The biggest threat to SA mining may well be what PwC partner and mining analyst Andries Rossouw refers to as the instant gratification challenge. ‘Too many stakeholders in the industry are focused on what they can get out of it in the short term,’ he says. Government’s need for tax revenues and organised labour’s repeated above-inflation wage-increase demands are well known. But other players seem to be acting in an equally short-termist way.

‘Shareholders want dividends instead of capital investment,’ says Rossouw. ‘Communities want grants, not investment in sustainable projects, and many of management’s incentive schemes reflect the limited thinking.’

It is no secret that SA’s mining industry is in the middle of the long-anticipated perfect storm. There is little prospect of relief from low commodity prices – although the gold sector may be an exception – as well as high administered costs and uncertainties ranging from energy supply to regulation.

Within the sector, however, are small glimmers of hope that demonstrate, among other things, how some miners are taking greater control over the destinies of their assets.

First, companies are increasingly investing in securing their own energy supply. Second, they are also looking to more high-tech, capital-intensive methods of mining.

Finally, what is a crisis for some is sometimes an opportunity for others. Changes are afoot that see a few companies expanding (such as Sibanye), while some are divesting (Anglo American Platinum), and others are sitting tight and increasing operating efficiencies (Kumba Iron Ore).

PwC’s publication SA Mine demonstrates the depth of the crisis. Profits announced by JSE-listed mining companies in 2015 were down 75% on 2014.

‘This excludes the big dual listings like Anglo-American and BHP Billiton,’ says Rossouw. Most notable, however, is that the net profit earned by the 35 companies analysed, for year to mid-2015, was a mere R2 billion, which could buy one-half of a top-of-the-range VIP jet.

‘The industry is really struggling against all measures,’ he says. ‘Total revenue grew only 4%. Almost the only shining light is the improved safety performance.’ In the industry, accident-related fatalities were down to 84 in 2014, the lowest figure in more than a century.

So what are the prospects for 2016? To begin with, the commodity price trough is not going to go away. ‘This is the new normal,’ says PwC Africa oil and gas advisory leader Chris Bredenhann. ‘Six months ago it was still credible to suggest that most commodity prices would recover quickly. Now it seems pretty clear there’s not going to be a dramatic recovery for at least 12 to 18 months. There’s simply no good news anywhere in the global economy.’

The outlook, however, varies depending on the mineral. ‘Iron ore and coal are under more pressure than the others,’ says Rossouw. Globally, there’s over-supply in both subsectors. ‘Coal is South Africa’s biggest export earner, so this is especially concerning.’

Moreover, the coal problem is deeply structural with the role of the mineral in the global energy mix threatened by both the rise of renewable energy on the back of concerns around carbon emissions, as well as the continuing viability of US shale gas.

Bredenhann says that many had thought the halving of the oil price would reduce US shale oil production. But, he adds, this hasn’t happened, adding that ‘not only have they found ways to reduce costs but also technology has made such a leap that these producers can still play even if oil fetches as little as $40 a barrel’.

Iron ore prices have plummeted to below $59/ton in an 18-month bear market. But Kumba, SA’s dominant producer, has done what is necessary to bide their time and ride out the slow down.

The outlook for gold is a bit more bullish. There is no major new source of supply coming onto the market, as Rossouw points out. But all this means is that not too much is likely to change very quickly. At under $1 100 per ounce, the gold price is some way off the highs of 2011/12, when it peaked at more than $1 800.

‘Too many stakeholders in the industry are focused on what they can get out of it in the short term’

ANDRIES ROSSOUW, PARTNER AND MINING ANALYST, PWC

The future prospects for platinum are somewhat brighter, as it seems pretty clear that it is now at the bottom of the cycle. ‘Stockpiles were built up in 2008 and immediately after when prices were high,’ says Rossouw. ‘The market is busy de-stocking now. At some point the price will start to appreciate again.’

Of course, the platinum subsector is particularly challenging at the moment. ‘Lonmin’s rights issue shows just how tough things are,’ he says. Last November, the company’s $400 million rights issue – at a massive discount – was presented to shareholders as the only alternative to a forced closure. The company had already cut output and shed 2 600 jobs in the year to September.

‘Some companies are divesting to settle debt,’ says Rossouw. This does, however, create opportu-
nities for others. One that has acted is Sibanye – it bought Anglo American Platinum’s Rustenburg Platinum Mines for R4.5 billion in September 2015. Under the tough stewardship of Neal Froneman, Sibanye earned its reputation through the tight – and profitable – management of marginal gold mines. It was, of course, spun off from Gold Fields in early 2013 and has proven unexpectedly successful.

While there are factors that miners can control, there are others that they simply have to adapt to – the SA industry can do very little about international commodity markets. The regulatory environment is much more contentious.

Many, like Froneman, believe there is a leadership black hole in precisely the space that government should be occupying. Last October, he was quoted in Business Day as saying: ‘We looked to the government to lead the industry forward but it doesn’t come. [Leadership] is certainly not going to come from the unions and associations. In my mind, we have had to step up to the plate.’

The sudden change of political bosses hasn’t helped. In September 2015, Ngoako Ramatlhodi –who had been in office for little more than a year – was replaced by the unknown Mosebenzi Zwane, a Free State politician with no background in mining.

This came as a shock to the industry, although criticisms have been muted. DA shadow minister James Lorimer describes the new appointment as ‘at best mediocre’. He adds that Zwane’s first detailed public pronouncement, when he spoke last October about how government could take advantage of low commodity prices to put mining assets in the hands of empowerment beneficiaries including ‘women, young people and co-operatives’ showed ‘no better grasp of his portfolio than his predecessors’. The replacement of Ramatlhodi, who had demonstrated signs that he was coming to terms with his portfolio, is an example of precisely the problem with short-termism.

The mining industry has an acute sense of regulatory uncertainty, with the Minerals and Petroleum Resources Development Act being re-drafted and the industry’s BEE charter up for renewal. Ramatlhodi had shown signs of recognising the importance of these issues. His successor, however, appears oblivious to them.

If government is unable to lead, where does that leave the mining companies?

Some are indeed ‘stepping up to the plate’. One way in which they are doing so is by securing their electricity supply through self-generation. A few years ago, these generation projects were largely confined to off-the-grid areas. Now, pretty much every major mine has an energy project, usually solar-based, aimed at freeing it from Eskom’s erratic and increasingly expensive system.

Sibanye is once again leading the charge, with plans to install an energy solution at company – not merely shaft – level.

It is looking to take its four gold mines and new platinum assets off grid, and has made moves to acquire a stake in Waterberg Coal, a near-bankrupt company that sits on a 4 billion ton coal asset. The miner has announced that it intends to partner with a 500 MW independent power producer to which it would supply coal from the Waterberg mine.

In an environment characterised by immediate gratification, miners have found that they need to proceed independently if they are to secure their longer-term features. This behaviour has, of course, been imposed on them by circumstances. However, it is a pattern that may help make future investments more secure.

By David Christianson
Image:  Andreas Eiselen/HSMimages