones Marketing Overview Efune International Simon Efune Chief Executive Officer Overview GFMS Paul Walker Chief Executive Officer Overview Virtual Metals Jessica Cross Chief Excutive Officer Refining Rand Refinery Alan Muir Managing Director Refining Rand Refinery Johan Botha Relationship and Product Head Global Markets Refining Musuku Beneficiation Systems Michael Wightman Manager Recycling Perkins Metal Recovery Ian Perkins Director Recycling Cape Precious Metals Sharon Eades Managing Director Recycling Metal Concentrators Bernard Stern Director Recycling First Assay Cheryl Burger Managing Director Recycling Finegold Laboratory Services Graham Lennox Managing Director Recycling First Refiners Dean Hardie Proprietor Manufacturing OroAfrica Gary Nathan Merchandising Director Manufacturing OroAfrica Steven Nathan Chief Executive Officer Manufacturing Silmar David Mearkin Managing Director Manufacturing Alan Mair Manufacturing Jewellers Alan Mair Chief Executive Officer Manufacturing Daberon David Ungar Managing Director Manufacturing Orofino Gioielli Pierluigi Mazzocco Managing Director Manufacturing Goldmaster Jewellery Graham Miller Managing Director 57

67 Manufacturing Sid Forman David Forman Managing Director Manufacturing Silplats Johan Smit Chief Executive Officer Manufacturing Creative Gold Winston Akum Sales Director Manufacturing Studio C Manufacturing Jewellers Chris van Rensburg Proprietor Manufacturing Andreas Salver Jewellery Andreas Salver Managing Director Manufacturing Pneuma Jewellers CC Michael Pneuma Member (Owner) Manufacturing B Miller and Company Mark Miller Managing Director Manufacturing Natal Wholesale Jewellers Hilton Rabinowitz Managing Director Manufacturing Charles Greig Svetla Stephens Manager Manufacturing Global Gold Company representative Company representative Manufacturing Retailer Galaxy Richard Butterfield Chief Executive Officer Manufacturing Retailer Galaxy Gavin Blignaut Merchandise and Manufacturing Director Retailing American Swiss Merridy Edgson Merchandise Director Retailing Sterns Merridy Edgson Merchandise Director Retailing Foschini Shirley Brink Senior Buying Manager Retailing Game and Dion Dean Hofhuis Merchandise Buyer Retailing Truworths Nicole Strydom Fine Jewellery Buyer Retailing Tourvest Maurice Hartshorne Chief Executive Officer Retailing Makro Michelle Webber Buyer Wholesaling Gemini Gold Gary Kruger Managing Director Wholesaling Charmaine's Range Tim Watson Chief Executive Officer Wholesaling OroAfrica Gary Nathan Merchandising Director Wholesaling Panda Manufacturing Tim Watson Chief Executive Officer Wholesaling Ungar Brothers David Ungar Managing Director Coins Gold Reef City Mint Glenn Schoeman Managing Director Coins South African Mint Natanya van Niekerk Manager Coins Universal Mint Lambert van der Nest Managing Director Industrial end-uses Mintek Jason McPherson Engineer - Advanced Materials Division Investment ABSA Exchange Traded Fund Vladimir Nedeljkovic Debt Capital Markets Dental end-uses Schoenitz Dental Company representative Company representative Dental end-uses Rosebank Dental Company representative Company representative Dental end-uses PTH Creative Ceramics Company representative Company representative CHAPTER 3: REFINING AND RECYCLING

