Record high gold prices have created opportunities for the SA gold mining industry but have also exposed its weaknesses more clearly than ever before.

From the beginning of January 2007 to the end of May this year, the gold price in US dollars rose by 42%, to more than US$900/oz. In rand, it rose over this period by 60%, to more than R7 000/oz. Despite this, SA gold producers' profit margins - and their share prices - have remained under pressure.

The three large gold mining groups, AngloGold Ashanti, Gold Fields and Harmony, have all reported weak financial results, mainly because of severe cost pressures and disruptions in production. Safety-related work stoppages and the electricity supply shortage contributed to the production setbacks.

For AngloGold Ashanti, its large hedge book, a legacy from financial policies first applied in the years of low gold prices, came to represent a huge opportunity cost.

As with some other metals and minerals, shortfalls in gold production in SA have reinforced a deficit in world markets, adding to the upward pressure on bullion prices. Without that, the difficulties facing the local gold mining companies would have been considerably worse.

An unusual combination of events bullish for gold helped boost the price in the first half of this year. These included worsening fears about the global credit crisis, rising concerns about inflation, a sinking US dollar and Eskom's electricity cutbacks.

The potential influence of each of these on the gold market has waxed and waned. In the second quarter of 2008, SA mines seemed to have stabilised production, concerns about local power supplies receded somewhat and the credit crises eased, but worries about global inflation increased markedly.

In April, UK-based precious metals research firm GFMS said in its outlook for 2008 that continued investor interest would be the principal driver of a continued rally to a high above $1 100/oz.

In the medium term, it added, prices could moved "sideways" or even retrace a little more. The mid-800s was considered a possible low for the rest of the year, with prices below that level most likely to be bid up by bargain hunting and stock replenishment.

GFMS added that imbalances in the market suggested that sooner or later the gold price would have to fall. Nevertheless, this was most unlikely to occur in 2008 and potentially not until well into 2009.

Cost pressures are unlikely to ease soon. The commodities boom and high levels of investment in infrastructure in emerging economies have created a shortage of skills and equipment in the global mining and construction sectors.

Shortages of resources such as metals, minerals, fuel, electricity, timber and consumables have led to steep increases in input costs, including materials, energy and wages. For the past two years, the world gold mining industry's production costs have risen by 17%-20%/year, and similar increases are expected for 2008.

Against that background, the gold mining companies have been challenged to find new ways of managing costs and improving financial efficiencies, while taking full advantage of high gold prices. In SA, they have also had to cope with the growing intolerance of workers, government and - for international groups such as Anglo American - of shareholders and directors towards fatal accidents on the mines.

All have espoused safety philosophies and targets of "zero fatalities", though the difficulty of achieving this was again shown when nine people died underground at Gold Fields' South Deep mine on May 1, the same day that group financial director Nick Holland took office as the new CE, succeeding Ian Cockerill.

In his response to the accident, Holland announced a new, independent review of the group's safety practices.

His appointment was the most recent among a changing of the guard at all the large SA gold miners in the past year. At AngloGold Ashanti, Mark Cutifani, an Australian engineer, succeeded previous CE Bobby Godsell, who elected to retire in October. Harmony's Graham Briggs, who previously ran the group's Australian operations, was appointed CE after Bernard Swanepoel resigned suddenly in August.

Similar changes have occurred at smaller producers. At the medium-sized DRD Gold, financial director John Sayers (who had earlier spells as financial director of industrial groups Nampak and Altron) was appointed CE in January 2007.

Most of the four new CEs were internal appointments and are no strangers to the challenges facing their companies. Some helped to formulate and approve existing strategies. But all have taken over at a time of unusual duress and have shown willingness to introduce fresh thinking.

Graham Briggs - Global experience will come in handy

Partly of necessity, change occurred most quickly at Harmony. When Briggs was appointed, at first as acting CE, the group published abysmal September quarterly results showing a severe deterioration in costs, sharply lower operating profit and a loss after interest and tax.

In the December 2007 and March 2008 quarters, Harmony restructured its operations, closing or disposing of a number of shafts or mines. It slashed its production costs, cutting almost 6 000 jobs.

