Investment in South African mining is in danger of hitting a new low. John Ollett explores the causes and asks whether this trend could change.
Mining has been an essential part of the South African economy ever since 1685, when Simon van der Stel, the first governor of the Dutch settlement at the Cape of Good Hope, sank the first mine shaft and discovered the copper deposits of Namaqualand.
In 2011, the mining sector contributed 8.8% of South Africa’s GDP but when the indirect impact is also taken into account the figure is closer to 18%, according to the Chamber of Mines. Over 12% of the investment made in South Africa each year is directly attributable to the industry, with almost 20% of total investment being indirectly attributable. Despite its importance to the economy, the industry has not flourished in recent years.
South Africa missed out on the commodity boom with a 1% decline in mining GDP each year between 2001 and 2008, compared to a 5% growth rate in the top 20 mining economies elsewhere in the world, Roger Baxter, senior executive of economics and strategy for the South African Chamber of Mines pointed out in a presentation in March this year.
One of the main reasons for this decline is falling interest in the sector from foreign investors. “There has been a pretty regular declining trend for the last 30 years,” Chris Hinde, director at industry consultants IntierraRMG tells GTR, “it only peaked in about 1980”. The government, through both its policies and bureaucracy (in the form of red tape and complex licensing procedures), is often highlighted as the most significant contributor to the decline of the industry, but mining has been affected by labour unrest and increasing electricity costs too.
Several companies that have traditionally focused on South Africa because of its mineral resources have been looking to the mineral wealth of other countries. BHP Billiton, one of the world’s largest mining companies, has a pipeline of 21 projects, not one of which is in South Africa.
“A lot of South African companies are buying assets in other countries to develop,” Jeff Clark, senior precious metals analyst with Casey Research, tells GTR.
AngloGold and Goldfields, two of South Africa’s largest gold miners, are focusing more on other countries. AngloGold Ashanti has reduced its South African share of production from 42% to 35% in the past five years, and expanded its Americas production from 16% to 25%. Goldfields now has preliminary and advanced drilling targets around the world, including in Mali and Ethiopia, but none in South Africa.
Red tape, taxes and a new law
Some of the biggest factors affecting investment in South Africa’s mines have been governmental policy and new regulations. “A key requirement for offshore investors into the South African mining sector is that the government’s strategy and legislation intentions are clear and certain, including potential mining tax and black economic empowerment changes,” Jason Barrass, Barclays’ head of Africa trade, tells GTR.
But regulation in South Africa has remained opaque, giving investors around the world a perception of regulatory uncertainty. “As a country we have done ourselves a massive disservice by allowing the perception of regulatory uncertainty to get completely out of hand. It doesn’t matter whether there is uncertainty or not, you only need a perception of it for investors to hold up their hands,” Paul Miller, mining and resources investment banker at Nedbank, explains to GTR.
This perception has not been helped by the longstanding threat of nationalisation that has been hanging over the industry for several years, despite being rejected by the ANC, South Africa‘s ruling party. As well as this, “there are other challenges that miners must face, such as delays in getting mining permits and doubts about the long-term security of projects,” Tasneem Vally, director of structured commodity trade finance at Deutsche Bank explains to GTR.
Threat of the MPRDA
The most controversial policy initiative the government has developed is the Mineral and Petroleum Resources Development Act (MPRDA) amendment bill, which is currently moving through the South African legal system. The bill encourages in-country beneficiation, the refining of mining raw materials to finished products, which remains a point of contention between miners and regulators, and also brings in a number of new offences and penalties.
Peter Leon, partner and head of the Africa mining and energy projects practice at Webber Wentzel, has argued in the South African parliament that the bill, in its current form, contains much which is not clearly defined or explained.
There are also a number of sections within the bill which give powers to the minister of mineral resources, Susan Shabangu, over beneficiation, export restrictions and mining rights, but no criteria against which her discretion may be assessed.
Such uncertainty will exacerbate rather than improve the difficulties that exist with the current mineral regulatory regime and may further damage investor confidence in the mining industry, Leon outlines.
It is generally believed that if the legislation is implemented it would act as a deterrent to any mining company seeking to open a mine in South Africa. “If it is passed in its current form, it is quite likely to see the demise of the South African mining industry,” Miller tells GTR.
The bill’s goals of strengthening the mining industry by removing ambiguities within the existing act, streamlining administrative processes, and improving the regulatory system as well as creating jobs and economic benefits for the South Africa people are considered laudable but the discretionary powers that it gives the government are considered too vast.
