South Africa’s mining industry remains a critical component of the economy but it has faced a crisis of confidence from the local mining industry and civil society. However, all is not lost, as practical measures are being taken to build an economy that is underpinned by inclusive growth, competitiveness and transformation in critical areas of the productive sectors, of which mining is a vital part.
Mining plays a vital role in supporting the goals and aspirations of the National Development Plan (NDP), contributing approximately 7% to the Gross Domestic Product (GDP). Despite the economy having diversified over time, the mining industry remains a central part of the economy, with an indirect contribution of over 17% to the GDP. An estimated 50% to 60% of South African mines’ purchases, i.e. consumables, capital goods and services, are currently being sourced from BEE suppliers.
The ANC, under the leadership of President Cyril Ramaphosa, has indicated its commitment to the NDP, stating that it foresees an economy that encourages investment, offers policy certainty and addresses barriers that inhibit growth and social inclusion.
Last year, the appointment of the Mineral Resources Minister, Gwede Mantashe, restored some optimism about the future of the South African mining industry. Creating an environment with adequate infrastructure, less policy and regulatory uncertainty and a skilled but flexible workforce should go a long way towards attracting investment.
In his opening address at the 2019 Investing in Africa Mining Indaba, Minister Mantashe reassured about 7 000 delegates that South Africa was now open for mining business and ready to work with them in addressing the remaining impediments to investment.
He insisted the revision of the Mining Charter in September 2018 had cleared up uncertainties about mining policy and paved the way for new investment. The charter significantly improved the previous draft charter of June 2018 by recognising the 26% black economic empowerment ownership, which mining companies had already achieved, rather than obliging them to increase that level to 30% on existing mining rights.
He also noted that, in 2018, he had withdrawn the 2013 Mineral and Petroleum Resources Development Amendment Bill to separate oil and gas from the mining legislation. A draft Upstream Petroleum (Oil and Gas) Bill is in the process of being developed.
“This bill will provide certainty to the upstream petroleum industry and stimulate growth and development in this sector. Therefore, we can say with confidence that South Africa provides a conducive environment for investment and that we have a stable regulatory framework, which provides security of tenure for investors,” he stated.
“Additionally, to increase our competitiveness as a mining jurisdiction, the government is addressing the challenge of administered prices—including those for electricity, rail and ports, as well as the infrastructure bottlenecks, which have been raised by investors as a constraint to doing business in South Africa. It is our view that administered prices can be used to stimulate the economy,” he added.
A key project, going forward, will be to revitalise exploration activities for which he has directed the Council for Geoscience to enhance its geological mapping knowledge, fast-track the identification of new mineral targets and to drill and quantify the size of these deposits.
“The mapping programme will bring South Africa in line with progressive exploration and mining jurisdictions and it is our intent to secure a minimum of 5% of the global exploration budget within the next three to five years. This will identify and affirm new mineralisation systems that are consistent with the new demand trajectory of mineral resources, such as battery minerals. Notwithstanding our long heritage of mining, we remain highly attractive for investment in the renewal of the mining sector that will discover world-class mineral deposits in the short term,” said Minister Mantashe.
2018 review
The 2018 financial year proved to be a challenging year for the South African mining industry. Globally, the financial performance of the mining industry improved considerably from the previous year. That position was largely mirrored by South African bulk commodity producers with iron ore, coal, manganese and chrome performing well. Unfortunately, the aggregated South Africa mining industry, which is more exposed to precious metals, did not enjoy the same benefit from price increases.
South Africa’s mining industry contributed R356 billion to the country’s GDP in 2018, an increase on the R335-billion contribution in 2017, the Minerals Council South Africa’s Facts and Figures 2018 Pocketbook shows.
The Minerals Council pointed out that the industry had, during 2018, contributed R93 billion to fixed investment and sold R475 billion in primary mineral sales. Furthermore, it paid R22 billion in taxes—a R3-billion, or 16%, increase from 2017—and R7.6-billion in royalties—a 31% increase from 2017.
During 2018, the mining industry paid employees R127.4-billion, compared to the R126 billion paid to employees in 2017, and contributed R21 billion to pay-as-you-earn tax on behalf of employees. The report indicated that the industry employed 453 543 people, resulting in around 1.4-million indirect jobs and, based on estimates, these employees supported around 4.5-million dependents.
During 2018, the mining industry’s growth rate was greater than that of the national economy; however, the report did note that the national growth rate of 1.2% was “disappointing”. A positive element highlighted was that employment in some sectors, including coal, iron ore, manganese and chrome had grown during the period.
“2018 can be described as a mixed bag of performance for South Africa’s mining industry, with bulk commodity prices continuing to rise during 2018 from the lows at the beginning of 2016, while precious metals continued to struggle,” says Michal Kotzé, PwC’s Africa Energy Utilities & Resources Leader.
“Cost-saving initiatives could not offset the impact of input cost inflation. The increased costs and production challenges meant a weakening in operating results. Together with the gold and platinum impairments, it meant that the industry recorded a loss for 2018,” he adds.
These are some of the key highlights from PwC’s 10th edition of SA Mine, a series of publications that highlights trends in the South African mining industry.
