The 2015 financial year has proved to be extremely challenging for South Africa’s mining industry as local cost pressures, worker unrest and a continuing slide in commodity prices have resulted in shrinking margins and impairment provisions.

Further, mining companies are grappling to improve productivity to address the demanding global and local mining environment.

These are some of the findings from advisory firm PwC’s seventh edition of ‘SA Mine’, a series of publications that highlights trends in the South African mining industry, released by PwC last month at the 2015 Joburg Indaba.

The firm says the mining industry continues to be “marred” by labour unrest, with gold mining companies continuing to be locked into a three-month wage stalemate with unions, in addition to the pressures of the recent coal strike mounting.

PwC African mining industry leader Michal Kotze says the message to miners is clear: “They should continue to focus on costs, refocus on their core business and carefully evaluate growth opportunities.”

He points out that the market capitalisation of the top 35 mining companies declined to R414-billion as at June 30, 2015, compared with R675-billion as at June 30, 2014.

Kotze says the decline continued when compared with market capitalisation as at September 30, 2015, ofR304-billion, resulting in an aggregate decline of R371-billion, compared with June 30, 2014.

“Although iron-ore and coal prices were the most severely impacted on platinum and gold mining companies have not escaped the continuing downward slide in commodity prices.”

He highlights that South Africa’s main revenue-generating commodities have not experienced real prices as low as those experienced in 2015 in ten years, and it is not certain yet, if or when, the prices will start to recover.

Kotze points out, however, that, despite a continued reduction in prices, coal remains the highest-earning commodity in South Africa.

“Coal had a solid performance over the last decade, with marginal increases in production in the last few years. The long-term decline in gold production was temporarily halted in the last two years.

“This decline is indicative of the ever-increasing depths of existing mines, technical difficulties experienced by start-up operations and a continually growing base. “Platinum-group metal production has been severely impacted on by industrial action since 2012 and by mine closures in the low-price environment,” he says.

Kotze comments that, in the absence of a meaningful price increase, it is unlikely that platinum production levels will increase from the current lower base.

Financial Performance

“Financial performance for the South African mining industry in 2015 was extremely challenging and downcast,” says PwC assurance partner Andries Rossouw.

He notes that 2015 cash flow is the worst since the financial crisis in 2008 and reflects the margin pressure and liquidity concerns experienced by the industry.

Rossouw explains that the free cash flows generated were insufficient to make existing borrowing repayments, let alone distributions to shareholders, adding that revenue only increased by a “mere” 4%, or R12-billion, from 2014.

Operating expenses increased by 14%, which is higher than the 13% of the previous financial year. However, he notes that, when companies affected by a platinum strike are excluded, the increase climbs to 15%.

“Labour costs still remain the biggest cost component in the local mining industry. The share of labour costs decreased marginally from 47% to 45% in the current year,” Rossouw says.

The 2014 period saw record levels of impairment charges being recorded within the mining industry. In 2015, the industry saw impairment charges as a percentage of capital expenditure reduced to 40%, which is still above the 35% four-year average.

“Net profit reduced by 75% to R2-billion despite a R26-billion reduction in impairment provisions. The earnings before interest, taxes, depreciation and amortisation, or Ebitda, margin is 22% in the current year, down 7% on last year,” Rossouw concludes.