The 1970s are known for political scandal while the 1980s are known for pop culture. They are also known for South Africa’s boom in the mining economy. I write this article from Johannesburg dubbed eGoli (the city of gold) for its once rich gold mines.
At the peak of those glory days, for every R100 the economy produced in 1980, R21 was from mining. In fact, during this boom, in 1987, the industry employed 760,000 people.
Today, the story of South Africa’s mining sector makes for grim reading. The once mighty sector is a shadow of its former self as precious metals continue to struggle. Statistics South Africa (Stats SA) reports that gold has lost ground over the last three decades. The annual production index for gold is now 46% lower than it was in 2007.
In 2016, the industry contributed only 8% to the economy. That is R8 for each R100, which is R13 less compared to the 1980s. The problem is in 2019; the mines are old, deep and lack investors.
According to Stats SA, “mining production decreased by 5.6% year-on-year in November 2018”.
The largest let-downs were the once flourishing gold and diamonds.
“The bulk commodities and base metals have performed in line with the global industry. Metals like coal, manganese and chrome have performed very well for South Africa. Unfortunately precious metals haven’t performed that well,” says Andries Rossouw, partner at PwC South Africa.
In its 2017 report, PwC revealed that gold and platinum had witnessed devastating dips in market capitalization. Gold, for instance, saw a dip of a shocking 52%, which translates to R114 billion ($8 billion), while platinum’s market capitalization dropped by 21%. Last year, the market capitalization for gold dropped by 4% from 25% while platinum dropped 5% to 29%.
Rossouw, however, stresses that it is important to note that other commodities are performing well.
Coal is among them.
“The coal industry has been performing well in the last year at the back of higher coal prices. Eskom still demands a large number of coals for their coal-powered plants. So, it is important that our coal industry delivers that demand from Eskom. We are also exporting big quantities of coal mainly to India because they also need quality coal for their power generation,” Rossouw says.
The good performers helped “mineral sales increase by 8% year-on-year in November”. It’s not enough. Even so, most companies are facing a painful drop in rankings and profits.
For instance, “Impala Platinum and Sibanye-Stillwater dropped by two and four positions respectively in the top 10 companies in the country,” according to the PwC report.
In fact, Impala Platinum dropped from R27 billion ($1.9 billion) in June 2017 to R15 billion ($1.06 billion) in June last year. It is forcing the company to restructure and cut jobs.
“The only option for conventional producers today is to fundamentally restructure loss-making operations to address cash-burn and create lower-cost, profitable businesses that are able to sustain operations and employment in a lower metal price environment,” says Impala Platinum CEO, Nico Muller.
Over the next two years, the company will downgrade from 11 to six operating shafts, reduce future production from 750,000 platinum ounces per year to 520,000 and cut jobs from 40,000 to 27,000.
Gold Fields is another company facing challenges.
Its South Deep mine, one of the biggest gold mines in the world, continues to make losses. It lost R4 billion ($283 million) over the past five years. Last year, it retrenched 1,082 employees at its South Deep mine.
“South Deep is a complex and unique mine, that has faced persistent issues that need to be addressed in a holistic manner which include, rising operating and overhead costs, consistent failure to meet mining and production targets; poor equipment reliability and productivity impacted by poor maintenance practices and operational conditions,” said the company in a statement released last year.
The problem is so big that according to a report by the Department of Mineral Resources, there are about 6,000 abandoned mines in the country and massive job cuts.
“We have about 454,000 people now employed in the industry compared to 532,000 employees when the industry was performing well. In the 2018 calendar year, it dropped about 3,000 employees and that is despite shaft closures,” Rossouw says.
This is a far cry from the industry’s heyday.
Due to global conditions, mining production reached a record low in 2016 in South Africa, but since then, other countries have enjoyed growth, while the domestic mining industry shrinks. It seems the bigger problem might be the relationship between industry and government.
Regulation is one of the major hold backs for the sector.
Until recently, the Mining Charter, which addresses the distribution of mineral wealth more equally to redress the racial injustices of apartheid, has caused courtroom battles between government and industry.
First issued in 2004 and amended in 2010, many agree the Mining Charter was a hastily and poorly written document, full of oversight, compiled without consultation with the industry. Industry heavyweights and unions disputed it, lawyers and economists argued over it and investors stayed away as a result.
“For investors to invest in the country, they would want to see a track record… We have had about 10 years of under investment, especially in our platinum sector and that will show in our lack of supply coming out of that sector in the future. Given the long-term nature of the mining investment cycle, it will impact our ability to supply in the future,” Rossouw says.
Last year, in fact, in terms of its overall investment attractiveness for mining companies, the Fraser Institute, a Canadian public policy think-tank, ranked South Africa 48 out of 91. It ranked 74 out of 104 destinations in 2016, yet in 1980, mining accounted for almost 50% of the world mining market capitalization.
