South Africa’s mining industry on cusp of recovery?

South Africa’s mining industry could be on the verge of a recovery, as the sector returns to profit. According to the ninth edition of PwC’s SA Mine Report, 2017 was another challenging year for South Africa’s mining industry, with a decrease in dividends and market capitalisation, various retrenchments across the industry and marginal increases in taxes paid. However, the report notes that spot price increases for bulk commodities supported the industry and resulted in a return to profitability, after the first substantial increase in revenues in five years. Michal Kotzé, PwC Africa energy utilities and resources leader, comments: "The 2017 year can be described as a year of policy uncertainty and real questions over the long-term sustainability of the industry. “After the price lows of December 2015 and January 2016, the current year saw US dollar prices recover for most commodities with the exception of platinum. Although some US dollar price gains were offset by a stronger rand, the improved prices did bring the industry as a whole back into profitability.” Despite an improvement in the financial performance of the industry, regulatory announcements in June 2017 resulted in market capitalisation dropping to June 2015 levels. A subsequent recovery at the end of August was aided by improved US dollar prices and hope by investors that the suspended new Mining Charter would be revised before final implementation. The 2017 financial year saw a decrease in the market capitalisation of the companies analysed to almost the low levels of 2015, according to PwC. “The market capitalisation of the 29 companies analysed in this report decreased to ZAR420bn, a 25% decline from ZAR560bn as at 30 June 2016. Market capitalisation recovered somewhat to ZAR506bn as at 31 August 2017, on the hope that there would be an amicable solution between the industry and the regulator.” Coal maintained its strong position as the leading South African mining commodity revenue generator. Despite its percentage of revenue generated remaining unchanged at 27%, it increased total revenue to ZAR119bn from the prior year’s ZAR105bn. Platinum group metals’ (PGM) share of total revenue decreased to 22% from 24%, as total PGM revenue decreased by ZAR2bn to ZAR94bn. Gold’s share of mining revenue decreased to 16% from the 18% seen in 2016. In contrast, iron ore’s share increased to 11% from 9% due to a ZAR10bn increase in revenue, according to PwC. Revenue increased by 13% (ZAR43bn) from the prior year. “It is notable that this is the first substantial increase in more than five years,” comments Andries Rossouw, PwC assurance partner. Operating expenses increased by ZAR13bn, which is a 5% increase from the prior year. Continued low commodity prices have resulted in another year with significant impairments in the industry, with a total of ZAR22bn in impairment provisions. More than ZAR100bn was impaired during the past three years, more than wiping out the past two years of capital expenditure in the industry. Labour still accounts for the majority of mining companies’ costs, accounting for approximately 44%. Labour costs increased by 4.5%, which was marginally below inflation. “In the last number of years we have not seen a significant change in the risks identified by mining companies,” warns PwC. “These include: volatile commodity prices and foreign exchange fluctuations; the regulatory, political and legal environment; socioeconomic environment around mines; sustainable business plans or budgets; labour relations; operating costs; reliance on third-party infrastructure; employee safety and health; liquidity and capital management; and compliance with environmental standards. “In 2017, the risks have remained relatively consistent, with three companies also including cybersecurity and its consequences as a risk,” the report notes. According to safety statistics, the level of safety has improved substantially in the industry, with fewer fatalities reported during the past ten years. This is indicative of investments made by mining companies in safety initiatives. Technological advancements have spurred innovation and new ideas in the mining industry. A number of mining companies have adopted emerging technologies. The use of remotely-piloted as well as autonomous drones to survey opencast mines is a common example of the adoption of emerging technology. Mines are also using autonomous drilling, proximity devices, collision awareness systems for mine vehicles and trucks, cloud and mobility solutions. Mining in Africa The report also looks in detail at three countries outside South Africa, noting: The DRC The growth in the DRC mining sector since 2002 has been facilitated by the commodities boom, attractive tax and customs incentives, greater stability and an improved regulatory environment. By the end of 2016, 482 companies held mining rights, compared to 35 in 2002. The production of copper amounted to 1.035 billion tonnes at the end of 2016, versus 27,259 tonnes in 2002. Cobalt production achieved 69,038 tonnes at the end of 2016, versus 11,865 tonnes in 2002. Nigeria Despite various challenges, the government has taken a number of steps to make the mining sector more attractive for investment by putting in place clear regulatory policies and operationalising existing ones. There are still a number of challenges in the sector, ranging from insufficient infrastructure to regulatory conflicts. The Nigerian mining sector realises it needs to align itself with world trends and norms, especially around the future demand for various minerals. Tanzania In 2016, the Tanzanian government introduced fundamental changes to the income tax regime for the extractive sector. June 2017 saw significant changes for the sector, even more fundamental than the 2016 changes. The broad objective of the new legislation is to seek to obtain a higher return to Tanzania from its natural resources.

South Africa’s mining industry on cusp of recovery?

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