The recent gazetting of the improved mining charter – which removes some of mining investors’ key concerns – is expected to unlock potential deal flow, says Greg Webber, co-head of mining and resources at Nedbank Corporate and Investment Bank (CIB).
The past five years have been dismal for mining investment, due to a combination of low commodity prices and regulatory uncertainty. Several local and international banks with specialist mining teams have scaled back their presence in South Africa due to the constricted deal flow. Those that remained, such as Nedbank CIB, have picked up the slack.
“The key issue for mining investors is regulatory uncertainty, and I think the revised mining charter is a step in the right direction,” says Webber. “Another positive factor is a gentle recovery in commodity prices, with the exception of gold and platinum, plus a weaker rand. All this is beneficial for mining investment. Anyone investing in SA mining at present wants absolute certainty that the goal posts are not going to be moved again during their investment horizon. The mining minister Gwede Mantashe seems to have a keen understanding of the roadblocks to further investment and has been very open to dialogue.”
Mining groups have been forced to consolidate and optimise production, which has been a driver of merger and acquisition activity.
Nedbank CIB has been involved in financing and arranging some of the largest mining deals in the country, including:
- Joint arranger and funder of a bridge loan to Harmony to fund its acquisition of the Moab Khotsong operations from AngloGold Ashanti.
- Joint arranger and funder for the project financing of SepFluor’s Nokeng fluorspar project at Rust de Winter, 80 km north-east of Pretoria. SA has the world’s largest reserves of fluorspar, used in the production of calcium chloride (a vital component in several industrial applications, including steel production).
- Sole co-ordinator and joint arranger and funder of Royal Bafokeng Platinum, who are developing the R11 billion low-cost and mechanised Styldrift mine that is being ramped up to full production by 2020.
- Sole arranger and funder of Northam, who are developing the Booysendal mine, a 105 million ounces platinum group metals operation on the border between Mpumalanga and Limpopo, currently being commissioned on a modular basis.
- Joint arranger and subscriber for preference share funding for Exxaro’s new BEE structure.
The deal flow is nothing like what it was 10 years ago, but Webber says the bank remains busy, due in part to a thinning field of competitors in mining finance. The team comprises 15 professionals covering a broad range of skills, from technical to engineers, lawyers and accountants. “Given the increasingly complex regulatory environment, you need highly specialised skills to be able to evaluate projects from a feasibility standpoint, and assess the projected cash flows to make sure these make sense in the up-cycles as well as the down cycles.”
Webber says the key issue influencing the bank’s decision to back a project, apart from the robustness of the feasibility studies, is management. A common mistake many banks made in previous commodity booms was assuming that prices would continue to rise. “This can result in money flowing into projects that probably shouldn’t get any, for the simple reason the projects cannot sustain a downturn in the commodity cycle,” he says.
Given the harsh operating climate for miners, Webber says the bank supports those mining operations that are “growing down the cost curve.” This is evident in parts of the platinum sector, such as Northam and Royal Bafokeng, where production is moving to lower cost, often mechanised mining operations. “We support those mines that are growing down the cost curve. We look for management’s willingness and ability to make the tough decisions to keep costs under control.”
One of the sadder tales of SA mining is our diminishing importance in global gold production. SA will remain a high-cost producer if we continue to do things as they have been done in the past – by focusing on deep level, labour-intensive mines. “It is good to get miners linking up with research and universities to find ways to bring down costs and improve safety by mechanisation and modernisation. This will extend the life of our gold mines by quite a few years.”
Given the relatively stagnant nature of mining in SA, Nedbank CIB is spending a lot of its time abroad in the mining finance hubs of London, Canada and Australia. While there is reason to be more optimistic about mining investment in SA, Nedbank CIB is equally optimistic about opportunities to grow its business on the rest of the continent.
Brought to you by Nedbank Corporate and Investment Banking (CIB).