• Back to basics

    The sector will have to focus on consolidation to ride out the commodities downcycle.

    Back to basics

    It is sometimes said that there’s nothing like a crisis to bring people together. Even if this is true, a positive outcome is not guaranteed. Crises are as likely to expose differences as heal them. That, unfortunately, is what seems to be happening in the South African mining industry.

    As commodity prices continue to move downward in the second half of 2015, the mining industry worldwide continues to shed jobs, cut back expansion and exploration, and sell marginal assets. Anglo American, the world’s fifth-largest diversified mining group, recently announced its intention to cut its global workforce by one-third, effectively shedding 98 000 jobs.

    Anglo is not alone. Mining companies are cutting jobs in every jurisdiction. In South Africa, Lonmin has announced the closure of five platinum mines, which will cost 6 000 jobs. Restructuring of Anglo American Platinum’s Rustenburg shafts will see cuts of 7 000 jobs and Kumba Iron Ore (another Anglo American company) will finally close the Thabazimbi operation, which means a loss of 1 200 jobs.

    According to reports, there have been 35 000 retrenchments in the platinum sector, 10 000 in gold and more than 3 600 in the iron ore and chrome sectors in South Africa since 2012.

    In Zambia, the copper industry has been bleeding jobs despite government complaints that are rather similar to those heard in South Africa. In August, First Quantum announced that its Kalumbila operation would shed 1 480 jobs. The company was criticised by President Edgar Lungu over much smaller job cuts (343 contract workers at Kansanshi) earlier this year.

    In January, Bloomberg’s Commodity Index – which tracks the prices of 12 key commodities – was already at its lowest level since 2002. It has fallen a further 12% since then. Gold may drop below US$1 100 for the first time since 2010, iron ore prices are down 77% from their peak of US$190/ton in 2011, and copper is trading at a six-year low.

    Job losses can all too easily become a political football. Nowhere is this more the case than in South Africa, where the rate of unemployment is in excess of 25%.

    There is, however, a mismatch between politicians’ concerns about job losses and the mining industry’s worries about viability. The industry believes that government has no comprehension of the scale of the present crisis, nor the sector’s imperatives.

    Speaking at Sibanye Gold’s interim results presentation in August, CEO Neal Froneman argued that ‘the sooner the government understands the economic realities of running a business, the sooner it will do the right thing. We are tired of political comments instead of concrete actions. Government has to nurture this industry. Until it changes its mindset about nurturing these businesses we will continue to be at loggerheads’.

    This statement marked a departure from the ‘quiet diplomacy’ the industry has employed since 2012. There was an almost palpable sense of relief that someone had at last spoken bluntly on behalf of the industry.

    Quiet diplomacy has not worked. Some observers, such as Ian Cruickshanks of the South African Institute of Race Relations, believe that government has interpreted it as ‘a sign of weakness’. Indeed government seems more inclined to ‘bully’ the industry than previously.

    There’ve been 35 000 retrenchments in the platinum sector, 10 000 in gold and more than 3 600 in the iron ore and chrome sectors in South Africa since 2012

    In January this year, Optimum Coal – a mostly opencast colliery owned by the world’s largest diversified mining firm, Glencore – announced that it would be retrenching 1 000 workers. The mine was battling, not because of the global market price or problems with its coal seam but because it was lumbered with a 22-year-old supply contract with Eskom.

    Conditions have changed since the mine entered the agreement with the electricity-supply parastatal. The costs of both power and labour have soared and Optimum has found itself supplying coal at below its cost of production. The beleaguered Eskom, in trouble on every front, refused to renegotiate. In late July, Optimum announced a further 380 job cuts.

    The response from the Department of Mineral Resources was extreme. On 4 August, Minister Ngoako Ramatlhodi announced the suspension of Optimum’s mining licence.

    Since 2002, mining companies cannot own the resource they mine in the South African jurisdiction. It is owned by the state, and mining rights are allocated in terms of the Mineral and Petroleum Resources Develop-ment Act (MPRDA).

    When that legislation was passed, mining companies warned that it could be used to undermine the security of their investments. However, Ramatlhodi’s action fell a long way short of the industry’s greatest fear – outright nationalisation. It is probably best seen as a further milestone in an ongoing bargaining process – between the industry and government – over jobs in the industry.

    In fact, given the recent history of the jobs issue in the industry, he had no real political alternative but to act.

    In January 2013, the present minister’s predecessor Susan Shabangu responded with outrage to an announcement by Anglo American Platinum that it intended shedding 14 000 jobs. She accused the company of ‘arrogance’ and ‘playing games with us’, and threatened to suspend its licence. Anglo Platinum’s plans were part of a strategy to deal with its losses on South Africa’s platinum belt. Among other things, it intended moth-balling four of its seven platinum shafts.

    At the time Anglo backed down, at least in public. The company had certainly failed to observe a clause in the mining legislation that requires a 60-day consultation period before cutting a ‘large number’ of jobs.

    If Ramatlhodi had only threatened to suspend Optimum’s licence – rather than actually doing so – he would have appeared toothless. But this does not mean that the mining industry doesn’t feel threatened; nor does it suggest that such perceptions are without foundation.

    The gulf in understanding between the government and the mining industry is wider than ever. The minister’s high rhetoric on announcing Optimum’s suspension was clearly aimed at a domestic political audience.

    ‘The retrenchments … were inhumanely conducted and disregarded all the legal prescripts that govern the process of retrench-ments,’ he stated, according to Reuters.

    Later, after discussions with the company, Ramatlhodi conditionally withdrew his suspension of the licence. However, the minister’s attitude can hardly be comforting for an industry that feels misunderstood and under threat.

    Not only has a perfect storm – made up of rising administered prices (labour and electricity), workforce unrest and collapsing commodity prices – been building for several years, but the South African government seems set on self-inflicted damage too.

    There are two major current uncertainties in the country’s regulatory framework. The amended MPRDA was withdrawn in mid-2014, despite having been consented to by the industry’s representative in the form of the Chamber of Mines. There is as yet no sign of its replacement.

    There is also uncertainty over black economic empowerment (BEE). The Department of Mineral Resources wants to align the sectorial BEE charter with the codes enacted by the Department of Trade and Industry. The industry has been implementing the 2002 charter, a form of voluntary self-regulation. One of its key provisions is that every company should be 26% black-owned.

    There have been endless disputes over whether this target has been achieved. It has become a factor in the awarding of mining licences.

    The industry asserts that ‘once empowered’ should mean ‘always empowered’. In other words, if a company’s BEE partners cash-out and in so doing reduce its black ownership holding to below 26%, the company should still be acknowledged as ‘empowered’. The dispute looks likely to end up in court as the chamber seeks certainty on the issue.

    The real problem in South African mining is that government seems to believe that the downturn is simply part of the ordinary business cycle. Mining firms cannot, however, see where recovery is going to come from. China’s great industrial boom appears to be over and oversupply can be expected to keep resources prices low for several years.

    Workforce pay issues, too, have presented a serious conundrum. In August, as the industry entered its traditional ‘strike season’, unions again refused to settle for increases that are less than well above inflation.

    However, on a positive note, in late August the industry, government and unions committed to a broad set of plans aimed at stemming job losses and mine closures and enhancing the sector’s long-term sustainability. Chief among the ideas are the promoting of platinum as a reserve metal like gold; rehabilitating mines to keep workers employed; retraining schemes and enhancing productivity. It’s a relief that the parties are in agreement about the situation in the sector and are still talking.

    By William Oliver
    Image: Anglo American