Nobody wants to hear about SA’s miserable mining sector. It’s fed us nothing but bad news for years. “It’s in terminal decline”, says Peter Major, director of mining at Cadiz Corporate Solutions, and few in government appear to notice or care.
If there’s any sliver of good news in this tale of woe, it’s that some of this misery is reversible given the vast and still untapped potential of mining in SA. Peru and Chile’s mining sectors are booming after making some astute policy changes. Chile’s mines were nationalised in 1971 under communist President Allende when they were producing less than Zambia or Democratic Republic of Congo. They were privatised a few years later after General Pinochet staged a coup, and encouraged mining investment. Chile is now the world’s largest producer of copper, generating more than US$40 billion a year from copper alone, more than the $37 billion SA makes from all metal sales combined.
Legislation alone does not account for Chile’s success. Policy certainty, and a pro-investment mining and tax regime were the main drivers of growth.
SA miners are burdened with all sorts of regulatory and cost burdens, from BEE quotas to a Labour Relations Act that was hustled through Parliament before the Constitution came into effect. What’s left is “a worse than nationalised mining sector”, says Major. Parliament’s great triumph since 1995 are the 2000-plus pieces of legislation and 3000 policy changes it crafted. Not to mention the 450 000 jobs lost forever. Business, and mines, are drowning in red tape. There’s a very substantial cost to that.
“SA has half the world’s minerals and almost no-one to mine them. We have 6152 abandoned mines and counting. In 1980, our mines accounted for almost half the market cap of mining stocks in the entire world. Now we’re down to about 2% to 3%,” adds Major.
If you want more numbers to back up the claim of a mining sector in terminal decline, Major has them. Gold mines used to employ north of 500 000 workers in the 1980s when Cyril Ramaphosa was the National Union of Mineworkers leader. Then came the gold miners’ strike of 1987, and mines started shedding jobs in search of less risky alternatives, such as automated mining. Now the sector employs a little over 110 000.
Henk Langenhoven, chief economist at the Minerals Council of SA, sits on a working group (with government and labour) tasked with fixing the sector. He has a more positive outlook on the future. “In the last few months there’s been a noticeable change in attitude in government, and a willingness to hear our point of view and help solve the problems the industry faces. We will be issuing a compact, which is a kind of roadmap for the future, based on certain common interests. Ethical leadership is one of the issues everyone agrees on. Health and safety is another. We’ve had commitments to ethical leadership in the past, but these were more talk than action.”
The Minerals and Petroleum Resources Development Amendment (MPRDA) Bill remains in limbo, and of questionable Constitutionality – particularly the proposed amendment requiring export licences for minerals. Lack of policy certainty, rather than bad policy, discourages investment.
Langenhoven says the first step in fixing the sector is a recognition of what’s broken about it. “One of the issues at the Department of Mineral Resources is the backlog of applications for mining and exploration licences. We used to have an electronic tracking system for licences, but this was abandoned – and is now being restored. Exploration in SA has virtually died. We have to start exploring again.”
A survey of 16 mining companies by the Chamber of Mines suggests mining investment could increase 84% if hurdles such as policy uncertainty are cleared. These mining companies plan to spend a combined R145 billion in capex over the next four years, but a more certain and conducive environment could increase this by a staggering R122 billion, creating another 48 000 jobs, says the survey.
For example, Eskom’s new power stations need at least two new coal mines. SA remains one of the world’s most resource-rich countries, much of which is still poorly explored. Then there is the question of what to do with illegal miners, who it’s estimated, generate sales of R7 billion a year, according to a PwC report, SA Mine. The recent decision to issue mining permits to illegal diamond miners in Kimberly could become a blueprint for the rest of the country.
At its peak in the eighties, the JSE had 140 listed mining companies. Now we have a little over 40. And of the mining companies left on the JSE, how many are truly South African? The Resources index (RESI) is just 25% SA-based. The rest of the assets are located outside SA.
“We still have 50% of world’s known gold, and half of that is at the bottom of existing shafts – but we’re filling in shafts, and selling hoists for scrap. It’s criminal,” says Major. “SA mining is the world’s most destroyed industry without going to war. We’ve traded our gold mines for shopping malls, property shares and casinos.”
On a more positive note, Major says platinum shares offer decent value based on the metal’s lower than average long-term price. Mining stocks are highly cyclical, and are now still 50% off their 2011 peak. “SA has roughly 70% of the world’s platinum group metals supply, but the sector expanded too quickly after government nationalised all mineral rights in 2004,” adds Major. “That pushed up production and depressed market prices.”
For close to 100 years, mining stocks yielded a 14% US dollar return, with the JSE gold index offering dividend yields over 8%. Now the dividend yield hovers around 2.3%, after three decades of falling earnings.
What’s killing our mines?
The corpse of our once robust mining sector has government’s fingerprints all over it, says Major. Some of the more obvious culprits of its demise include:
- Electricity – we once had the world’s cheapest electricity, a major advantage for power-hungry mines. We also had cheap steel to sink massive shafts. Those days are gone.
- Transport costs are excessive: moving goods from harbour to interior costs 4-7 times what it costs in US.
- The mind-blowing complexity and cost of BEE deals. And BEE shareholders are borrowing to buy into a declining sector – not a recipe for success.
- Government’s double-cross on nationalisation: it said it would never nationalise the mines, but that’s exactly what it has done just 10 years after the 1994 elections.
- A Labour Relations Act that facilitates and generates tension and unrealistic expectations, and raises labour costs.
- Government making policies unilaterally, and imposing costs and demands based on bubble prices and unrealistic assumptions.
Invest in the sector?
It seems that at this point, there are well-priced, but highly selective opportunities in the resource sector. However these are only for those who are very well versed in this space, and who are prepared to play the long game.