68 APPENDIX B: METHODOLOGY Generally: Owing to a shortage of aggregated data and the diverse and fragmented nature of the downstream industries, the researchers were obliged to gather data by means of research interviews with a range of participants. More than 60 interviews were conducted (see Appendix A). These were supplemented with desktop research as well as the gathering and testing of views and estimates, where useful, of senior industry players and the Jewellery Council of South Africa. Gold mining: Data for the gold mining industry was collected by desktop study relying particularly on information provided by the Chamber of Mines and the annual reports of the large mining houses. A face-to-face interview was also held with the Chief Economist of the Chamber of Mines, and numerous telephonic interactions were conducted with the Chamber's statistician. Refining: Data was gathered in face-to-face interviews with senior executives of Rand Refinery and telephone interviews with a senior executive of Musuku Beneficiation Systems. Recyclers: Face-to-face interviews were conducted with the owners of the five most prominent secondary recyclers who, according to an average of industry views, account for about 85% of the recycled gold measured by volume. 15% thus was added to the gathered data of volume of gold used and numbers employed to account for recyclers not interviewed. Jewellery manufacturing: The jewellery manufacturing market is made up of hundreds of small enterprises which makes gathering data challenging. The authors considered a comprehensive industry survey but were advised that the response rate would be low and results so jumbled as to negate the value of the exercise. Also, manufacturers are generally loath to pass on information without a face-to-face reassurance of confidentiality. The authors were thus obliged to collect data in interviews, preceded by an ed questionnaire to raise questions in advance. One problem was the size of the industry, which is estimated at 500 manufacturers. Industry experts were consulted to select the firms using the largest volumes of fine gold. According to an average taken from 15 industry sources, the selected sample covers a representative sample of gold usage of 84% of the fine gold used in manufacturing. Thus, another 16% was added to collected data to extrapolate fine gold usage for the entire industry. Resultant figures were then tested with the Jewellery Council and other industry players for viability. Interviews were also carried out with four smaller producers to gain a feel for how they operate and how much gold they use. 59

69 Employment data was also obtained during interviews. Many of the manufacturers who were not interviewed are small family operations or one-man businesses. We assumed, therefore, that the non-interviewed enterprises employ on average 3.5 people per enterprise. Thus 1,750 persons were added to the collected employment data. Jewellery retailing: Data collation was also difficult for a number of reasons. Firstly, the sector is competitive and retailers are protective over data regarding sales, mark-ups and sources of gold jewellery. Secondly, where a retail jewellery company is part of a larger commercial entity, jewellery sales data is often collated by the larger entity and the statistics specific to the jewellery component of the overall business are not always available. Thirdly, calculating volumes of fine gold used in retail is difficult because the retail industry does not think and plan and talk in volume of fine gold, but in number of units sold and sales figures. Finally, when gold reaches the retail market it has become mixed with other precious metals and stones in finished pieces of jewellery. Splitting out the volume of gold used in any one piece and calculating the value of the gold sales alone was an impossible task for nearly all the retailers. The methodology involved sending a questionnaire to senior representatives of the 12 biggest retailers being Sterns, American Swiss, Game, Dion, Galaxy & Co, Tourvest, Browns, Arthur Kaplan Jewellers, Natal Wholesale Jewellers (NWJ), Edgars Consolidated Stores, Truworths and Foschini. Then the representative (either CEO or chief jewellery buyer) was interviewed in person. Edgars Consolidated Stores, Browns and Arthur Kaplan Jewellers declined to provide any data, so data collected in 2004 was replicated in the 2006 review for these retailers. A view was formed based on industry views that the 12 top retailers account for 84% of sales in the market. In calculating number of stores and numbers employed in retail, primary data was gathered from the 12 major players. An assumption, based on industry views, was made that there are another 700 independent retail outlets countrywide, with an average of 3 staff per outlet. 2,100 persons were added to the employment data that had been gathered from the 12 biggest retailers. Wholesalers: Face-to-face interviews were conducted with five jewellery wholesalers, a category of market participant not considered in the 2005 handbook. Retailers were also quizzed on the extent to which wholesalers were used in supply. Coins, industrial end-uses and Investment: Face-to-face interviews were conducted with four coin producers and questionnaires completed. Face-to-face interviews were conducted with ABSA, and telephone interviews with the JSE about investment products. Telephone interviews were conducted with three dental laboratories and Mintek

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