South Africa’s once mighty and economy-dominating mining industry is, at present, in dire straits. It is an industry – and this is particularly true of its gold and platinum sectors – that is struggling for survival under a gloomy pall weaved out of a myriad of challenging factors. In 2013, such factors included, but were not limited to, subdued commodity prices, increased working costs, constrained infrastructure and high labour costs, coupled with poor levels of productivity, strained labour-management relations, an uncertain regulatory environment and the inevitable maturation of the industry.
However, as 2014 dawns, the most pertinent question is: How will South Africa’s troubled mining sector fare this year, a year that not only marks the twentieth anniversary of the advent of nonracial democracy, but also coincides with the country’s fifth democratic elections and the Mining Charter deadline?
The consensus of two of South Africa’s top financial institutions, Nedbank Capital and Standard Bank as well as professional services firm Deloitte & Touche, is that South Africa’s mining sector will continue to operate in a tough environment in 2014.
One of the main issues that will reinforce the difficult operating conditions over the next 12 months is the fact that commodity prices are expected to prove challenging.
In an interview with Mining Weekly, Standard Bank commodities research head Walter de Wet elaborates that the first half of the year, in particular, will be relatively tough from a pricing perspective.
“What will be key is where commodity prices sit relative to the cost of production for South African miners. We think that gold at $1 250/oz on a 12-month basis is problematic for South African gold producers. Platinum below $1 400/oz and palladium below $720/oz will also prove problematic.”
De Wet adds that it is not expected that global growth in demand for mineral commodities will prove strong enough, at least in the short term, to increase prices on a sustainable basis. Apart from the fact that most of the markets are currently in surplus, De Wet states that slow growth will be the result of continued US monetary policy issues, slower growth in China and the weak European economy.
However, subdued commodity prices are likely to impact on the precious metals mining sectors most noticeably and there is general consensus that South Africa’s bulk commodity sectors, particularly iron-ore, coal and manganese, will perform relatively well in comparison.
Another significant factor that will impede growth in the industry is the difficulty in attracting foreign investment for both expansion projects and greenfields initiatives.
While South Africa is, at present, considered underwhelming as far as mining investment potential is concerned, Nedbank Capital resources finance head Peter van Kerckhoven insists that the inability to raise capital is not a uniquely South African phenomenon.
“Investment in mining is at an all-time low globally,” says Van Kerckhoven. “It’s not that the world is flying high and we are the only country that is struggling to attract investment. There are pools of capital available in the world but it’s a case of SA Inc versus the world in attracting that capital.”
Thirdly, expectations and demands placed on the South African mining houses by the various stakeholders are not likely to be eased.
Deloitte & Touche mining industry leader Tony Zoghby tells Mining Weekly that, in 2014, stakeholders are likely to demand greater benefits from local mining houses despite the fact that operating costs are rising, grades are falling and profit margins are being squeezed ever tighter.
He adds that at a time when commo- dity prices are flat or falling, the mining industry is being stretched to capacity by the continuing expectation to meet investment returns and to deliver on government’s socioeconomic agenda.
Significantly, 2014 marks the deadline for the Mining Charter. While there is general consensus, especially within the industry itself, that most South African mining houses have largely met the transformation objectives and that they will meet the stipulated 26% black ownership target, the way in which government will measure compliance with that target is still uncertain.
Nedbank mining and metals investment banker Paul Miller argues that it will be a complex undertaking to establish whether companies have met the target or not.
“And the fact is that, in most cases, it is arguable one way or the other,” says Miller, adding that, unless companies really have not complied with the charter requirements, there is little risk that the rug will be pulled out from underneath them.
“But government’s view is likely to be quite different to [that of] the mining companies and I fear we might see punitive measures being implemented to force behaviour change to government satisfaction.”
While not necessarily a challenge in itself, the fact that South Africa will hold its fifth nonracial democratic election in the second quarter of the year could have some noteworthy implications for the mining sector.
Although electioneering and the actual ballot are not expected to have any impact on mining output, Standard Bank mining and metals executive VP Peter von Klemperer believes that the run-up to the elections will result in a slower, more interrupted, start to the year than normal. However, this will be slightly mitigated by the fact that China, which celebrates its New Year in February, also has a slow start to the year.
Miller adds that, if history is anything to go by, there might well be a change in Cabinet following the elections, with a new Minister being appointed to oversee the Department of Mineral Resources.
Having outlined the challenges that the South African mining industry is expected to confront, it must be emphasised that there is a possibility that strides will be made in improving the regulatory and operating environment over the next 12 months.
In an interview with Mining Weekly, newly elected Chamber of Mines (CoM) president Mike Teke states there is a strong desire and commitment from all stakeholders to stabilise the troubled mining sector. It is expected that such stabilisation will be achieved through three mechanisms.
Firstly, Teke is hopeful that the Framework Agreement for a Sustainable Mining Industry, which is being led by Deputy President Kgalema Motlanthe, will be driven to its logical conclusion and can start fulfilling require- ments in 2014. The Framework Agreement, which was crafted and agreed to by almost all the major stakeholders in July 2013, aims to examine and overhaul a range of archaic practices, particularly those that were previously used to secure and maintain cheap labour, which still serve as irritants.
Secondly, Teke explains that the CoM aims to reinforce the Mining Industry Growth Development and Employment Task Team (Migdett) by building in a ‘Migdett Plus’ initiative, which will incorporate other government departments and ensure that the number of participants in the process is broadened.
While he acknowledges that there are many who are cynical of what Migdett can achieve, he insists that the initiative has facilitated improved discourse and engagement between industry, government and the trade union movement.
Thirdly, it is hoped that discussion concerning the Mineral and Petroleum Resources Development Act Amendment Bill, which aims to improve the regulatory system, remove ambiguities and streamline admini- strative processes, will be brought to a successful conclusion and that the Bill can be promulgated this year.
“If we do not allow the ball to be dropped, I believe that the successful conclusion of these processes in 2014 will help bring back stability to the South African mining industry,” says Teke.
Significantly, he acknowledges that at the heart of the industry’s instability lies the difficult labour-management relationship as well as the hostility between the various factions within the trade union movement.
Thus, the CoM president insists that he intends to make a concerted effort in engaging with labour unions over the coming year, especially with a view to bringing the Association of Mineworkers and Construction Union (AMCU) – the only major stakeholder that refused to sign the Framework Agreement – back to the discussion table.
While the rationalisation of South Africa’s regulatory framework and the stabilisation of labour relations will certainly improve operating conditions, and will also go some way in ameliorating foreign investors’ perceptions of the South African mining sector, it is imperative that, if the country’s mining houses want to make themselves attractive in this highly competitive global arena, that concerted effort be made in boosting their investment appeal.
Zoghby insists that, in order to boost investment appeal, the mining houses have to pay greater attention to cost optimisation. He believes that there is lesson to be learnt from some of the South African gold mining companies that have recently gained some significant value out of optimising corporate costs.
“When we talk of cost optimisation, we often refer to costs at an operating level and people tend to neglect the corporate costs. However, there is margin to be squeezed out of reducing corporate costs,” says Zoghby.
It is also important that, from the perspective that South Africa’s mining industry is in a mature stage of development and the life of many of the large orebodies is rapidly diminishing, attention be paid to ensuring the longevity of the industry.
However, Miller believes that the country may well have many payable deposits, particularly in terms of base metals, still to be discovered and exploited.
“We have to get some sort of incentive in place for greenfield exploration, and this is something we should definitely focus on after the elections,” says Miller.
However, having highlighted the challenges and some of the solutions, it remains to be seen what concrete steps will be made in rationalising South Africa’s stricken mining industry in 2014.