Even before Covid-19 hit South African shores, the mining industry was already in a structural decline and, without significant intervention to alter this trajectory, the sector's output, employment and economic contribution will continue to decline.
Business for South Africa (B4SA) risk work group head and former Anglo American South Africa deputy chairperson Norman Mbazima says that between 2010 and 2018, the South African mining industry’s real output value in dollar terms decreased by 10%, total direct employment shrunk by 50 000 and yearly capital expenditure shrunk by 45%.
There are, however, nuances to these conclusions, with certain subsectors having shown modest growth, but traditional sectors – such as gold – have shown significant declines.
Mbazima questions in an editorial piece published for the Centre for Development and Enterprise why South African mining is declining when it has geological opportunities and while the rest of the world’s largest mining jurisdictions have been growing at rapid rates in recent years.
He explains that South Africa is mining out existing mines and not replacing these with new mines and new resources, and questions why there is not investment into new mines at a significant scale?
To find an answer to this question, Mbazima has been involved in extensive research and benchmarked South Africa against numerous competitive mining jurisdictions and interviewed many of the country’s most senior mining executives to get to the bottom of the issue.
He notes that there are five factors that make the quantitative investment case for new mining opportunities unattractive, namely electricity supply, logistical bottlenecks, regulatory uncertainty, cost competitiveness and licence to operate.
Mbazima states that South Africa has two major problems with electricity supply – load-shedding and above-inflation electricity price growth.
B4SA estimates that the South African mining industry lost between R7-billion and R12-billion in output last year owing to load-shedding, representing about 4% of total industry output for the year.
This effectively cut top-line revenue for most operations by an enormous quantum, not to mention the operational complexities introduced by load-shedding.
Unreliable power supply not only has a devastating impact on profitability, but also causes uncertainty about the ability to operate effectively and profitably in future. This while the increasing tariffs also undermine profitability.
B4SA suggests that all options be explored by government to maximise Eskom’s generation performance as quickly as possible, but also enable self-generation or third-party-facilitated generation.
Mbazima says that despite South Africa’s various challenges in attracting mining investment, there are a few distinct opportunities for additional production, particularly in bulk materials such as iron-ore, manganese and coal.
However, these are constrained by logistical and infrastructural bottlenecks, which limit the full potential of existing assets, not to mention potential new assets.
He points out that rail and port infrastructure investment, combined with competitive rates for the use of this infrastructure, is one of the largest levers to unlock known potential output growth in South African mining.
A lot has been written about mining regulatory uncertainty in South Africa. There are numerous ongoing processes relating to the current iteration of the Mining Charter that do indeed inject uncertainty into the mining regulatory framework, says Mbazima.
He believes that even if all the uncertainties associated with the current iteration of the charter are resolved, intense regulatory uncertainty will remain specifically because of the existence of a charter. He elaborates that a charter can change and at any time.
“Regulating a mining industry with such a malleable regulatory instrument injects enormous uncertainty, especially given the fact that mining investments are made over a 10- to 30-year horizon.
“The global best practice is clear: mining industries should be regulated by simple, clear, direct legislation, with stability commitments built into the legislation. Leading mining jurisdictions regulate by legislation; not charter.
“If done by legislation, the regulatory regime cannot be changed very easily, and the investor can trust that the regulations which exist today can be planned around for the long-term,” Mbazima states.
B4SA is not proposing scrapping the redistributive requirements currently contained in the charter, but does believe that these should be agreed upon and then hard-coded into law, so that the investor can plan with clarity and certainty.
Mbazima proposes that government amend the Mineral and Petroleum Resources Development Act to write all regulatory requirements explicitly into law, with global best practice stability commitments, effectively eliminating the need for a charter.
Mbazima further explains that more than 60% of South Africa’s mining output (by value) is produced in mines that are in the bottom half of cost competitiveness. This means that South African mines typically have higher production cost per unit of output.
South African output will be some of the most vulnerable if demand for commodities is reduced. If demand and prices drop, mines will become some of the first to no longer be able to produce profitably, owing to comparably high unit production costs.
B4SA’s analysis suggests numerous drivers for this challenge, including the complexity of mining in some of the deeper and older mines, the relative lack of investment in modernisation for some mines, high labour costs per unit of production – as a result of complexity of mining – and, of course, electricity prices.
Speaking of labour, Mbazima points out the last determining factor of the mining industry’s attractiveness for investment is issues with labour and mining communities.
He explains that the mining industry’s relationship with organised labour and mining communities has often been impossible to predict with certainty, especially since the advent of Covid-19.
B4SA says government should consider ring-fencing a portion of mining royalties to boost development activities for the mining communities most affected by mining activities.
Mbazima states that it is necessary that selected high-potential areas of the country are remapped at 1:50 000 scale and all existing geosciences materials should be made available free of charge and on easy to access platforms.
The organisation also suggests that mining licence application processes be overhauled to be faster, more objective and more efficient, as well as that government should offer special incentives for investing in exploration.
Meanwhile, the organisation estimates that South African mining output is likely to come in at between 15% and 25% below pre-Covid expectations this year.