Regulatory environment
For the first time since 2012, capital expenditure grew as the completion of long-term platinum and gold projects continues, while older and inefficient shafts are being closed. While the new mining charter underlined the regulatory uncertainty, the appointment of a new Minister of Mineral Resources in February 2018 brought the hope of open dialogue and more certainty to the industry. Although the gazetted version of the charter is likely to still receive some criticism, there was a concerted effort by industry and the government to move closer to each other. Environmental regulatory changes are also receiving much-deserved attention.
Market capitalisation
In 2018, the total market capitalisation of the 31 companies analysed in this report recovered to R482 billion (R420 billion in 2017). Although it is a R62-billion increase from the previous year, it is still below the June 2016 level of R560 billion. Of the companies analysed, gold and platinum group metals (PGMs) continue to dominate the share of market capitalisation but experienced declines of 4% and 5% respectively. Iron ore saw an increase of R40 billion from 2017 to 2018; increasing the commodity’s percentage share of capitalisation from 13% to 20%. The rest of the commodities remained stable.
Mineral production
Manganese, iron ore and chrome are the only commodities that showed real production growth over the last 15 years in South Africa. Coal production showed a marginal increase for the first time in three years. However, it has remained largely flat over the last 15 years. Gold continues its long-term decline. The ongoing low-price environment for platinum is likely to result in the further curtailment of supply in the absence of a reasonable price increase. The total revenue generated by the companies analysed for the financial year-end, 30 June 2018, increased by 8% (R28 billion) from the previous year. Increased coal and manganese revenues mainly drove this. Coal grew its share of total South Africa mining revenue and leads at 29% of mining revenue for the year.
Financial snapshot
The increase was driven by good rand price increases for the commodity, with production marginally up. Platinum and gold reflected a lower percentage on the back of relatively weak prices and low production for the year. The rand strengthened in the second half of the year, resulting in an average decrease in prices received for gold, platinum and iron ore.
Despite various cost-saving initiatives, above inflation cost increases continue to put the industry under pressure with a decline in earnings before interest, tax, depreciation and amortization (EBITDA). Capital expenditure recovered from the lowest levels in 10 years to reflect a 19% increase. Operating expenses increased by 13%. Labour costs continue to be the biggest cost driver in the mining industry. The current year impairment doubled from the previous year mainly because of gold and platinum impairments. After last year’s net profit, this year’s companies are back in a loss-making position due to the higher impairments and lower EBITDA. The EBITDA margin of 22% is lower than the previous year’s 25%. Net interest expense increased by R2 billion from the prior year, mainly because of borrowings utilised for business combinations.
The mining companies had an aggregated tax expense of R9 billion, down from R10 billion on the previous year, but reflected increased tax payments of R18 billion, a 29% increase from the previous year.
Solvency ratios decreased slightly compared to the previous year as a result of the net loss realised due, in the main, to impairment provisions that were recognised. The aggregated liquidity position is also healthy and better for the global mining position. Unfortunately, this hides the challenges that are still experienced at an individual company level.
Value to mining investors in South Africa
The mining industry continues to add significant value to the country and its people. Stakeholders in the industry include employees and their families, unions, the government, shareholders, suppliers and customers. As reported in company value-added statements, employees still take the lion share of value added at 47%, followed by the government through direct taxes, as well as payroll and royalties, with 24%. Shareholders received an improved share on the back of improved dividends from bulk commodity producers.
Going forward
In his address at the Mining Indaba, President Ramaphosa assured delegates of the government’s positioning of the mining industry as a key player in the future growth and development of our economy, with significant work being done to remove the uncertainty that has held back the development of the industry.
In addition to cementing the regulatory environment, there will be a focus on sectors affecting the mining industry.
“The energy, transport and water sectors—all of which are important for the mining industry—represent the bulk of the infrastructure investment spending plans that the government is planning for the years ahead,” said Ramaphosa.
President Ramaphosa challenged mining companies to strive to achieve what he calls the “10 value-creating principles for a more modern, successful and productive mining industry”:
- Companies should foster inclusive growth in the areas where they operate;
- Companies should partner with local governments to improve infrastructure, such as water and roads, in the areas where they operate;
- Companies need to see investment in the living conditions of their workers as more than a regulatory obligation;
- Companies should invest in education and training;
- Companies should partner with training colleges, contributing to the development of curricula and providing work experience for students;
- Companies should embrace beneficiation;
- Companies need to pay more attention to, and invest more in, the health and safety of workers;
- Companies need to provide internships and job experience opportunities for young people—as well as provide business opportunities for SMMEs—because that is the only way to prepare our youth for the world of work and stimulate growth through the active participation of SMMEs;
- Companies must prioritise the development of young women, through proactive hiring policies, prioritised training, promotion and mentorship;
- Companies must have the courage to include their workers in the shareholding of the companies.
He also urged the industry to take advantage of the technological advances underpinning the Fourth Industrial Revolution.
Ramaphosa said, “I am encouraged by some of our mining houses that are already making use of technology—no longer for purposes of replacing people with machines—but fundamentally to improve efficiency, guarantee safety, produce a skilled workforce and, most importantly, preserve jobs.”
