 JOHANNESBURG (miningweekly.com) – South Africa has an opportunity to become a centre of mining finance for Africa as the continent becomes the world's next major producer of copper and cobalt, Xstrata CEO Mick Davis said on Tuesday night.
Davis told the Wits Business School audience that it was just a matter of time before Africa's prodigious mineral riches would need to be developed to satisfy world demand, but that restrictions currently prevented foreign listed companies from enjoying full indexation on the Johannesburg Stock Exchange (JSE).
Coupled with South Africa's ongoing exchange controls, these restrictions made the finance-centre vision impossible to achieve.
"Amendments to these regulations could open up the JSE to the world's major mining companies and aspirant regional players, attracting additional investment flows and encouraging the re-establishment of a centre of mining finance excellence," Davis said.
He recalled, in reply to Mining Weekly Online's question, that when South Africa's former mining major Gencor listed as Billiton on the London Stock Exchange, the mining sector represented only a tiny portion of the LSE, with Rio Tinto the only significant major.
The advent of Billiton and later Anglo American and companies from South America turned the LSE into the major generator of mining finance, both in the equity and debt markets.
"That happened because there was little regulation that we had to fulfill as Gencor to list on the LSE. There were very few barriers to entry. Essentially, they created an environment where any credible company with an appropriate track record could actually list, and they have continued to maintain that situation," Davis said.
What the JSE needed to do was to create indexation for companies that wanted a separate listing in South Africa.
Without indexation, shares had no liquidity and therefore could not trade. Without liquidity, South Africa could not be a finance centre and could not generate capital.
Companies only listed on stock exchanges to access the public finance market.
"If the stock exchange cannot deliver capital to you, it's a waste of time and money to list on it. It's a simple issue that the JSE will have to attend to.
"But the other restriction is exchange control. You have to allow the free flow of funds, both in and out of this country. This country has matured over many years, but no government has had the courage to remove exchange control and ultimately that step has to be taken before South Africa can become a normalised environment.
"If that does happen, I am convinced that, with developments in Africa, you will see the JSE generate significant finance for resource companies," Davis said in response to Mining Weekly Online.
Earlier, he had made the point that there had been a secular change in demand for commodities. "We remain in the super-cycle," he said.
But despite this, a number of significant commodity producing countries failed to benefit from the last commodity boom to the extent that might have been expected.
This was because major investment decisions depended at least as much on political, regulatory, security and fiscal considerations - over which governments had control - as they did on the richness of the resource endowments.
The primary role of governments was to establish the conditions for a facilitative environment in which all the participants in the mining industry could flourish as a result of certainty and stability; transparency and security of tenure; the provision of effective rail, ports, roads, electricity, water and access to finance; and the availability of especially technical skills.
"I was pleased to see at the recent Mining Summit, convened by the South African government, together with the mining industry stakeholders, that they are really discussing all of these issues in the South African context. That's absolutely critical to position the industry for future growth," he said.
Governments, such as Chile, had for long recognised the central role they could play in promoting a flourishing mining industry.
Between 2001 and 2008 – "the first phase of the super-cycle" – the Chilean mining industry's contribution to gross domestic product (GDP) had grown by a compound rate of 12% a year in real terms.
By contrast, the South African mining sector's GDP, over the same boom period, had shrunk by 1%, in spite of the demand for coal, ferrochrome and platinum, all in abundance in South Africa.
If, instead of shrinking, South Africa's mining industry had achieved an average growth rate of 5% a year during the period, 45 000 additional jobs would have been created in the mining sector and R60-billion would have been added to GDP by the mining sector.
"In the not too distant future, under-investment in water infrastructure risks pitting the mining industry against its own communities, as water scarcity grows. It doesn't have to be this way and value can be captured from the ongoing super-cycle," Davis said.
But security of energy was crucial and South African did not have it.
Xstrata itself had put on hold a R5-billion investment in the expansion of its ferrochrome business, which would have created 2 000 jobs in construction and 500 permanent new jobs by generating additional foreign revenues of more than R5,4-billion a year from the beneficiation of local chrome ore.
"Eskom cannot do it alone. Further, we need urgent regulatory changes to facilitate credible and sustainable electricity generation in the medium term. Viable solutions include the participation of energy-intensive companies, such as Xstrata, in the construction of own generation, aimed at satisfying our own demand, thereby relieving Eskom of the financial and execution burden and risks, while at the same time enabling us to secure the future of our operations," Davis said.
The legacy of poor education and the under-investment in technical education had undermined South Africa's ability to develop new engineers and skilled trades people to fill the vacancies.
"The school system is just not up to the task," he said.
Teachers needed training and a "teach first" programme should be introduced, which involved top graduates teaching in the more challenged schools before embarking on their chosen careers.
The private sector could partner government in this by offering stipends to supplement salaries and to employ the graduates in proper posts once their teaching assignments were complete.
Xstrata, which is listed on the LSE, has grown under Davis' leadership from a company with a market value of $500-million into a globally diversified major mining company with a market value of $50-billion in only eight years, withstanding the tests of rapid acquisition-led growth, severe economic downturn and currently a period of more organically orientated growth.
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