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Rising costs, strikes, lower production and weak demand continue to buffet local miners

6th December 2013

  

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South Africa’s mining industry continues to face tough times, as it is plagued by increasing costs and continued industrial action, which, together with lower production and international demand weakness, have resulted in shrinking margins and wide-ranging impairment provisions for the industry.

The significant decrease in the profitability of the industry has also resulted in a substantial contraction in the market capitalisation of South African mining stocks. This decrease is in line with international mining counterparts that are also struggling with higher costs and lower prices.

A weakening rand has shielded the local mining industry from the decline to a certain degree, with rand prices remaining rela- tively flat.

These issues were highlighted in professional services firm PwC’s fifth edition of SA Mine, a series of publications that highlights trends in the South African mining industry.

The findings in SA Mine are based on the financial results of the top mining companies with a primary listing on the JSE, and those with a secondary listing and whose main operations were in Africa for the financial year ended June 2013.

Only companies with a market capitalisation of more than R200-million have been included in SA Mine. The selection criteria excluded global mining companies Anglo American and BHP Billiton, as these organisations do not necessarily reflect trends in the South African mining environment.

PwC African mining leader Hein Boegman says the mining industry continues to add signifi- cant value to the South African economy with regard to gross domestic product contribution, employment, tax revenues and export revenue. The importance of this contribution was recog- nised by the willingness of government, labour and business to sign a framework agreement to support the sustainability of the industry.

“Despite the challenging year, balance sheets remained strong, with stable liquidity. However, increased gearing was required, as companies had to fund sustaining capital expenditure and, in some cases, operating losses. The R25-billion impairment provisions that were raised highlights the difficulty of making long-term decisions in volatile markets,” he says.

There was a continued decrease in the market capitalisation of mining companies in the 2013 financial year. The market capi- talisation for the top 37 companies declined by 28%, from R833-billion to R597-billion, as at June 30.

Gold mining companies were affected the most, losing R109.6-billion, or 48% of their market capitalisation, following the decline in the gold price.

Platinum mining companies lost R75.8-billion, or 29%, of their market capitalisation.

The market capitalisation of the top ten mining companies declined by R228.9-billion, or 30%, to R544.6-billion.

Most of the top ten companies’ market capitalisation declined, with the exception of platinum miner Lonmin and mining holding company Assore, both of which have grown in value since 2012.

Although the composition of the top ten companies remained consistent, the gold producers moved down the order, notes PwC.

The market capitalisation of the 37 companies had improved after June 30 increasing by 19% and, as at September 30, stood at R708.7-billion.
Despite a decrease in price, coal remains the highest earning commodity in South Africa.

The increase in the rand basket price of platinum was offset by lower sales volumes this year, resulting in revenue consistent with the previous year.

The decrease in gold production more than offset the increase in the average gold price achieved, while iron-ore recorded its first decrease in revenue in the last ten years. This was mainly the result of a lower-than-average iron-ore price of 5% and lower sales, despite good production.
“As expected, given the turmoil in the industry, financial performance in the industry was disappointing,” says Boegman.

Revenue was largely flat as the rand-price-driven increase in gold revenue was offset by lower sales volumes among almost all the commodities. Production was severely affected by the labour strikes that took place in the last two years, which started in the platinum sector before spilling over to other sectors.

Operating expenses increased by 16%, which is in line with the 13% (16% if adjusted for the 2012 Impala Platinum strike) of the previous year. This increase occurred despite the ‘no work no pay’ strike principle and a significant decrease in production at most entities.

If the strike-affected platinum companies are excluded from the operating expenses analysis, then the real increase is 23%, indicating the significant cost pressure being experienced by the industry, states the report.

Labour remains the biggest cost component in the mining industry, with its cost percentages varying from more than 50% for the deep-level conventional mines to less than 30% for companies that mine pre- dominantly opencast.

Given the above-inflation increases in recent years and lower productivity, this cost component is likely to remain the biggest for some time.

As expected, and in line with global counterparts, there were substantial impairments in the current year.

The R25-billion impairment provision equates to 34% of the current year’s capital expenditure and 6% of total mining assets. The 64% decrease in net profit is a result of the R25-billion impairment, the decrease in the earnings before the interest, tax, depreciation and amortisation margin, from 37.0% to 28.5%, and the effective tax rate of 43%, which is well above the previous year’s rate of 31%.

Overall, mining companies have done well in disclosing the risks they face; however, Boegman says the challenge remains to adequately link performance and risk management to put the necessary measures into practice.

Volatile commodity prices, labour unrest and rising costs were among the most common risks disclosed by the companies included in the analysis.

Large impairments, owing to underperforming assets and capital projects, have featured prominently in the financial results. These have led companies to implement cost management and cash preservation strategies, which, in turn, have resulted in retrenchments and difficult wage negotiations. There is also resultant uncertainty about the sustainability of some mines.

“Gone are the days when risks for companies were focused only on health and safety issues. Nowadays, it is imperative that mining companies rethink risk and the risk landscape in which they operate,” says Boegman.

He adds that companies currently need to integrate risk and performance management and evolve risk management to be more predictive in expecting and planning for negative potential events. “The changed environment requires mining leaders to steer their companies through the near-term low-margin challenges, while recognising the impact on all stakeholders involved.”

Safety statistics indicate that there is a higher level of focus in place and this becomes particularly clear when current statistics are compared with historic rates, as the current statistics show a substantial decrease in fatali- ties and lost-time injuries over the last ten years.

The mining industry adds significant value to South Africa and its people. Stakeholders in the industry include employees and their families, the unions representing them, investors, suppliers, customers and government as regulator and custodian of income tax for the country.

The monetary benefit received by each stakeholder in the indus- try is usually summarised in mining companies’ value-added statements. It is a lot more difficult to quantify benefits resulting from costs that assist in uplifting communities or in protecting the environment for future generations.

Employees received 37% of value created, compared with 27% in the last financial year. If the impressive performance of global diversified mining major Anglo American’s business unit, Kumba Iron Ore were to be excluded from this breakdown, then employees received 46% this year, compared with 36% in 2012.

The State received 21% this year, compared with 19% in 2012, comprising direct tax, mining royalties and tax on employee income, deducted from employees’ salaries. The actual contribution received by the State is significantly higher, with indirect taxes, such as value- added tax and import and export taxes, also being collected.

Funds reinvested in the form of acquisitions and capital additions comprised 37% this year, compared with 27% in 2012, of the total value created. Distribu- tions to shareholders remained consistent at 20% of the value created and, therefore, decreased significantly in rand terms, highlighting the volatility of returns to shareholders.

Excluding Kumba, this percentage dropped to 7% this year, compared with 12% in 2012.

To create sustainable value, stakeholders need to accept that the suppliers of labour, capital and resources need to be compensated fairly and equitably, particularly since these stakeholders cannot operate in isolation.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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