MINEFUL OF THE FUTURE

Leveraging the next wave of growth: How can we invest in African mining

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Nearly everything the modern human race relies on is either made from minerals or depends on minerals for its production. Dating back to the discovery of gold in 1886, South Africa in particular has a long mining history and the industry has been the driving force behind the country’s economy. Although the industry has been faced with a number of challenges over the past decade, according to the South African Chamber of Mines, our total mineral reserves are estimated more than $2.5 trillion, with the mining sector contributing around 18% of GDP and over 50% in foreign exchange earnings.

According to Statistics South Africa, mining production decreased by 4,2% year-on-year in November 2016. The main negative contributors were:

  • platinum-group metals (PGMs): -10,8% and contributing -2,4 percentage points;
  • iron ore: 8,7% and contributing -1,5 percentage points; and
  • gold: -9,4% and contributing -1,3 percentage points.

Manganese ore (26,9% and contributing 1,5 percentage points) was a significant positive contributor. Seasonally adjusted mining production decreased by 3,9% in November 2016 compared with October 2016. This followed month-on-month changes of -0,8% in October 2016 and -0,6% in September 2016.

“Seasonally adjusted mining production decreased by 1,5% in the three months ended November 2016 compared with the previous three months. PGMs (contributing -1,6 percentage points) and iron ore (contributing -1,1 percentage points) were the largest negative contributors,” according to Statistics South Africa.

Although a number of the challenges in the mining industry might not be easy to overcome, the sector nevertheless continues to make a valuable contribution to the South African economy, most notably in terms of foreign exchange earnings, employment and economic activity.

According to KPMG, a premier sponsor of the 2017 Investing in African Mining Indaba (taking place from 6 to 9 February at the Cape Town International Convention Centre), the Mining Intelligence Database points out that the mining and related industries not only employs over one million people–spending R78 billion in wages and salaries–and is the largest contributor by value to black economic empowerment (BEE) in South Africa and provides job mining opportunities for unskilled and semi-skilled people across the spectrum.

KPMG says the South African rand continues to be inextricably linked to mining–since minerals and metals contribute such a hefty portion of our export revenue and “its foreign exchange value is highly sensitive to the price of minerals and production, fluctuating up and down as the price of gold and other commodities rises and drops or when labour unrest on the mines threatens production.”

Changes

Given all this, the importance of the mining sector for the South African economy and trade and investment in general, should not be underestimated and experts say, regardless of the challenges ahead, 2017 could well be a turning point for the industry, providing that the mining industry is prepared to make some serious changes to stay relevant. These changes, according to a KPMG media release, include an increased emphasis on:

sustainable mining methods which take into account the social and environmental impact of the industry;
adding value through beneficiation;
achieving BEE targets; and
promoting more equitable sharing in our rich resource base.
Reflecting back on 2016 and taking a peep into the future, PricewaterhouseCoopers (PwC), a triple A + level 1 contributor committed to ongoing transformation in South Africa, told Opportunity magazine in an exclusive interview that some of the successes achieved in 2016 will help to build a strong foundation for the industry’s prospects for 2017. These include the fact that multi-year wage negotiations were signed with minimal industrial action.

“From an outsiders view the negotiations appeared to occur on a much more mature basis. Fatalities reduced further as mining companies invested heavily in safety, in equipment working practices and in training. The improved commodity prices towards the end of last year provided much needed energy in the industry,” according to PwC.

Reshaping the industry

Andries Rossouw, Assurance Partner at PwC, says the biggest lessons learnt in 2016 are that stakeholders in the industry realised that they can’t merely wait for prices to recover, but rather have to reshape the industry to cope with the current low price environment. He predicts that in 2017 the cost saving initiatives implemented over the last couple of years will start bearing fruit.

“Those mining companies who maintain discipline whilst prices recover modestly will benefit most. More mining companies will start looking beyond survival mode and towards strategic longer-term planning. There will be an ongoing focus on technology to optimise and improve mining safety and to drive specific commodities demand.

“After very negative global view on coal last year, the significant recovery in coal prices, increased local demand and export infrastructure in the latter half of 2016 will put a lot of focus on coal,” says Rossouw.

