The last few years have been extremely challenging for the South African mining industry. Investment into the sector has been weak and many projects have stalled.
“Companies have been focusing on optimising their portfolios of assets, strengthening their balance sheets, and being very disciplined in spending capital,” says Greg Webber, co-head of mining and resources at Nedbank CIB. “There has been a large shift to cost cutting. Coupled with that, access to the local equity and bond markets has largely been closed for mining companies. It has been an ‘investment off’ environment in South African mining.”
There have been three primary reasons for this, with regulatory uncertainty being the most prominent.
“Until the release of minister Gwede Mantashe’s Mining Charter last year, we were in a period of limbo while Mining Charter II tapered off and various versions of Mining Charter III floated around,” Webber explains. “That definitely turned investors off.”
The last few years have also been a period of significant commodity price volatility. In 2015 and 2016 the prices of bulk commodities and base metals fell substantially. That also dampened the appetite for investment.
Finally, mining cost inflation has become a growing challenge in South Africa.
“We have seen electricity, labour and certain other costs increase at rates greater than the broader inflation rate,” Webber says. “Couple that with labour and community unrest and safety setbacks, and it just hasn’t been an appealing environment for investment, particularly if you look at it with an international lens and compare South Africa with other mining jurisdictions around the world.”
The revised mining charter
In late September last year, the revised Mining Charter III was released after engaging at length with stakeholders in the local industry. This, Webber believes, has made a difference to how South Africa is perceived by investors.
“The whole collaborative approach towards producing that mining charter and the way it has been received by the market has certainly changed the narrative around the sector and made it more positive,” he says. “We have come out of that perpetually negative cycle, and hopefully that translates into a more positive approach to investment.”
However, as encouraging as the release of the mining charter has been, it has not gone all the way to producing regulatory certainty.
“We still need some clarity as to how long these rules will remain in place, or when they will next be reviewed,” Webber argues. “Is Mining Charter III now in place for eternity, or until the next election, or until the next mining minster? That remains unanswered.”
In that sense, the uncertainty created under former mineral resources minister Mosebenzi Zwane has left investors wary. The revised charter also still leaves some questions around ‘once empowered always empowered’ as companies will still have to ‘re-empower’ themselves when renewing a mining right.
Amendments to the Mineral and Petroleum Resources Development Act are also still pending. Those too need to be finalised before there is absolute clarity on the legal environment.
Finding investor support
In addition, these factors have to be considered in the context of the broader structural issues facing the sector.
“We have been a mature mining destination for a long time and a leader internationally,” says Webber. “The downside to that is that we are depleting our geological resources and, although there is quite a lot left, it is becoming more complicated and costly to get to. That is a fairly insurmountable challenge and it shows up in varying degrees across various commodities.”
This makes South Africa less competitive globally, particularly when coupled with the rising cost of inflation. However, that does not mean there aren’t still opportunities to be found.
“There are still some very good unexploited ore bodies in this country,” Webber says. “There are a number of projects under development, so the opportunities for investment still exist.”
What is important for the sector is that more momentum is created to ensure that the right level of investment is found to support these projects.
“Broadly speaking, what has been done by the minister and industry in their collaborative approach over the last year or so has definitely brought a more positive attitude to the sector,” says Webber. “It has arrested the slide of disinvestment out of SA.
“My sense is that the industry is in a relatively stable position at the moment,” he adds. “Commodity prices are largely at sustainable levels and the ship has been steadied. But has enough been done to now promote a growth phase and an ‘investment on’ phase in the country? The jury is still out on that one.”
Brought to you by Nedbank CIB.