If mining companies chose to develop their new deposits in other jurisdictions, like Australia and Canada, then investors and financiers will move with them and this will have the opposite effect to that intended by the bill.
There is still time for the bill to be changed before implementation and the Department for Mineral Resources’ invitation for submissions gives the mining industry time to respond. AgriSA, Anadarko, Anglo American, BHP Billiton and ExxonMobil, among others have already made presentations to the committee with their objections and the final decision is pending, but is unlikely to be resolved until next year.
Difficulties of depth
Away from the regulatory and labour problems (the stand-off between workers and mining companies, which came to the world’s attention last year with the shooting of 40 strikers, continues), a significant challenge to the South African mining industry is the depth of its deposits. Their mines are very mature, Clark of Casey Research comments. The mines that are closer to the surface are now exhausted and companies are forced to exploit very deep deposits. AngloGold’s TauTona mine in South Africa is approximately 3.9 km deep, making it one of the deepest mines in the world.
Deep mining presents more complex challenges than standard open-pit mining, and mines at great depths are more difficult to automate. However, because of the cost benefits that would come from improved productivity, South African mining companies are investing in and researching automation and improved drilling methods. Advances are being made by companies like AngloGold which is testing out new technology on its TauTona mine this year.
Price of power
The mining industry is a heavy user of electricity and requires a consistent high-grade supply to function, something with which South Africa has struggled in the past. Clark comments: “They have serious energy problems which emerged two years ago that they still have not been able to resolve.”
At its worst, in 2008, South Africa’s electricity supply could not meet demand and there were rolling blackouts across the country, which restricted production atmany of its mines, leading to large increases in global platinum and gold prices.
A similar crisis may be on the horizon with the cost of power more than doubling in the last three years. In 2012, Eskom, South Africa’s electricity generating company, generated 2.6% less electricity compared to 2011.
Analysts indicated at the time that this could either mean the industry has become sophisticated in the way it uses power, or that Eskom simply wasn’t generating as much power as was needed to sustain big businesses. Mining companies remain some of its biggest customers, using 14.5% of Eskom’s 2012 electricity sales while heavy industry consumed 26%.
Eskom has looked to further increase electricity prices, asking the National Energy Regulator of South Africa for an increase of more than 10% – leaked figures suggested anywhere between 14% and 21% – for customers who use the most electricity. However, the regulator refused this request and decided that Eskom could raise its tariffs across all sectors by an average of 8% each year up to 2018. The Chamber of Mines pointed out that, for gold and platinum miners, the 8% hike will add R800mn to costs.
With volatile global commodity prices, particularly in gold and platinum, electricity supply takes up a large proportion of a miner’s total costs – placing a dampener on miners’ enthusiasm for South Africa. “You have to have security of supply in terms of electricity at a cost that makes sense,” says Vally.
Not all doom and gloom
Despite the problems that face South Africa’s mining industry, it still has a number of advantages which mean that miners continue to develop and operate mines there. GTR asked Tronox, a mineral sands producer opening a mine on the east coast, why it chose South Africa: “Because that’s where the ore is,” said a spokesperson. Tronox is financing its open-pit mineral sands mine with local cash-on hand and a local revolving credit line, he added.
The company also runs a mineral separation plant and a smelter complex, which use a lot of electricity, and which it intends to supply from the new mine rather than ship the raw material abroad.
South Africa also has some of the world’s largest reserves of chrome, manganese and platinum, which means, Miller comments, that “if you want to be exposed to those commodities you have to be exposed to South Africa”. This is especially true of platinum, since South Africa produces over 70% of the global total. For an investor or miner that wishes to be involved in this metal, there are few other choices.
But platinum is not the only material that will remain profitable for South Africa, Barrass of Barclays adds: “Globally, commodity demand is closely linked with demand from China and South African iron ore is still attracting considerable interest… In addition, there remains strong interest in South African thermal coal development.”
This may result in the opening up of the untapped coal reserves in the Waterberg, which has only just started attracting interest, but requires significant infrastructure to get the coal to port or Eskom.
“There will be strong and positive growth in the iron ore and coal sectors over the medium to long-term,” he concludes. On top of these minerals, it also has extensive reserves of coal, copper, diamonds, gold, mineral sands and vanadium. “We have some ore bodies here that are phenomenal and they’re not going to go away,” points out Miller.
However, South Africa is no longer a premier destination for miners and Barrass of Barclays believes there will be fewer new companies entering the market up to 2015 than previously but that there will be a gradual expansion, driven by established miners.
The problems with the regulatory situation, labour environment and power generating difficulties are solvable, but require a lot of work by all those involved.