The 12 months to June 30 proved to be a challenging year for South African mining companies, in contrast with the global mining industry, which achieved a considerable improvement in financial performance compared with the prior year.
PwC on Tuesday released the tenth edition of its ‘SA Mine Report’, which comprises analysis of the top JSE-listed mining companies.
The 2018 edition looked at the performance of 31 companies, each with a market capitalisation of about R200-million.
In the year under review, the total market capitalisation of the 31 companies recovered to R482-billion, compared with R420-billion in the prior year. Although a R62-billion increase, this was still below the 2016 level of R560-billion.
Market capitalisation was influenced by gold and platinum-group metals (PGMs) experiencing declines of 4% and 5% respectively, while iron-ore increased by R40-billion between 2017 and 2018, which increased the commodity’s capitalisation from 13% to 20%. The rest of the commodities remained stable.
On the upside, the JSE mining index outperformed the JSE all share index in the reporting period, for the first time since 2008. The JSE mining index, in US dollar terms, also compared relatively well with the HSBC global mining index.
In the reporting period, commodity price increases bode well for bulk commodity producers, specifically iron-ore, coal, manganese and chrome.
However, the aggregated South African mining industry is more exposed to precious metals, which did not enjoy the same benefit from price increases.
“Cost-saving initiatives could not offset the impact of input cost inflation. The increased costs and production challenges meant a weakening in operating results.
“Together with the gold and platinum impairments, it meant that the industry recorded a loss for 2018,” PwC Africa energy utilities and resources leader Michal Kotzé pointed out during a briefing to discuss the report’s release.
For the first time since 2012, capital expenditure (capex) grew as the completion of long-term platinum and gold projects continued, while older and inefficient shafts were being closed.
In terms of production, PwC energy and mining assurance partner Andries Rossouw noted that manganese, iron-ore and chrome were the only commodities that showed real production growth over the last 15 years.
Coal production showed a marginal increase for the first time in three years. However, it has remained largely flat over the last 15 years.
Gold continued its long-term decline, while the ongoing low-price environment for platinum was likely to result in further curtailment of supply in the absence of a reasonable price increase.
Meanwhile, employee numbers in the mining industry dropped to 452 000 in the reporting period, and were expected to decrease further as restructuring in the platinum sector continues.
Total revenue generated by the companies analysed for the period increased by 8%, or R28-billion, compared with 2017, which was mainly driven by coal and manganese revenues.
Coal grew its share of total South African mining revenue to 29%, driven by good rand price increases and higher production.
PGMs revenue was supported by the R9.1-billion Sibanye-Stillwater acquisition of the Stillwater operations in the US and a R3.7-billion increase in revenue at Anglo American Platinum (Amplats).
However, Rossouw pointed out that since PGMs in concentrate produced by Sibanye is still refined and sold by Amplats, there is an element of duplication in the revenue.
The total revenue increase was offset by decreases at Lonmin and Impala Platinum.
The remaining mining segment’s revenue increased, owing to higher coal and iron-ore prices. The most notable increases were experienced by Kumba Iron Ore at R6-billion, Exxaro at R2-billion, Wescoal at R1.4-billion and Tharisa at R1.4-billion.
“More than R7-billion of the total increase relates to an increase in metals purchased at Amplats, owing to the sale of its Rustenburg operations to Sibanye-Stillwater.
“The costs associated with the newly acquired Stillwater operations also amounted to R7-billion,” Rossouw explained.
Meanwhile, the rand strengthened in the second half of the year, resulting in an average decrease in prices received for gold, platinum and iron-ore.
“The decrease in rand prices, as well as weaker production for gold and platinum, are putting deep-level South African gold and platinum producers under significant pressure as reflected in the market capitalisation of these entities,” Rossouw said.
Despite various cost saving initiatives, above-inflation cost increases continue to put the industry under pressure, with a decline in earnings before interest, taxes, depreciation and amortisation (Ebitda).
The mining industry is at a net loss position after another R46-billion in impairments. Despite cost control and cash management, companies still reported decreased margins.
Capex recovered from the lowest levels in ten years to reflect a 19% increase. Operating expenses increased by 13%.
Labour costs continue to be the biggest cost driver in the mining industry, at 46% of operating expenses, compared with 44% in 2017.
“The current year impairment doubled from the previous year mainly because of gold and platinum impairments. After last year’s net profit, this year’s companies are back in a loss-making position owing to the higher impairments and lower Ebitda. The Ebitda margin of 22% is lower than the previous year’s 25%,” Rossouw highlighted.
Net interest expenses increased by R2-billion from the prior year, mainly because of borrowings used for business combinations. The mining companies had an aggregated tax expense of R9-billion, which was down from R10-billion in 2017, but reflected increased tax payments of R18-billion, which was a 29% increase compared with 2017.
Solvency ratios decreased slightly compared with the previous year as a result of the net loss realised, in the main, as a result of impairment provisions recognised.
“The aggregated liquidity position is also healthy and better than for the global mine position. Unfortunately, this hides the challenges still experienced at individual company level,” Rossouw averred.
PwC expects mining companies will continue to control costs and production for the foreseeable future.