By Dave Brown – Exclusive to Gold Investing News

Gold and diamond discoveries played an important part in the growth of the early Republic of South Africa, and historically the country was the world’s largest gold producer for many years before conceding the top spot to China in 2007. Gold was discovered in the area known as Witwatersrand (“Wits”), triggering what would become the Witwatersrand Gold Rush of 1886.

South Africa is currently estimated to have the world’s largest quantity of gold reserves with 6000 tonnes; however, China has maintained its leading position in gold production through the end of 2009, followed by Australia, South Africa and the United States. South Africa produced 210 tonnes of gold in 2009 and its mineral wealth is appreciated by most investors as it is the world’s largest producer of diamonds, platinum, vanadium, manganese, chrome, and vermiculite. It is also the second largest producer of palladium, ilmenite, rutile and zirconium; and the world’s third largest coal exporter.

Geological Perspective

South Africa’s expansive gold ore deposits represent a considerable part of the world’s reserves with approximately 95 percent of the mines operating underground reaching depths of over 3.8 km. The main gold producing area is concentrated on the Archaean Witwatersrand Basin. The Wits has been mined for more than 100 years, producing more than 41,000 tonnes of gold, and remains a relatively underdeveloped source of the yellow metal.

The Wits is a gold placer deposit, unlike most other gold deposits in the world, with gold being hosted by conglomerates and grits. The sedimentary basin is massive and stretches through an arc of approximately 400km across the Free State, North West and Gauteng Provinces. The gold bearing conglomerates or reefs are generally tabular with varying dips. Most of the Wits is covered by later stage sediments of the Ventersdorp and Karoo groups, with an outcropping in Johannesburg, which started the country’s gold rush and resulted in formation of the city of Johannesburg.

South Africa does have other smaller gold producing regions outside of the Wits, in the form of Archaean greenstone belts. The main gold producing greenstone belts are the Barberton Greenstone Belt and the Kraaipan greenstone belt. The Barberton greenstone belt is situated in the Mpumalanga province, just north of Swaziland. The Kraaipan belt is located west of Johannesburg, near Kuruman. Other smaller belts exist in the Northern Province, but have been worked sporadically.

Economic Context

South Africa reaped the benefits of macroeconomic stability and a global commodities boom from 2004 to 2008; however, growth began to slow in the second half of 2008 due to the global financial crisis’ impact on commodity prices and demand. Additionally, South Africa began to experience an electricity deficit towards the end of 2007. The national power supplier encountered problems with aging generating stations which necessitated “load-shedding” cuts to businesses and residents in the major cities.

South Africa’s former economic policy has traditionally been fiscally conservative, focusing on attaining a budget surplus and controlling inflation. The current government largely follows the same prudent policies, but must contend with the impact of the global crisis and is facing growing pressure from special interest groups to use state-owned enterprises to deliver basic services to low-income areas and to increase job growth. More than one-quarter of South Africa’s population currently receives social grants. Unemployment remains relatively high and outdated infrastructure has constrained growth. Legacy economic problems remain from the apartheid era – especially poverty, lack of economic empowerment among disadvantaged groups and a shortage of public transportation.  Last year, GDP contracted slightly by approximately 2 percent.

Investment Opportunities

Gold Fields (NYSE:GFI) is one of the world’s largest unhedged producers of gold, with operations at Driefontein, Kloof, Beatrix and South Deep, in addition to gold reserves in Ghana, Australia and Peru.  Gold Fields is primarily involved in underground mining in South Africa, although in Peru it has exposure to surface gold and copper mining and related activities, including exploration, processing and smelting.  The company has estimated total attributable mineral reserves of 81 million ounces and mineral resources of 271 million ounces. Goldfields aims to increase production at South Deep to 300,000 ounces during 2010. Goldfield’s South Deep mine is situated in the districts of Westonaria and Vanderbijlpark in the Gauteng Province. The South shaft has been recommissioned with the ore body remodeled for the next 30 years. The project is on track for build up to full production by the end of 2014.

AngloGold Ashanti (NYSE:AU) is a leading global producer of gold, with about one third of its operations in South Africa at West Wits and Vaal River. As of the end of last year, AngloGold Ashanti’s ore reserve totaled 71.4 million ounces with the company producing 4.6 million ounces of gold from its operations. Although the company’s primary source of revenue is derived through the production of gold, it also generates income through sales of silver, uranium oxide and sulphuric acid. On October 5, 2009, AngloGold formed a joint venture with De Beers in marine exploration and mining. On August 12, the company reported strong earnings of more than double the previous quarter to $129 million largely due to posting lower costs and an increase in production from its mines in South Africa.

Harmony Gold Mining Company (NYSE:HMY) is the 5th largest gold producer in the world.  Its operations are located primarily on the Witwatersrand Basin, encompassing ten underground operations, an open-pit mine and surface operations that span four provinces, namely Gauteng, North West Province, Mpumalanga and the Free State. Last year, the company reported ore reserves of 48.2 million ounces and mineral resources of 215.7 million ounces.  Harmony Gold hopes to complete the expansion at its Doornkop South Reef mine by 2015. Doornkop produced 64,000 ounces of gold in the 2009 financial year, but is expected to produce 250,000 ounces per year at full production capacity.  Earlier in August, the company announced a significant increase in the mineral resource at the Wafi-Golpu porphyry copper-gold project, which is part of a joint venture in Papua New Guinea. This mineral resource for Wafi-Golpu now contains 16 million ounces of gold and 4.8 million tonnes of copper. Harmony reports the lowest average cost per tonne amongst South African underground gold operations.

DRDGold (NASDAQ:DROOY) is a mid level, unhedged gold producer. In 2009, DRDGold produced 247,690 ounces ,and declared mineral resources of 56.4 million ounces and ore reserves of 6.0 million ounces.  Last week, the company reported a substantial increase in net profit after tax for the quarter reflecting the impact of continuing steps by the company to de-risk its business.  The objectives included transferring environmental rehabilitation liabilities and the voluntary liquidation of offshore subsidiaries.

Vantage Goldfields (ETR:3V3) is a junior level exploration and development company with three projects in the under-explored Barberton goldfield, South Africa’s largest greenstone belt.  The company reports a resource base of 3.47 million ounces, which they are aiming to increase in order to become a mid-tier gold producer in the next three years.  This objective is to be accomplished through staged low-risk gold production expansion based on expanding currently operating, or reopening dormant mines, and applying underground bulk mining techniques to relatively shallow ore bodies.  It will also depend on continued exploration of strategic holdings in the Barberton goldfield, which may enhance the gold resource inventory and support longer term growth beyond 100,000 ounces per year.  Earlier this month the company announced successful completion of an independent Bankable Feasibility Study (BFS) on Stage 1 of the proposed shallow underground mining production plan at its Barbrook Project.

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