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Mining’s vital signs are fading

Nearly half of listed mining companies are in the red.

SA’s mining industry’s real GDP is smaller than it was in 1994. The financial services industry, in contrast, has grown its GDP nearly 170% over the same period.

The Minerals Council of SA recently reported that barely a quarter of gold mines are making profits under current conditions.

Looking at the return on capital employed for the mining sector for the latest available reporting periods, roughly half of the listed mining companies are in the red.

Even more troubling is that over a five-year period the picture is virtually unchanged, with 14 of the 31 reporting companies showing a negative average return on capital.

Platinum and gold, once the bedrock of the South African economy, have become virtually irrelevant, though for different reasons. Both are affected by deteriorating metal prices, and face the same headwinds: above-inflation wage increases, high electricity prices, and a dysfunctional and hostile mining regime, all of which are reflected in the lack of investment in recent years. There is a sense that gold mining is stumbling into its sunset years.

Former Harmony CEO Bernard Swanepoel says SA’s gold mining sector has possibly 30 years of life in it, though it could be a great 30 years. Mines are deeper and more expensive to work, with labour now accounting for more than half of costs. Many are looking to technological solutions to bring down costs by a percent or two.

Read: SA has 39 years of gold left

SA platinum mines face competition from Zimbabwean and Russian producers, while global demand is being squeezed by a shift away from diesel to cleaner-burning petrol and electric engines. The growth in recycled platinum also weighs on the demand for platinum group metals (PGMs).

Read: Is there a future for platinum?

The overall picture for mining may be gloomy, but this is not to say there weren’t some excellent investment opportunities in the sector.

As the accompanying table shows, the best return on capital over a five year period came from Wescoal and Assore, with averages of between 17% and 20% a year. Assore’s share price is up nearly five-fold since early 2016. Wescoal’s share price is 150% up over the same period. Exxaro is up three-fold. Even DRDGold has doubled in price since early 2016. ARM is up 200%.

That’s if you got the timing right. For buy-and-hold investors, mining has been a disaster over five years: only a third of mining shares made any gain whatsoever over this period. The best was Merafe Resources with a gain of nearly 90% over five years, which is equivalent to the average gain in banking shares, as measured by the JSE Banks Index.

That’s the beauty of mining from an investor’s point of view, and why it continues to attract interest so long as there is the prospect of hauling ore out of the ground at a profit. Mining profits are highly geared to commodity prices and the general operating environment. A 10% improvement in commodity prices dramatically alters the mining outlook, particularly for those currently operating at a loss. But there’s also the danger: the market cap for Implats and Lonmin, both platinum producers, has halved since the start of the year. Lonmin, with a market cap of less than R3 billion, is a shadow of the mining titan it once was.

Looking at the table below, it is difficult to see how some of these companies can continue to erode shareholders’ capital for much longer without radical surgery. That generally involves shutting down loss-making operations and switching to more profitable ones. A Minerals Council survey of 16 companies representing a cross-section of commodities suggests a total of R145 billion will be spent on capex in the next four years, but this could rise to R267 billion given a more conducive investment environment. Mining needs this investment to improve its profitability profile.

The regulator is seen as hostile to the sector, and the legislative environment is uncertain and subject to arbitrary change. One example of this is the unilaterally developed Mining Charter and its BEE ownership requirements, which has faced stiff resistance from the sector.

Source: Share Magic

There has been a more cooperative approach in recent months, according to Henk Langenhoven, Minerals Council chief economist, and a better understanding among regulators of the challenges that have to be overcome to breathe fresh life into a moribund sector. That is the first necessary step in salvaging what looks like as hopeless business case.

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Is the lemon with the Squeeze?

You can get 8.5% interest If you buy government bonds, risk free*. Why would you take the risk in business ?

Unless you are able to make a solid 20% then it’s worth it however the currency and purchase power devaluing is creeping up.

Way to many uncertainties and Labour quality is poor.

Forget one second that SA is looking at it’s self, our businesses compete internationally even if they only operate in S.A.

1994 is a good place to start. The ANC Government has done everything to destroy a once thriving Industry that was not only the bedrock of the SA Economy – but provided jobs (and tax receipts to SARS)thousands of families.

Mining Towns ( Stilfontein, Rustenburg, Carltonville, Virginia, Welkom) are now shells of there former selves.

Mining infrastructure has been stripped and carried away – with little assistance from the local SAPS.

There are probably more illegal miners than there are legal miners today – again Government and SAPS do very little to stop the rot. The only conclusion you can draw is that they are complicit in this theft.

Safety too has been compromised. Mines take shortcuts – are there still Inspectors of Mines ?

With all of the above you can thank the short sighted, and ignorant ANC Government.

Very true, but I think there was too much initial effort placed on taking the spoils post 1994, instead of cultivating the existing mines for more spoils later.

Why bake more cakes when you can have a cake now? Now in 2018 we are living the consequences of that plunder.

With 50% of the mining companies in the read I guess the ANC’s job is only half done!

This might be the natural way of things, seeing as mining was born from British colonial rule – nothing negative here necessarily – the Brits ran a business in SA with the local economy also benefiting (some may disagree).

All in all, the taper down of the investment and involvement by the Brits along with the end of lifespan of these mines based on the work required to get at the deeper resources, surely contributed to the decline we are seeing now.

Smarter mining might keep things alive another few decades, but the current increase in the rules for redistribution of the return on these mines to the socialist program we are currently going for, will not feed everyone for long.

To believe that things will remain the same over time is a recipe for disaster.

Competition is real and markets change but this country thinks like a communist country. The future is not so rosy since most cash cows are dying out

From a global point of view it is safe to say mining is slowly taking a back seat. We are shifting into an age of information and wisdom , sustainable and eco-friendly business. The fourth industrial revolution at play.

It is true but the ANC has a mass of people it has to please with jobs.

4th industrial requires skills and knowledge, I doubt someone who works in a mineshaft would even understand this concept.

Valid points certainly in terms of cyclical and regulatory risks, but yet again ‘sentiment’ always seems to go too far – which leads to investment opportunities.
The negative news around Platinum in particular is a bit overdone. Yes, there is the diesel story and recycling etc but the PGM metals as a whole are acknowledged to have truly awesome properties applicable in many fields. My sense is that they will be increasingly in demand in high tech manufacturing in future.
But let’s see.

The mining industry [Gold] for the last twenty something years -has forgotten how ensure that the being extracted is done by ensuring “simple basic rules”.
1. Blast barricades – forgotten
2. Keep your blasted gold sweepings not further than 11 meters behind the advancing panel. –
3. Sweeping Method do not use excessive water
4. Do away with mechanized mining in low stope width mines – Rail are muss more efficient than trackless transport
5.Keep the tramming haulage’s maintenance as a Priority
These are some of the simple rules that are lacking and is no longer being practiced on gold mines.
My visits to some these gold mines show shocking management on the part of Senior management- which could possibly enhance the lack of safety.

I agree that our mining charter hasn’t helped but you can’t underestimate the damage that losing the Gold Standard has done either. Western countries have been trying to supplant the value of resources with technology and have succeeded. However, I think they have misjudged the psychology of emerging super powers like China, India and Russia. For them, gold will never lose its luster, Iron ore and steel its strength and coal its value ( in the short term) We just have to position the value of Platinum…and we’re well placed to serve this unopposed? . Perhaps battery technologies will require more platinum in the future – it would be our saving grace!

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