Around the world, 2014 saw commodity prices drop. Mining majors have become increasingly cautious about new investments and more inclined to focus on cost-cutting within their existing portfolios. What these conditions imply is an even greater need for mining jurisdictions to make themselves as attractive to investors as possible.
In this regard, South Africa and most other African countries continue to move in different directions. Many have worked hard to improve their regulatory frameworks. Most recently, Côte d’Ivoire enacted a new code that was so impressive, Randgold Resources CEO Mark Bristow described it as a ‘go to’ jurisdiction in West Africa.
African mining is notoriously tough. Investors often know in advance that legal, logistical and financial infrastructure is inadequate. For this reason, governments that do relatively simple things to show their willingness can make considerable strides in attracting investors.
However South Africa, the country with the most developed enabling environment on the continent, has continued to flounder. Mining companies are wary of government’s grasp of mining issues, its commitment to the sector and the state’s unclear ambitions.
In June 2014, Ngoako Ramatlhodi became the new Minister of Mineral Resources, replacing Susan Shabangu who was appointed the Minister of Women in the Presidency.
The Chamber of Mines had worked extremely hard to build a relationship with Shabangu and found itself almost back at the starting point: Ramatlhodi’s inexperience was apparent from the start. He began setting up a task team to deal with the labour crisis in the platinum sector, issuing stern deadlines, but quickly abandoned the initiative when it became clear that the problems were intractable.
In October, Ramatlhodi asked the mining industry to take him into its ‘full confidence’ when it planned to restructure or make large deals. Given his department’s track record of partiality and the misuse of confidential information, this appeal has to be perceived as either naive or threatening – if not both.
Ramatlhodi’s big initiative in his first few months in office was his request to President Jacob Zuma to return the amended Minerals and Petroleum Resources Development Act (MPRDA) to Parliament for reconsideration (which Zuma did in mid-January). The Act, intended to increase minerals beneficiation within the country and make it easier to apply for mining licences, has a fraught history.
Democratic Alliance shadow minister of mineral resources James Lorimer has consistently opposed the Act. He says the more than 30 ‘unfettered discretions’ it grants the minister constitutes radical uncertainty, is unconstitutional, will discourage investment and cost jobs. Lorimer says the enabling environment for mining in South Africa is already inadequate.
‘That is why South Africa, with the world’s largest mineral endowment, is currently attracting only 2% of global mining investment,’ he says. According to various reports, the country’s non-energy mineral endowment stands at around US$3 trillion.
The problem with Ramatlhodi’s initiative to change the amended MPRDA is that neither his motives nor his intentions are clear. He has said he is ‘studying’ the Act. It has been suggested that in its present form, the law will restrict new entrants, which would affect the minister’s core constituency – emerging black-owned South African mining companies.
South Africa’s legendary gold sector is in dire straits and is surviving only by cutting costs on a scale that will undermine future viability
The issue may be that the Act’s provisions for a mandatory state share have already spooked oil and gas explorers. Or maybe Ramatlhodi is genuinely concerned with the substantive and procedural constitutional niceties at stake.
However, the final version of the law was approved by the Chamber of Mines, which at first strongly opposed it. The chamber, which represents about 90% of local mines, engaged with the department for more than a year to soften its requirements, especially those related to beneficiation. After fighting for changes, succeeding in getting it amended, approving those amendments and then seeing its efforts be in vain, the chamber’s members cannot help but perceive the enabling environment as more uncertain. Ironic, since Shabangu’s main objective when she introduced the law was to ‘create certainty’.
According to Statistics South Africa, the total volume of mining production in August 2014 was 10% lower than it had been a year prior to that. A large part of that decline was the fact that the strike-ravaged platinum industry mined 45% less than it had in recent years. Platinum is the second-biggest sector in the country, behind coal. None of the other major sectors are having an easy time either.
South Africa’s legendary gold sector is in dire straits and is surviving only by cutting costs on a scale that will undermine future viability.
Mike Schroder, a portfolio manager at Old Mutual Equities, says: ‘South Africa is likely to hoist its last skip of gold-bearing ore from the once giant Witwatersrand deposit in 2019.’ That won’t quite be the end as mines elsewhere will last longer, especially on the Free State gold fields where Harmony Gold’s Target mine has potentially many years left. Most South African gold miners have greatly cut capital expenditure in 2014. This, as Schroder says, ‘comes at the expense of the life of their reserves’.
Gold mining in the country faces many of the same structural conditions as the older part of the platinum sector. The challenges include deep ore bodies and thin seams – conditions that lend themselves to a large-scale cheap labour/investment model. Actions by organised labour over the past three years have confirmed that the model is not viable.
Current problems are regulatory in nature. Eskom has been tardy about renewing contracts and there are long delays at the ministry
So ruthless has the cost-cutting been that two of the greatest names in the sector – AngloGold Ashanti and Gold Fields – have left the industry’s global marketing organisation, the World Gold Council. That organisation, perpetually bullish on the metal, expects the gold price to rise 20% over the next couple of years, mostly thanks to the appetite for jewellery of China’s emerging middle class. This may happen, but in late 2014, the price was below US$1 200/oz in a territory where a third of existing mines are said to be making a loss.
South Africa’s coal sector illustrates another set of problems in the continent’s oldest and most complicated mining environment. The country has enormous reserves – 240 years’ worth at the current rate – but may face a shortage in the near future. Eskom purchases about 70% of the country’s coal via long-term contracts and uses it to generate power. But the real money in coal mining lies in exports, which earns, per ton, more than twice the parastatal’s rate.
Current problems, however, are regulatory in nature. Eskom has been tardy about renewing contracts and long delays at the ministry – which is said to take over three years to process permits before mine construction can begin – have resulted in very little new investment. The state has responded by threatening to make coal a ‘strategic resource’, which will prioritise Eskom even more and discourage future investment.
Iron-ore mining shows the type of difficulty currently facing miners even where political and regulatory uncertainties are nowhere near the top of their list of concerns.
The great problem for South Africa’s big iron-ore miners – Assmang as well as Kumba Iron Ore – is the international market. Both firms have magnificent assets, which means that exceptionally high-grade ore can be extracted at low costs.
However, the current international price of iron ore is at its lowest in five years and has dropped by 35% this year alone to under US$80/ton.
About two-thirds of South African iron ore is exported to China. But Chinese demand has wavered in the last couple of years while a range of new mines and mine expansions – especially in Australia and Brazil – have come on stream.
The reason global iron-ore prices have fallen so precipitously is due to overproduction. South Africa’s biggest companies are little more than bit players in the global iron-ore economy. The three dominant miners – Vale, Rio Tinto and BHP Billiton – are trying to protect their recent capital investments by dumping into the market (at prices as low as US$20/ton) to drive out high-cost Chinese competitors.
South African firms are helpless spectators. They will survive, but any expansion plans are likely to be on hold for the foreseeable future.
According to South Africa’s National Development Plan, government still sees mining as a major future source of growth and jobs. But the enabling environment has to improve.
A position of 64 out of 112 jurisdictions (8th out of 16 African mining countries) in the Fraser Institute’s rankings is not good enough in the current international mining climate.