A lack of funding and government overregulation of the mining industry are two of the most significant factors hampering the junior mining sector’s growth and project development efforts in South Africa, says Sephaku Holdings CEO Dr Lelau Mohuba.

“With a great project, but with no funding and no prospect of getting into production quickly, it is unlikely that you will see that particular project being developed,” adds Village Main Reef joint CEO Marius Saaiman.

“Juniors are in a difficult position as their access to funding is more often than not more limited than that of the majors, who have been conserving cash or have stronger balance sheets, which [they can use] to raise capital,” says BDO head of mining advisory services Ursula van Eck.

However, the 2013 international mining report, ‘Turning High Risk into Potential’, compiled by advisory firm Grant Thornton, highlights that, even amid challenges, mining executives remain optimistic about their business prospects, owing to the fact that many miners – 54% of those surveyed – expect the prices of commodities from their flagship assets to rise.

The report also notes that most investors are looking to invest in projects that are nearing feasibility or are close to production. Exploration companies tend to sell or spin off earlier-stage projects to focus on more advanced projects, in order to increase the appeal to investors and improve prospects for securing investment.

“The South African junior mining industry holds immense potential; the beauty of mining is that the orebodies that are available for mining do not have an expiration date. While challenges that occur on the surface temporarily affect getting the orebodies out, essentially, the product does not lose its value.

“While we are facing some challenges in the industry, we are optimistic that, in the next two to three years, we will see a change. “
The current state of the industry is a passing phase and there will be a positive turnaround for junior miners,” says Mohuba.

Junior miners in Africa, which has a small capital market, are not doing well and the industry is struggling, particularly in raising capital. Many junior mining experts have said that there are good projects out there that can be sustainable in the future but “investment morale” is at a low because of uncertainty in the industry.

New Africa Mining Fund director Neil Gardyne notes that investors look for political and regulatory certainty in the countries that they are looking to invest in and that the next two to three years will be a difficult period for the juniors.

“The one thing that is important for international investors is understanding the certainty of the environment in which they are investing and the fact that things are not going to change overnight, particularly in the mining environment, when we are talking about new developments and new projects,” says Saaiman.

There are also long lead times between the period of investments being made and cash flow starting to be generated by projects.

Mining entails long-term investment and it takes some time to get a mine up and running, especially for deeper mines, which is what South Africa specialises in.

“The ability to exit from long-term invest- ment commitments, once a decision has been made, is minuscule and if the environment continues to change, with no con- tinuous certainty on some level and no one really understanding what the rules are or what the expectations of the investors are, then why would they be keen to participate in an unstable environment?

“Investors would much rather . . . go to jurisdictions where returns are potentially not as attractive but where there is absolute certainty around what the requirements are,” says Saaiman.

Mohuba and Gardyne place emphasis on the issue of overregulation in the industry. Legislation in South Africa is often geared towards the majors and many mining executives feel that there should be some re-examination of the current legislation that governs the way in which a mine is run.

“The junior mining industry struggles owing to overregulation of the industry by government. Copious amounts of time are spent trying to get the correct papers to begin mining and this affects the way investors look at the junior mining industry.

“Return on investment is threatened by this overregulation. This is an area that needs immediate attention if we want to grow a successful investor-friendly and stable environment,” says Mohuba.

Further, there needs to be clarity on the regulations that affect mining houses.

“[There is need for] clarification on aspects of the Mineral and Petroleum Resources Development Amendment which are in direct conflict with other pieces of legislation and also on plans to implement a ‘super tax’,” says Van Eck.

“There is no clarity in the industry and people do not want to put money into projects that are located in places that do not offer them assurance in terms of what is happening in the industry.

“Investors are not interested in lengthy waiting periods to begin exploration and, in South Africa, it takes forever to start the mining process. Every licence takes years, and we cannot be sitting and waiting for mining licences because investors will lose interest,” adds Mohuba.

