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When push comes to shove

PwC’s annual SA Mine 2015 report says mining companies are facing liquidity challenges.

JOHANNESBURG – The consulting arm of PwC released its SA Mine 2015 report at the Johannesburg Indaba today, which aims to highlight trends in the SA mining industry over the year to end June 2015.

The report focuses on 35 companies with a primary listing on the JSE, and that have a market capitalisation of R200m or more.

Still more pain

Market capitalisation fell by 55% to R414bn across the companies surveyed over the period. But the suffering was not in isolation – the share price performance of South African mining companies was almost perfectly correlated with the collapse of international mining indices.

Across the industry, revenue has remained flat, despite costs increasing rapidly. “So we can see why the industry is struggling and why it’s unsustainable,” says Andries Rossouw, partner at PwC. Coal is still the biggest revenue generator for SA Inc. Platinum production has improved and is the second-largest export earner for the country. Iron ore has grown impressively over the last ten years, but the picture is not that pretty for platinum. The downward trend in production in gold has been reversed over the last two years.

Margin erosion continues to be the order of the day. “There has been some respite from the depreciating rand,” says Rossouw. “The adjusted EBITDA margin is now sitting at 22% (versus a long-term historical average of 30%), which is really too low to be investing in capital expenditure and paying dividends,” adds Rossouw.

While the average margin remained positive, marginal assets – through a combination of higher costs and lower revenues – prompted further impairments in the industry, albeit at a lower level than seen at the peak in 2013. There were R24bn of impairments this year, R6bn of which came from Exxaro impairing an asset outside of South Africa, as was Harmony’s R4bn impairment of its asset in Papua New Guinea, which means the total impairment of South African assets was R14bn in 2015.

This didn’t have much effect on the ratio of market capitalisation to book values, due to the precipitous fall in share prices which saw market capitalisation as a percentage of book value fall from 1.5 to 1. “The market clearly doesn’t have confidence in what these companies have on their books,” says Rossouw, which might also suggest more impairments are to follow.

A drag on bank earnings? 

The report highlighted concerns over the liquidity of mining companies. “A lot of the companies funded themselves when interest rates were very low, and given their poor profitability, these companies are going to struggle to refinance themselves,” says Rossouw.

The report adds that, “it seems inevitable that some companies may not be able to make large terminal repayments from profits and may have to enter into negotiations with loan providers in order to agree on more workable arrangements”.

Shareholders eat last 

There is also clearly little appeal for investors to participate in the industry – the report highlights employees received 39% (2014: 37%) of the value created. The state – through direct royalties and taxes and including the tax on employee’s earnings – enjoyed 18% (2014: 20%) of the total. Distributions to shareholders represented 15% (2014: 11%) of the total value created, but if Kumba Iron Ore is excluded, the dividend percentage declines to just 3%. This is a very small share of the pie, and its doubtful whether this will entice further investment in the industry.

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