JOHANNESBURG (miningweekly.com) – While favourable market conditions, higher commodity prices and strong internal discipline will produce increased liquidity and balance sheet strength for miners this year, advisory firm PwC Africa energy, utilities and resources leader Michal Kotzé believes South Africa’s commodity sector will continue to suffer.

This, he explains, will affect bulk commodities such as coal, copper, iron-ore, zinc, manganese and chrome, which have shown remarkable price increases over the last two years.

Miners of bulk commodities in Africa will experience similar trends to those of the global mining industry, he tells Mining Weekly Online, noting that these trends include the continued divestment of noncore assets, an increased percentage of investment in controlled projects, as well as the continued partnering for diversification and synergy.

New entrants into the trend market, he added, include private equity firms taking part in the global mining space as they see value in the market, while integrating vertically as consumers buy into the supply.

However, the South African market is suffering, owing to the expensive and deep-level nature of its mines but also because there is a big focus on precious metals in the country, such as gold and platinum, Kotzé tells Mining Weekly Online.

Nevertheless, there is hope, he averred. “There is a lot of focus on structuring South African companies to focus on profitable mines and operations. There is a process under way to address these issues, but the reality is that there are mines that are operating at breakeven or losses that still need to be addressed,” he explained.

Internationally, however, precious metals have not done well either.

The dollar gold price has remained relatively flat and platinum prices are at extreme lows. With higher input costs driven by input cost inflation, precious metals miners are not experiencing the same growth as companies producing other commodities.

“They are still faced with the challenges of the bottom of the commodity cycle and job losses and mine closures are real risks,” Kotzé lamented.

On a more positive note, PwC assurance partner Andries Rossouw on Tuesday said that while PwC expects to see an increase in value and growth opportunities this year, the firm anticipates that this will be tempered by a continued focus on maintaining a robust and flexible balance sheet.

“In 2018, we expect that favourable market conditions, higher commodity prices and strong internal discipline will produce increased liquidity and balance sheet strength”.

Further, according to PwC’s ‘Mine 2018’ report released on the sidelines of this year’s Junior Mining Indaba conference held in Johannesburg, the world’s Top 40 mining companies have delivered an “impressive financial performance” in 2017, the firm noted, with revenues up 23% to $600-billion.

PwC’s 2018 outlook indicates that the Top 40’s improved financial performance will continue as companies continue to benefit from this upward momentum in the mining cycle.

There are concerns, however, as Kotzé explains that one of the risks currently facing the world’s top miners is the temptation to acquire mineral-producing assets at any price in order to meet rising demand.

“While we expect capital expenditure to increase next year as companies implement their long-term growth strategies, miners must be careful to maintain discipline and transparency in the allocation of capital,” he warns.

In terms of balance sheet results, PwC’s report indicates that miners continued to focus on strengthening their balance sheets in 2017, with $25-billion being allocated to the repayment of debt, and capital expenditure at a record low of $48-billion.

Tax expenses, meanwhile, increased by 81% in 2017, with taxes paid to governments rising by 67%, even though corporate tax rates remain relatively stable across most key markets.

The shareholder windfall is expected to continue in 2018, as shareholder returns have almost doubled year-on-year, from $16-billion in 2016 to $36-billion in 2017.

Based on current levels of performance, dividends are likely to reach record highs this year, PwC explained.

While the Top 40 Miners are enjoying a bounce back, PwC’s report warned that miners will need to stay focused and deliberate in the pursuit of their long-term goals to create value for all stakeholders on a sustainable basis.