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Abu Dhabi, UAETuesday 23 April 2019

South Africa's battered mining sector sees some relief ahead

Ageing reserves and disastrous policy decisions have cost the sector but a new era of collaboration between state and industry may reverse the decline

The African Mining Indaba conference in Cape Town, South Africa, offered new hope for miners. Reuters
The African Mining Indaba conference in Cape Town, South Africa, offered new hope for miners. Reuters

Cape Town // Time is running out to save South Africa’s ailing mining industry, once the lifeblood of the country’s economy.

Now, for the first time in almost a decade, business and government leaders have put aside differences to rescue what remains.

For more than a century the production of gold, diamonds, coal and base metals such as iron fuelled the South African economy. However, declining reserves, rising costs and a series of disastrous policy decisions have cost the industry dearly; in 2018 alone more than 53,000 jobs were lost, according to the Minerals Council of South Africa (MCSA), the industry’s main representative body.

While the realities of working ageing deposits are beyond the control of both industry and government, the fact that both sides barely spoke to each other by the end of 2017 was not. Now, rapid changes to the political landscape over the past year have brought the state and industry together once again.

“We are in a much better position to mine than we were a year ago” said Roger Baxter, chief executive of the MCSA. Mr Baxter was speaking at the Mining Indaba last week, Africa’s largest resource forum held annually in Cape Town, which has become an industry litmus test for investment.

At last year’s Indaba, mining companies gloomily explored their dwindling options as then president of South Africa Jacob Zuma backed legislation that would see resource players being forced to hand over control of their operations to crony businessmen under the guise of black empowerment.

Relations between miners and state officials such as the then resource minister Mosebenzi Zwane became so bad that the two sides had completely stopped communicating with each other. “Last year we had a minister with malevolent intent,” Mr Baxter said. “Now it’s completely changed. The new administration is open to talking to us, and working with us.”

Last year Mr Zuma was forced out of the presidency and replaced by Cyril Ramaphosa, a former mining executive. Mr Zwane was quickly supplanted by Gwede Mantashe, a one-time trade unionist who was himself a mine worker for 13 years.

Both men attended the Indaba, working the floor and meeting mining executives and essentially winding back years of bad blood that brought investment to a standstill. Mr Ramaphosa told the event that his administration had already met the investment targets that he had announced shortly after taking office, an indication that his government was getting the message through that it was open for business.

“We wanted to raise $100 billion in five years,” he said, referencing the target he announced last year. “In a few months, seven months at that, we were able to mobilise full commitments that are backed up by projects of $20bn,” he said to applause from the audience of around 1,000 bankers and mining executives.

He also rejected the often-repeated notion that mining in South Africa was a "sunset industry" running on depleted resources. Instead, new resource deposits were plentiful and waiting to be developed and the industry was seeing a ‘rising sun’, Mr Ramaphosa said.

Mineral resource minister Mr Mantashe also reached across the aisle and said the government aimed to raise mining’s contribution to the economy.

“Mining is now only 7 per cent of GDP; we want to see it raised to 10 per cent over the next three to five years," he said.

One of the first steps his ministry took after scrapping contentious black ownership requirements was to separate out the oil and gas sector, which up to then had been included under mining laws. South Africa may be sitting on billions of cubic metres of gas and oil reserves, both onshore and off the coastline.

However, mapping these reserves was incomplete, largely because energy companies were told they would have to comply with planned black ownership legislation that would require them to hand large shareholdings to government approved black businesspeople. Now, with oil and gas to be treated differently, exploration can recommence.

“With the separation of petroleum and mining, we expect oil and gas to become a significant part of South Africa’s economy,” Mr Mantashe said.

Meanwhile, mining still has the potential to re-invent itself. A study by Citigroup ranked South Africa the wealthiest country in the world in terms of mineral reserves yet to be mined, which were valued at more than $2.5 trillion. In spite of still large reserves, mining itself has declined, with around a third of all resource companies once listed on the Johannesburg Stock Exchange having either departed to other countries or shut down completely.

Convincing reluctant investors to re-enter what is already a high risk, long term sector will not be easy. The country is about to hold elections and political talk around possible land nationalisation has not helped the beleaguered industry.

“It’s not really one action, or one speech that will change investor perceptions to South Africa,” George Cheveley a portfolio manager at Investec Asset Management said on the sidelines of the Indaba event. Instead, investors need confidence that the rules they operate under do not arbitrarily change, as happened under Mr Zuma’s government.

“It’s not so much about what the rules and regulations are, it’s that they stay the same,” Mr Cheveley noted.

Another vexing issue is that of electricity, the price of which constitutes nearly a third of mining costs, according to MCSA figures. South Africa gets nearly all its electricity from state owned company Eskom, which is now deeply in debt to the tune of around 440bn rand (Dh118.62bn.

Eskom is struggling to remain solvent, while also battling to meet the country’s electricity needs of around 40,000 megawatts. Power outages are not infrequent even as the price of electricity has risen 500 per cent over the past five years.

On Sunday, Eskom warned South Africans to brace for almost daily power cuts to last until at least July this year.

It implemented so-called stage 2 rotational power cuts throughout the country on Monday, according to Bloomberg. That involves taking 2,000 megawatts demand out of the grid to prevent a complete collapse of the system. While generation units have returned to service, others have continued to trip, according to the utility.

Eskom is now asking government to sign off on a price increase of 17 per cent this year, with another 15 per cent for the following two years. Should this be granted, the MCSA’s Mr Baxter warned, mining would all but cease to exist. “I can guarantee that if Eskom gets what it is asking for, there will be no more deep-level mining.”

Mr Ramaphosa did announce in parliament last week that Eskom would likely be broken up into three state-owned entities dealing with power generation, transmission and distribution. The government will also support the institution financially, but further details will only be available in a couple of weeks.

But Mr Ramaphosa’s plan to split the company into three does little to address the producer’s problems, Moody’s Investors Service said.

Providing Eskom financial support before taking measures to generate savings at the utility would be credit-negative for the country, Moody’s said in a report on Monday. The remedies would entail “unpopular decisions on electricity tariffs and/or additional cost-cutting that would require agreement from key stakeholders”, it said.

If Eskom is allowed to raise power tariffs at the level it wants, this would ease the government’s contingent-liability risk but stoke inflation and weigh on economic growth, while small price increases would “maintain pressure on the company’s very weak financial profile”, Moody’s said.

As for the mining companies, the end of hostilities between them and the government has come as a relief. Mark Cutifani, the chief executive of Anglo American, a London-listed mining house with deep roots in South Africa, said with conflict reduced, the industry can be revived. “We can do much better with the assets we have, that represent a significant potential for the country today.”

Mark Cutifani, chief executive of diversified mining group, Anglo American PLC, speaks during a media interview on the second day of the Mining Indaba on February 05, 2019, in Cape Town. The Mining Indaba is Africa's foremost mining industry meeting, bringing international mining companies, government officials, and all role players in African mining, together. / AFP / RODGER BOSCH
Mark Cutifani, chief executive of Anglo American. AFP

Even in a perfect policy environment mining is a tough business. South Africa’s gold producers, for instance, are now pushing five kilometres below the surface to mine, which greatly increases the cost of extraction.

“We have to improve costs at least 10 per cent a year, because that’s the annual increase in cost. Minerals are becoming harder to reach," said Mr Cutifani.

Updated: February 11, 2019 03:04 PM

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