The country that missed the resources train
South Africa has the richest mineral resources endowment in the world, but has underperformed other resource-rich countries over the past decade! This was the view expressed by Sanlam Investment Management (SIM) resources specialist, Barend Ritter, at a m
The only way for the country to “catch up” with emerging commodities powerhouses would be for government to act as an enabler to companies in the sector. But in recent months, instead of facilitating development in the mining and beneficiation industries, government has created additional hurdles. Top among these is the uncertainly around the security of tenure in the mining industry. Investors are reluctant to commit to capital intensive mining projects due to the ongoing “buzz” around nationalisation. Before they commit they want assurances from government (and the African National Congress) that nationalisation is not – and never will be – policy. Black economic empowerment (BEE) requirements have also added to the cost and complexity of setting up new mining companies in the country.
Aside from nationalisation and BEE concerns, Ritter notes that investment in the resource industry is also hampered by the slow delivery on mineral right conversions over the past decade. He believes security of tenure would lift this uncertainty and unlock the significant investment required to put the local mining industry back on track over the next decade. Of course he was speaking before the Department of Mineral Resources (DMR) dropped the latest bomb, that future mining licences would be issued “with conditions” to ensure a flow of minerals to local manufacturers. It is this kind of government intervention and additional red tape that private companies shy away from...
Road, rail and port infrastructure is a must
Major mining houses plying their trade in South Africa face a number of “real world” challenges too. Rising electricity, fuel and wage costs have resulted in many lucrative mines becoming marginal – and with another 25% electricity hike on the cards for 2012 things aren’t getting any easier. To further compound matters, mines are losing millions of workdays to strike action each year as South Africa goes all out to scoop the “world’s most striking (sic) nation” award. Adcorp Holdings recently observed that South Africa “lost” 14.6 million workdays to strike action last year, with another 17.8 million days “at risk” through 2011. Many of these disputes play out at the country’s coal, gold and platinum mines, affecting production and profitability and driving up operating costs at rates well in excess of inflation.
Infrastructure is a major bugbear too. Iron ore and coal miners rely on the country’s rail and port capacity to export their product. Instead of producing at full steam they have to plan production to tie in with export quotas, and then hope there won’t be any hiccups in exporting their full share. For proof one need look no further than the Richards Bay Coal Terminal. By the end of March 2011 the terminal was running at an annualized rate of just 53.4 million tons (Mt) versus its 70Mt full-year target. Only 63.4Mt were exported in 2010. And this means coal giants such as Exxaro Limited will struggle to maintain their annual coal export volumes despite better international prices.
It is little wonder that South Africa has slipped in the mining production stakes. But we’re struggling to develop new opportunities too. We ranked 64th out of 79 countries in the 2011 Fraser Institute Global Survey of Prospecting Potential. “It’s not a great picture,” says Ritter. “In terms of exploration spend, our share of global spend has fallen from 6% to just 3% since 2003, which doesn’t position us well for the future.” Companies are voting with their feet – leaving South Africa for territories with more sensible mining policy. Part of the reason for this is the lengthy delay in obtaining mining licenses and environmental permits. More recently firms have discovered that the DMR is not beyond reproach either. The strange goings on around the Sishen Iron Ore concession involving Kumba Iron Ore, Arcellor Mittal, and ICT are a case in point.
The light at the end of the tunnel...
It is not too late for us to remedy the situation. Ritter says commodity prices are likely to sustain at high levels in the medium-term… Local mining companies can look forward to a period of continued profitability and should be able to regain some of the lost ground. “SA has got to take action,” observes Ritter. And there are several key factors that need to be resolved before the full potential of the SA mining industry can be unlocked. These include providing security of tenure, improving infrastructure delivery and addressing the upward pressure on real wages. The bottom line is that investment capital follows yield – and chooses the highest possible yield for each unit of risk. Higher commodity prices will take care of the yield side of this equation, but it is up to government to address the risk!
“South Africa has the resources and the skills. Our success hinges on how we mobilise these and find efficient solutions that enable us to compete and grow our share of the global resource industry,” concludes Ritter.
Editor’s thoughts: Nationalisation, strikes, mine accidents, wage demands, rising electricity costs, conditional awarding of mining licences, acid mine drainage, copper theft – the list of obstacles to effective mining production in South Africa are growing by the day. Government already receives a large slice of mining revenue through corporate tax and mining royalties – and they already “own” the countries resource wealth as sole issuers of prospecting and mining rights – but it seems they want more… Should the state take over from private sector firms as owner and operator of the country’s mining assets? Please add your comment below, or send it to gareth@fanews.co.za
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