Mining Industry Leader for PwC Africa Michal Kotzé’s wish for 2017 is that the various role players in the mining industry should work together to address regulatory uncertainties and continue to remove bottlenecks to profitable growth.

Carel Smith, Head of Energy & Natural Resources for KPMG in Southern Africa, agrees that working together will unlock the potential of the mining sector in Africa.

“The need for collaboration between all stakeholders is the key to unlocking the potential of the mining sector in Africa. This means intergovernmental collaboration across countries in Africa and intra-governmental collaboration between departments, as well as producers, suppliers and communities in which the mines are based. All stakeholders must realise that they need each other in order for the industry to succeed.

This realisation should frame the trade-offs and compromises that are inevitable. This is a partnership, which will drive the other important Ps that will drive the industry, such as productivity, profitability, positive narrative. These are not new words—but they do take on new dimensions given a different context,” he says in a KPMG blog.

Speaking to Opportunity about South Africa’s biggest advantage in terms of improving trade in the mining industry in 2017—and our biggest challenges, Kotzé says we have a significant resource base on a broad spectrum of minerals with very good mining skills and experience. “The perceived mistrust between the Department of Mineral Resources (DMR) and the mining industry needs to be resolved. Ensuring regulatory certainty remains a significant challenge.”

Pressure on platinum miners

According to Kotzé the ongoing low PGM price market is putting a lot of pressure on platinum miners, which could hold the mining industry back in 2017. Furthermore, he says: “The negative socio-economic environment around mines and the expectation gap on what mines can deliver to communities,” could also hamper industry growth.

Looking at export relationships, South Africa exports nearly 50% of its minerals to western, eastern and southern Asia.

Rossouw says as mining commodity prices are largely linked to global per capita GDP growth, and Asia has been a big part of that growth over the last 15 years, growth in that region will most likely continue to influence global demand.

“Growth in mature markets like the United States and the European Union will support demand for metals like PGMs, nickel and discretionary expenditure items like jewellery, which generally benefit more from consumer driven growth,” according to Rossouw.

In terms of trade and investment on the African continent, Kotzé says the mining industry is a global family that needs to work together across borders in order to succeed. “Respect for local requirements and dynamics, while implementing the best of global standards, is often a recipe for success.”

Research and development

His advice to local mining companies is to make more investment in research and development to improve mining methods.

How will PwC make a difference in the mining landscape in South Africa and on the African continent?

“PwC builds trust. We provide stakeholders with assurance on a variety of levels to address the trust deficit that exists between various stakeholders in the industry. We are playing a key role in optimising efficiencies throughout the supply chain and with technological implementation, which is an essential element in managing costs.

We support the industry through the various restructuring initiatives from bringing transaction parties together, transaction and funding support and post implementation change management and synergy realisation.”

According to experts in the industry, further future advancement in the mining industry in South Africa—and Africa at large will depend on the level of innovation (which many believe holds the key to building a better future for the mining sector and the communities it serves) and modernisation and mechanisation (which have both been hot debates recently).

“Innovation is required at operational level to improve safety, efficiencies and to mine ore bodies that previously couldn’t be mined. Conventional mining as we know it today is unlikely to be used for new mines. Modernised mines allow for a better working experience for a higher skilled worker. Innovation requires long term investment. The recent tough years in the industry will mean that innovation decisions taken today is likely to only be implemented over the longer term,” says Kotzé.

According to Smith, CEOs across the industry are grappling with the notion of optimising costs in their businesses in order to drive profitability but also maintain good relationships with their stakeholders, such as workers and government.

“Productivity takes on a fresh slant when you approach the employee as a human being rather than a production unit. Profitability too loses its one dimensional, ‘I get rich at your expense’, connotation. Positive narrative doesn’t mean empty ‘spin’. To change the narrative of a 100 plus year-old industry, in a way that unleashes potential and inspires hope requires that we change!

“Modernisation doesn’t replace or exclude mechanisation. The matter may not be resolved through mass job cuts but through reskilling the workforce to maximise productivity and profitability. This is also dependent on access to the ore body. Appropriate mechanisation of ore bodies that would otherwise have been sterilised as unprofitable demonstrates how highly skilled jobs can be created if the industry is willing to let go of old paradigms. Modernise. Change our perspective. Think, and do, differently,” says Smith

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