Last month I devoted this column to the latest edition of the Minerals Council South Africa’s Facts and Figures booklet. Since then PwC has released SA Mine 2019, the 11th edition of its annual review – based on data and information from 26 mining companies – highlighting trends in the South African mining industry. It gives a slightly different, more analytical, perspective than Facts and Figures and paints a picture of an industry in transition on a number of levels.
According to SA Mine 2019, mining companies have begun to enjoy some welcome relief in 2019, as gains in commodity prices, aided by a weaker rand, have brought the industry back into profitability, despite increased costs and weak production. Free cash flows doubled and EBITDA and dividends are at five-year highs.
“Shareholders can be cautiously optimistic with the mining sector outperforming the JSE All Share Index over the last two years, as it recovers from an extreme low base,” says the review. Companies paying substantial dividends included Kumba Iron Ore (R12,5 billion, compared to R6,7 billion in 2018), Exxaro Resources (R5,5 billion, well over twice the 2018 figure), ARM (R2,4 billion) and Assore (R2,3 billion).
The market capitalisation of the industry increased to R884 billion in 2019, which compares very favourably with the figures for 2018 (R482 billion) and 2017 (R420 billion). Anglo American Platinum alone saw its market capitalisation increasing by R129 billion between June 2018 and June 2019.
While mining contributed 9,6 % of the country’s GDP in 2011, this declined to 8,1 % in 2018 and dropped below 8 % in 2019. “It is unlikely that mining will again reach the levels seen in 2011 as the South African economy needs to grow on a diversified basis,” says the review.
Confirming what many of us already suspect, SA Mine 2019 notes that no substantial capital expenditure has been made in large-scale new projects. “Mining companies are taking a disciplined approach when considering their capital allocation. As large-scale investments require long-term payback periods, long-term stability is required. While more certainty was brought about by the finalisation of the Mining Charter in 2018, more needs to be done in terms of dialogue. The implementation of the Carbon Tax Act and additional environmental regulations adds significantly to the cost base and implementation uncertainty in the industry.”
Sadly, the publication offers little hope for South Africa’s beleaguered gold mining industry, which now accounts for only 4 % of global production. “Not even the significant rand gold price increase could save gold’s terminal production decline, which was compounded by shaft closures and industrial action,” says the PwC review. Although the country still has significant gold resources, the distances from existing shaft infrastructure, safety concerns and increased labour and electricity costs are putting pressure on margins. The review concludes that, in the absence of significant technological breakthroughs, South Africa will struggle to remain globally competitive in gold production.
SA Mine 2019 adds that the mining sector in South Africa is in transition from a deep level, labour intensive, conventional mining environment to a mechanised, shallower, technologically advanced industry.
Total revenue generated for the year ended 30 June 2019 by the mining sector was R529 billion, up by 6 % on the prior year. This was mainly driven by increased PGM, iron ore and manganese revenue. The PGMs had an increased revenue contribution following strong palladium demand pushing up the basket price and improved production in the sector since the prior year.
The review says that coal continues to be the mining industry’s biggest revenue generator, despite the headwinds caused by changing global sentiment towards coal, and contributed 28 % of mining revenue for the year. It points out, however, that the coal industry is not really growing – in fact, production has largely remained flat over the last 15 years.
There was an 8 % increase in the operating costs in comparison to the previous year. The increased costs were driven by marginal increased production in the current year, higher electricity and labour cost and inflationary increase in consumables and mining supplies. Labour remains the largest cost driver in the sector and this seems unlikely to change, at least in the short to medium term, as labour cost increases remain above inflation.
Commenting on the findings of the report, Andries Rossouw, PwC Africa Energy Utilities & Resources Leader, says that in spite of an improvement in operating performance, both investor sentiment and the global attractiveness of the industry continue to erode with investors and consumers questioning whether the industry can create sustainable value for all stakeholders.
“More than ever, the speed of technological advancement, climate change, sustainable operations and changing consumer behaviour should be top of mind for mining companies,” he says. “They need to find a balance between stakeholder needs and long-term sustainable operations in their capital allocation decisions.”
Arthur Tassell