Mohuba feels that the waiting period can be shortened and the licensing process fast-tracked. “Government says that the lengthy waiting periods are due to the various departments in the Ministry which are responsible for granting licences. However, lengthy waits can be mitigated, and should be, because, as junior miners, we suffer because government overregulates the industry.”

Van Eck further states that government needs to improve transparency and the turnaround time pertaining to the issuing of mining licences.

There are other factors hampering junior miners in their efforts to raise funds and maintain sufficient cash balances – and many of these factors are not within a company’s control: general risk aversion on the part of investors and buyers of assets, stagnant economies, volatile capital markets around the globe, the high-risk, high-reward nature of exploration, and a rising number of labour disputes in the mining sector.

The Grant Thornton report states that 42% of executives who responded to the international mining survey cited increased government involvement and regulation as a constraint on growth, and another 36% rated permitting procedures as a constraint. “A majority of miners in Australia (58%) rated increased government involvement and/or regulation as a constraint on growth, the highest percentage among the countries surveyed.”

Exploration is a high-risk business made even riskier by increased government regulations. Many countries’ bureaucratic procedures are becoming more difficult, some to the point of discouraging both investors and, therefore, exploration.

Among the junior miners that participated in the Grant Thornton mining report, 55% rated access to funding as a constraint. This is a big issue in the industry because it is becoming difficult for investors to take risks on junior mining companies at the exploration stage.

“Funders in the mining industry look at junior miners and ask themselves when they will start to see a return on investment and, in junior mining, investors may be far from seeing cash flow and that becomes a bit of a crisis for investors because a criterion for investors is that you must be close to cash flow, and, many times, juniors are not and that leads to a struggle in getting funding for projects,” explains Mohuba.

“South Africa will have to address the political environment and improve on the certainty of the issues most important to the industry. As investors, we are against investing in African countries where the political and regulatory environment is uncertain,” says Gardyne.

He further notes that junior miners need to ensure that they are equipped with the right management in place, have attractive orebodies and are able to keep afloat for the next two to three years.

Saaiman states that government needs to be stringent with respect to enforcing the law. “If government says that you need a black economic-empowerment partner at 26%, then 26% should be the agreed-upon level for everyone. It should not change from week to week according to the people that government is dealing with.”

The Mining Charter requires that holders of mining rights achieve 26% ownership participation by historically disadvantaged South Africans in their mining operations by April 30, 2014.

“The Mining Charter [contains] a lot of additional administrative burdens to mining companies, and may limit your pool of available procurement avenues, owing to the requirement to deal with other companies with the requisite ownership structure,” says Grant Thornton South Africa national mining leader Steven Kilfoil.

Says Saaiman: “If government sticks to what it does best, which is to create infrastructure and an investor-friendly environment then operators will be able to estimate the risks and the required returns in the necessary decision to invest.

“I think that the current environment, which lacks leadership from all participating parties, including leadership at operational level, appropriate leadership by government and a weakness of leadership by organised labour, has created an environment where it is almost impossible to expect a foreign investor to invest in this country.”

Future Outlook
The outlook for the junior mining industry is largely based on the commodity prices but, internationally, it is evident that the availability of funds to invest in the junior mining industry has declined considerably.

“Even with the funding and regulatory challenges, the industry has fantastic growth opportunities; if we can sort out issues such as certainty, labour relations, security of tenure and infrastructure, we can create a sustainable junior mining industry environment,” says Saaiman.

Gardyne agrees with that sentiment and adds that the industry outlook does relate to how the world economy might recover and the geology of certain orebodies, particularly with regard to South Africa.

“Junior mining companies in this country have sort of tagged on to the end of the major mining companies that have been in business for many years; the geology has lent itself to the development of these huge mining companies.

“Now there are junior mining companies coming along and picking up projects at a time where there is instability and investor confidence is low. These juniors need to make sure that they can offer investors confidence in their projects, good management and good orebodies to become successful,” concludes Saaiman.