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What investors want to see in SA mining

Addressing key issues in a complex industry.

CAPE TOWN – South Africa’s mining industry remains a highly complex and contested space. Aligning competing interests has proved difficult.

To some extent this is what has resulted in the uncertainty that continues to permeate the mining sector. Mining companies, labour and government seem to have very different opinions on how things should be done, and this leads to instability.

Speaking from the side lines of the 2015 Mining Indaba, the director of equity research at Credit Suisse, Justin Froneman, said that international investors are worried about a number of serious issues in South Africa’s mining industry. And they are prepared to take their capital elsewhere as long as this uncertainty persists.

“The thing people most want is active leadership at both corporate and country level,” Froneman said. “There is a perception that not enough is being done. Things are quite unstable at the moment and investors want to see mechanisms put in place to address that. But unfortunately we are not yet seeing anything.”

He pointed out that one of the major talking points of the Mining Indaba had been the South African government’s desire to create a national mining champion. Minister of Mineral Resources Ngoako Ramatlhodi raised the issue again in his address to delegates.

“It’s something we still need more clarity about,” Froneman said. “The details are somewhat lacking, and we don’t understand the mechanics behind it. How will it be funded? Who will run it? As a result of this lack of detail, people are sceptical.”

He has also engaged in a number of discussions about BEE legislation and the question of ‘once empowered always empowered’. This is essentially a disagreement about the interpretation of the law, whether mining companies have to maintain a 26% empowerment stake, or if having reached that target once means that they have forever satisfied BEE requirements.

“BEE is a big question,” Froneman said. “Mining companies need to know what their ownership structures have to look like and whether they are going to be diluted down just to maintain their credits a good few years after the fact. Does it open up the industry to a bun fight about who has credit and who doesn’t?”

He also raised the question of whether the Department of Mineral Resources could threaten to revoke licenses on the basis of not meeting empowerment targets.

“The revoking of a title is around operational issues, and BEE is not one of those,” he said. “So we’ll see how big the stick is that comes out.”

The empowerment question also links to the continued need to address legacy issues in the industry. Mining is an emotional as well as economic business in this country, and that makes the environment complex.

“I think the legacy issues that surround South African mining cut deep, and as a result there is this perception that mining is still a very dirty game,” Froneman said. “The starting point is that the sins of the past are there, and as a result we have to rectify them.”

One way in which this is evident is the unionised workforce that is largely disgruntled. On top of this, there has now been a notable change in organised labour with the rise of the Association of Mineworkers and Construction Union (Amcu), and that has altered the dynamic.

While mining companies have slowly been addressing some of the workers’ main concerns such as accommodation and living out allowances, there is still work to be done. However, Froneman did highlight that mines have to consider their social responsibility in a very complicated environment.

“Mines have to rely on local municipalities that are largely in dire straits, and often it’s the mining companies themselves that have to pick up the can and provide services,” he said. “So the ability to fall back on support from government is somewhat lacking and that causes frustration at a corporate level.”

Froneman also expressed concern about the seeming continuous adjustment to legislation, which sometimes appears to be in response to changing market conditions.

“Unfortunately mining is cyclical,” he said. “Mines will pay lots of tax when times are good, but not so much when times are bad. There needs to be a fundamental understanding that we can’t take out everything we want from these companies regardless of the environment.”

Vitally there needs to be a better understanding between the parties and a sense of shared purpose.

“Mining companies are saying to government: you currently can’t provide us with power, you can’t ensure water, labour is unstable at best, we are a mature industry, and now you want to tax us to death or keep changing the legislation to your benefit. The cyclicality of the industry itself is catching up with everyone. We are maturing, but the systems are not quite there yet,” he said.

Froneman also pointed out that a number of the industry’s problems are self-inflicted. Since the end of the commodity super cycle, it has been evident that management in many cases has not done as well as it should have.

“What became very evident once the cycle turned was that a lot of investment that had been made was very poor,” Froneman said. “The fallout from that has been that in a weaker commodity price environment you’ve seen huge amounts of impairments, and ultimately a loss in shareholder support.”

What has also become evident is that, largely, management has not exercised active control over costs.

“Unfortunately the tail end of that has been very difficult to address, and as a consequence their ability to generate cash for shareholders has been smoked,” Froneman said. “As much as these companies look like they have a lot of profit, they are burning more than that in cash just to stand still.”

This combination of ill-conceived investments and poor cost control has led to a situation where companies have to rationalise. However, at the same time Froneman wouldn’t want them to start cutting back too aggressively now that the cycle is against them.

“You have to have reasonable investment throughout the cycle,” he said. “That’s what shareholders want to see – responsible investing and active management of costs.”

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