Global assurance, tax, transactions and advisory services company Ernst & Young mining and metals sector leader for Africa Wickus Botha will discuss the major challenges of the mining industry and the need to reposition South Africa’s business investment case to attract more investment capital at the industry’s strategic think-tank in August.
The first major challenge Botha identifies is the ‘Twin Capital Dilemma’, highlighting the difficulty for mining companies to access capital and the way in which they allocate that capital.
He says that single-commodity mining companies are finding it difficult to secure capital investments to start new projects or expand existing ones, as commodity prices are no longer growing and production levels are reaching a balance between supply and demand.
Botha adds that the return on investments for most mining companies’ investors are currently not good, as share prices are not performing well.
However, large diversified mining companies are struggling to allocate capital because their portfolios include several projects, resulting in uncertainty about which projects they should invest in, he explains.
“Companies need to balance the demands of shareholders and other stakeholders with the need to continue investing in projects through the economic downturn.
“Shareholders feel that these companies have not rewarded their investment through equity growth and the only way that shareholders can get a return on their investment is through dividends or share buy-backs. This is why most mining companies continue to pay dividends and are decreasing the amount of capital they are spending,” Botha explains.
Investors are unhappy about projects not being delivered on time, within budget and according to specifications, forcing them not to invest further; they are waiting for mining companies to return their investment with dividends or share buy-backs, he continues.
This has resulted in a global trend where massive projects, such as diversified mining giant Anglo American’s Minas Rio iron-ore project, in Brazil, are delayed until investors see returns on their investments.
The Minas Rio project was initially expected to be completed by 2010, but has been delayed several times, owing to a combination of regulatory and environ- mental factors. Despite these challenges, Anglo American is aiming to ship its first ore by the end of 2014.
“It is very challenging for mining companies to fund big projects and manage the capital agenda for mining companies to keep investors,” says Botha.
He adds that this is a worldwide phenomenon, with international companies being more affected than their South African counterparts, as the country has not earmarked any large projects in the last two years.
“Investors are reluctant to invest further in the South African mining industry for various reasons, including constant debates over policy, such as talks to nationalise the mines, taxing super profits and also beneficiation strategies. This uncertainty is one of the reasons South Africa has been unable to secure foreign investments for large projects in recent years.
“It is not just debates around policy that create investor uncertainty. The issue of uncertainty include clarity on logistics and transportation, securing electricity supply and taxation,” explains Botha.
He says the South African mining industry has an opportunity to use the economic downturn to reposition its business investment case and he hopes that all mining stake- holders at the Mining Lekgotla will discuss this repositioning because South Africa is competing with the rest of the world for capital investment.
“The country needs to be competitive and attract investment in South African commodities such as gold and platinum,” he notes.
However, Botha says the focus of the mining industry should not be on solely on gold and platinum.
“Although relevant to South Africa, gold and platinum are not as relevant to the rest of the world. “Bulk commodities, such as iron-ore, copper and metallurgical coal, which are globally more significant, should become of greater importance to alleviate the pressure on the gold and platinum sectors for job creation, economic growth and poverty alleviation.
“Mining and mining investment no longer form a regional or geographical economy. South African investments need to be seen in a global investment context and the country needs to show that it is globally competitive and an attractive investment destination,” say Botha.
Botha identifies margin management and productivity improvement as a collective challenge facing the mining industry, which involves managing costs and productivity in an economic downturn.
“Because commodity prices have cooled down, the extent of inflation across all commodities in the mining industry has been exposed.
“In a sector with continuous growth, such as mining, commodity prices continue to rise, which means all the stakeholders start chasing growth and are not paying attention to efficiency and productivity because the sector is sheltered by increasing commodity prices,” explains Botha.
He says that, over the last six to ten years, inflation has consistently been 3% to 4% above the consumer price index and the producer price index, which indicates high inflation rates in the mining industry.
This inflation is being driven by several factors, including salary increases consistently being 2% to 3% above inflation and a decrease in productivity, Botha notes.
South Africa needs to ensure that it receives funding for local projects by convincing investors to make capital investments to push projects forward, he notes.