Mining policies imposed by the Department of Mineral Resources (DMR) on local industry are creating increased uncertainty for investors, a growing number of whom are considering investing in mining projects and exploration in other countries, with a greater chance of a healthier return on investment, says Nedbank mining finance principal Paul Miller.

He spoke in September during the Hogan Lovells Africa Forum, held in Sandton, Johannesburg, on the topic of investor confidence in South African mining prospects and whether the local mining sector was becoming uninvestable.

Miller noted that mining investment required careful planning, explaining that several costs were difficult to manage, and that the only cost aspect which could be controlled to some degree by a miner was the cost to mine. Operating costs had escalated, with electricity tariffs having increased 300% in recent years and labour costs having moved ahead of inflation since 1994, he pointed out.

The majority of successful mines operating in South Africa operate according to a ‘price limit’, which is specific to certain current mine areas – referred to in mining jargon as ‘panels’ – with these areas forming the working face where material is mined.

Miller explained that, to be profitable in terms of every advance made into a panel, it must contain sufficient valuable commodities to justify the cost of mining it – the price limit per panel needs to account for the all-inclusive operating costs to mine that specific panel. This is the price limit and makes up the basic financial sustainability basis of mining.

He added that there was one cost that politicians seemingly did not understand: “Uncertainty is a cost. Uncertainty is a risk, and risk gets priced into the cost of capital for the mine”.

Therefore, any new mining project would have to factor in an elevated cost of risk into operating a mine, as each panel would have significantly higher costs, resulting in inflated price limits, he explained. An increasing price limit would consequently require higher grades and volumes of valuable commodities in each panel to justify the costlier price limit in relation to the risk of capital required by investing in a new mine.

Referring to the current investment climate in South Africa’s mining industry, Miller said: “What South Africa has done has, almost deliberately through ignorance or omission, pushed the costs up above where the pay limit is.” He added that a significant volume of additional capital had to be earmarked for every new project to account for risk, thereby increasing the cost of local mining investment and, consequently, making other jurisdictions with less stringent policies more attractive.

Nobody Is Being Fooled
Miller noted: “Occasionally, there will be a project that is rich enough to be built under almost any circumstances.” In this regard, he pointed to a specific instance in which the DMR issued a press release in July pertaining to a now well-known flourspar mine north of Pretoria, saying that the pomp and ceremony created by the DMR about how “South Africa can still attract investment” was nothing more than smoke and mirrors about a mining jurisdiction that was so unattractive that investors would rather invest elsewhere, despite some of those prospects posing greater risk in terms of grade uncertainty and difficulty to mine.

He alluded that this press release had, in fact, had the opposite effect in that everybody realised that its contents masqueraded as a genuine beacon of hope for investors that the DMR’s mining policy could be said to instil confidence.

Miller added that the fluorspar press release issued by the DMR was the first in a long while and it would be a long time before the DMR could issue another such statement about investment into South African new mining projects, because of the extraordinary situation the domestic mining industry found itself in.

He alluded that the vast majority of new mining prospects were currently uninvestable as a result of regulatory uncertainty.