The financial results of platinum group metals (PGM) and iron-ore miners, which are due to be published in the month ahead, are expected to reveal healthy dividends for shareholders and a strong rise in taxes paid to the fiscus, but little in the way of capital investment in South Africa, according to financial services provider Rand Merchant Bank (RMB).
RMB resources sector focus lead Henk de Hoop says that, after a decade of challenging times for PGM miners, leading producers are expected to continue to post “stellar” results.
PGMs is a collective term which includes platinum, palladium, rhodium, ruthenium, osmium and iridium. South Africa’s major PGM miners are Sibanye-Stillwater, Anglo American Platinum, Northam Platinum, Impala Platinum and Royal Bafokeng Platinum.
As a sense of the scale of the earnings recovery, RMB Morgan Stanley estimates that the combined earnings before interest, taxes, depreciation and amortisation for the top five PGM players could rise from about R20-billion in the first half of 2019 to some R100-billion in the second half of 2020.
He explains that South African miners overall managed the Covid-19 threat effectively, adding that even as South Africa endures the second wave, miners have been able to keep operating while identifying and treating those infected thanks to their efficient healthcare facilities, and years of learnings from managing the HIV and tuberculosis pandemics. “They seem to be leading the way with their proactive approach to the tackling of the virus.”
PGM miners have also been helped by strongly performing PGM prices, even as global economic activity shrunk during the pandemic. Within the group, palladium and rhodium in particular have benefited from the demand deriving from lower emission vehicles.
As such, De Hoop says that despite the already very positive sentiment, RMB think results could surprise on the upside. “We could see not just sharp increases in regular dividends but also special dividends too.”
Meanwhile, demand for iron-ore has been exceptionally high, driven in large part by the Chinese government’s economic stimulus programme.
For instance, he points out that Kumba Iron Ore – South Africa’s and Africa’s largest iron-ore mine producer – recently provided a pre-results statement saying it was on track to meet 2021 production. After a difficult first half when the South African mining industry was shut down, it said it was at 95% of 2019’s production levels by December 2020.
De Hoop also notes that the strong profits of the PGM and iron-ore miners should also be a great tax boon for South Africa, with the mining industry overall paying R27.2-billion in taxes in fiscal year 2020. “They have certainly helped the fiscus at a time when it is really needed by likely having to pay significantly more in corporate taxes and royalties than in previous years.”
However, despite the strength of cash generation in the past year, little is expected to be ploughed back into the industry in the form of capital investment because of a raft of uncertainties, he says.
“Unfortunately, there is still diminished faith in South Africa as a long-term investment destination. Factors such as an unstable power supply, outstanding issues around the Mining Charter and uncertainty around land expropriation without compensation make it difficult for miners to commit investment capital until there is greater clarity on how these challenges will play out. Investments require often well more than a decade to show a return.”
He noted that with significant economic stimulus efforts required around the world to restart the global economy, the South African government should also seize the moment. “The mining sector can mobilise significant exploration and project capital, but it needs, among others, greater regulatory certainty, removal of red tape, the ability to enhance its power costs and constraints through self-generation.”
The multiplier effect of this on South Africa’s job creation, supply chains, export earnings and tax income is staggering, notes De Hoop. “It requires, therefore, the full attention, speed and execution efficiency from the government.”