The group's underground management practices, which in Swanepoel's era were adapted to what was called the "Harmony Way", reverted to more traditional methods, using mine captains and shift bosses.

Harmony also curtailed its use of the relatively new work practice known as conops or "continuous operations". Conops was introduced, after years of negotiation with unions and government, with great hopes for efficiency improvements, but these failed to materialise as expected.

Harmony also eased pressure on its balance sheet by entering into joint ventures, such as the 50% deal with Australia's Newcrest Mining. The latter will contribute up to $525m to Harmony's Papua New Guinea gold assets.

Since Cutifani joined AngloGold Ashanti, the group has carried out a strategic review of all its assets. Some were identified for possible disposal. It is working on turnaround plans for its two problem operations in Africa: the Ubuasi mine in Ghana and the Geita mine in Tanzania.

The big change for this group relates to its hedge book. In April, it announced a $1,1bn rights issue, with most of the proceeds to be used to restructure - and greatly reduce - its hedge book. The new capital will allow the group to increase its financial flexibility and reduce short-term borrowings.

For investors, AngloGold Ashanti's hedge book has long been a contentious issue. It was set up by an earlier generation of managers in the 1990s, in an era of low and falling gold prices. Though the hedge exposure was reduced in recent years, the group continued to sell its gold at prices well below market prices. It generated large operational cash flows but still made a large loss after costs and charges related to the hedge.

Investors reacted favourably to the issue and capital of $1,77bn was raised. The restructuring of this book is another large step in the industry's retreat from hedging.

Other large SA producers adopted this way of thinking much earlier. Harmony has avoided any hedging since the early days after Bernard Swanepoel become CE almost a decade ago. Gold Fields, under ex-CE Ian Cockerill, adopted the same philosophy.

Early last year, Gold Fields incurred a $550m (R3,8bn) cost when it closed the Western Areas hedge book, which it inherited when it acquired the South Deep mine in December 2006.

As long as gold prices remain high, the retreat from hedging is likely to be applauded by investors, who usually prefer gold producers to be fully exposed to movements in the gold price.

Management's willingness to take these steps partly reflects an increased emphasis on cash flow and short-term returns, as well as funding capacity and balance sheet flexibility. Recent high bullion prices have done much to compensate for production setbacks. Most of the mining groups also have to fund large capital programmes for maintenance and new projects.

Several of the producers are in a peak phase of spending on expansion projects, with capital outlays expected to remain unusually high for the next 12-18 months. A key conundrum for Gold Fields' management is how best to exploit the large (30,7 m oz) gold resource at South Deep.

It can gain access to mine this gold through the twin shaft system and by developing horizontal shafts from the existing 4 subvertical shaft at its Kloof mine, adjacent to South Deep. The mine's location next to Kloof was part of the rationale for its acquisition by Gold Fields.

The process will be difficult and expensive. A year ago, Gold Fields was considering it a priority to get South Deep's production back to the 450 000 oz/year level at which it was operating before the serious shaft accident in 2006.

In the second half of 2007, it said a new mining plan was needed as the VCR reef was depleted, and priority had to be given to completing South Deep's infrastructure, including its shaft system. A new setback for the mine occurred with the accident involving nine deaths, in May this year.

Gold Fields is also spending heavily on other projects, including its new Cerro Corona mine in Peru, which is due to enter production soon. This and the Tarkwa expansion in West Africa are viewed as quality operations, expected to augment output and cash flows at the right time.

AngloGold Ashanti's main project among its SA operations - which now contribute only about 44% of the group's gold output - is its large and deep Moab Khotsong mine, which reaches full output in 2015. It's also working actively on expansion of its international operations.

At the end of the March quarter, it announced positive exploration results at its La Colosa deposit in Colombia. This, says Cutifani, represents a "major greenfields find".

Harmony is at an interesting stage because of several new projects, including the Doornkop South Reef project and the new Elandsrand mine, that it's bringing to production over the next two years. These are expected to result in increased production at better margins for the group.

Smaller existing or new miners - including Grand Basin and Central Rand - are developing new operations.

But there seems to little prospect that the collective effect of all these investments will reverse the long-term declining trend in SA's gold output.