With China being Africa’s, and South Africa’s, most important trading partner, the Asian superpower’s expected economic slowdown in coming years is a cause for concern, unless these economies can find alternative drivers of growth from other emerging markets, says Standard Bank mining head Mark Buncombe.
He mentions that, with diamond mining companies currently enjoying high prices, exceptional production performance and robust supply chains, Standard Bank’s mining team anticipates that the sector will continue showing resilience and growth, remaining financially sound in 2022.
“Diamond mines have made a significant contribution to the fiscus in the countries in which they operate, proving a stable source of foreign exchange, which translates into better balance of payments and currency stability. South Africa’s unexpected windfall of an extra R182-billion in tax collections was largely attributed to the mining sector,” he says.
He adds that these operations are using their strong financial position to repair balance sheets (industry net debt to earnings before interest, taxes, depreciation, and amortisation is at historically low levels), reward shareholders through dividends and buy-backs, decarbonise operations, contribute to communities and increase resilience.
Limited greenfield investment opportunities, as well as higher environmental and regulatory hurdles, mean that focus has been directed towards improving operational efficiencies. The Standard Bank team expects to see increased mergers and acquisitions activity as companies continue to strive for efficiencies, relative value and repositioning towards commodities with exposure to the energy transition.
Buncombe notes that social upliftment remains an important consideration for the industry, given the continent’s inequality and developmental challenges, which have been exacerbated by the Covid-19 pandemic. Mining groups have leveraged their success with managing infectious diseases such as HIV-Aids, Tuberculosis and Ebola to effectively curb the spread of Covid-19, both within their workforces and the communities in which they operate. This has the benefit of promoting their own long-term sustainability.
ESG Gaining Momentum
The mining industry’s shift towards a greener, more sustainable and community-orientated business model continues to accelerate. The continued focus on climate change and on the wellbeing of local communities, particularly in light of the Covid-19 pandemic, has meant that many mining companies are responding by accelerating the reduction of carbon emissions and addressing social issues.
With the industry now acutely aware of the need to operate sustainably, Standard Bank has seen a significant rise in interest in sustainable finance products, which are used to fund improvements in a firm’s environmental, social and corporate governance (ESG) performance.
“Diamond mining companies’ strong financial performance has also accelerated their decarbonisation initiatives. The industry is leading the move to renewable decentralised power to secure supply and gain control of costs. Standard Bank is currently assessing 2500 MW-worth of renewable-energy projects in the mining sector, with an improving regulatory environment translating into more favourable funding terms for these projects. This has the added benefit of negating the risk of stranded assets and helping to position companies for long-term growth,” he says.
The adoption of new energy sources used in extraction and production, such as hydrogen and solar, is also gaining momentum. The deep investments in cleaner technologies often result in efficiency gains, which is good for business. Further, premiums are paid for commodities with lower carbon footprints.
He adds that South Africa has an incredible renewable energy endowment and has, alongside Namibia, become a focal point for the development of green hydrogen projects to produce export products like green ammonia and decarbonised fuels. Interest in these projects has been generated in Europe and Asia, and along with complementary platinum-group metals (PGMs) that are used in electrolysis and fuel cell technology ensures that South Africa is well placed to benefit.
Buncombe notes that companies like Anglo American Platinum are leading the establishment of a green hydrogen economy on one of their mines that is planned to run hydrogen fuel cell heavy trucks and contribute significantly to attaining its ESG goals. Battery-powered mining equipment is also gradually gaining in market share in the industry as the original-equipment manufacturers are investing to enhance its performance and price.
“Mining companies are also spending significant resources to better manage scarce water resources by improving water usage and tailings dam management to reduce their environmental impact. In addition, the Fourth Industrial Revolution is resulting in technology investments that are improving safety, engineering advances, productivity and efficiencies through automation and digitalisation,” he says.
Supply Chain Disruptions
Buncombe adds that the diamond mining sector has shown incredible resilience, despite the global dislocation to supply chains as a result of the pandemic. However, there have been disruptions to the supply of key inputs such as explosives, steel and reagents. Despite these challenges, productivity has remained strong, supported by high commodity prices.
“African mines have also benefited from Chinese downstream refineries and manufacturers remaining incentivised to invest in the upstream mining assets aiming for higher margins and more security of the offtakes.
“There is an availability of equity cash in the industry, combined with a policy environment that is much more favourably disposed to public-private partnerships that South Africa will need to establish if it is to benefit from the cyclical upturn in [some commodities]. For example, Standard Bank sees potential for public-private partnerships to improve rail logistics in South Africa, which is likely to drive capital formation, jobs and growth beyond the mining sector,” he says
The pandemic has also caused an imported skills shortage in the sector, particularly from Australia, which faced stringent lockdowns. However, a surprising impact of this shortage is the further acceleration of local skills transfer to improve resilience going forward.
Price Risk Management Returns
Standard Bank has noticed that increased currency and commodity price volatility has resulted in increased price risk management activity by clients. High commodity prices are increasingly being locked in by clients to support their capital projects and stabilise high returns for shareholders. Further, rising interest rate environment is encouraging clients to fix rates.
A positive spin-off has been seen in some jurisdictions where weaker currencies have resulted in improved competitiveness in the industry as companies in these countries move down the cost curve.