“What has dropped us down the rankings in the last couple of years is the uncertainty and regulation environment largely due to the Mining Charter. Investors are cautious. They judge the government on past performance so there is still a bit of caution out there,” says Andrew Lane, Africa Energy & Resources Leader at Deloitte.
In February last year, President Cyril Ramaphosa appointed Gwede Mantashe — a former leader of the biggest union in Africa, the National Union of Mineworkers, as Mineral Resources Minister. With vast experience and trust from industry, Mantashe swooped in at the 11th hour to save the day and negotiated a new Mining Charter acceptable to industry and government.
“It was bad in 2017 and then we got a much positive outlook in 2018 when there was good interaction between industry, labor and all the stakeholders including government which culminated in the publication of the new Mining Charter which has gone a long way to address some of the concerns raised in the previous versions of the charter.
“It doesn’t mean that it has been completely resolved but there is good engagement between the various stakeholders that only means positives for the future in terms of the regulatory environment,” Rossouw says.
Lane believes the industry has welcomed Mantashe and it has a more positive outlook.
“The issue we have here is that most of the mines are deep and quite old. A lot of our remaining resources and reserves which are left are not safely or profitably minable with current technology. We are looking to technological advances to bring a lot of what remains in those commodities into a decently profitable environment,” Lane says.
At February’s Mining Indaba in Cape Town, President Ramaphosa, a mining man to the core, said significant work still had to be been done to remove the uncertainty that held back the development of the industry.
“As part of the package, government is reprioritizing spending, within the existing fiscal framework, towards initiatives that are aimed at driving economic activity, including financial and non-financial measures to turn around the economy,” Ramaphosa said.
Lane says there is a trust deficit which makes the investors adopt a wait-and-see attitude.
“We have further recognized the challenges raised with us by investors, among other things, administered prices for ports, rail and electricity, as well as infrastructure bottlenecks…We are working in earnest to address the constraints that were raised with us as we implement the Stimulus and Economic Recovery Plan.
“We are addressing issues that are of concern to companies such as visa regulations, reducing the cost of doing business, eliminating many bureaucratic constraints and making it a lot easier to conduct business,” Ramaphosa said.
There has been positive movement in the regulatory environment but, for companies, the cost structure is, by far, the biggest challenge especially with labor and electricity prices and shortage. In February, investors and credit rating agencies flagged Eskom’s rolling power cuts which weakened the rand. The power cuts also cost the mining industry productivity.
“We have the deepest mines in the world here. Certainly, the energy costs going up over the years have impacted productivity. Our mines are quite expensive to operate. We are not the most attractive destination for mining investment right now,” Lane says.
Ramaphosa said the government would announce its plans to stabilize and improve Eskom’s financial, operational and structural position and to ensure security of energy reserves in the country.
“Eskom’s contribution to the health of our economy is too great for it to be allowed to fail. It is too important and is too big to fail; and we will not allow it to fail. Restoring and securing energy security for the country is an absolute imperative,” he said.
Lane says government needs to continue to send a message of regulatory stability, act on Eskom and reliability of energy to start shifting the sector towards a more investor-friendly option.
There is also inadequate transportation in the industry. Some economists have said improving the costs related to exports such as port tariffs and railway costs would make the sector more profitable.
“Last year for example, we had to truck manganese to Durban which is inefficient. We should have freight rail in place to take care of those commodities,” Rossouw says.
Another concern is the socioeconomic conditions around mining companies.
“Mining companies are quite often the main providers of employment in rural areas and that means it creates expectations by community and when our economy is struggling as it is at the moment, it means the pressure of the communities around that mine provides pressure on the mine environment. We have seen mines being closed down by communities and not by employees in the last couple of years,” Rossouw says.
Minerals Council CEO Roger Baxter says the council has engaged extensively with government and other stakeholders on the challenges that have prevented mining from reaching its true potential.
“A collaborative approach is needed to develop and implement solutions that will see our industry grow and thrive in the future for the benefit of all. We need to get investment back in mining. We, as the industry, are fully committed to play our part,” he says.
There is also a push for green coal to boost the industry and according to Rossouw, however, the green economy won’t replace coal in developing regions like Africa, Southeast Asia and India.
“There is still a big increase in coal-fired power plants and generation capacity… The challenge the coal industry is facing, as a result of the green economy, has to do with the holding of new projects. A number of banks said they won’t fund any new coal projects and therefore some of these projects,” says Rossouw.
“There is potential for clean coal going forward and we need to invest in research and development to make coal work for us to provide cleaner energy from the vast coal resorts we have.”
Just over two in every three gold mining jobs in 1995 no longer exist. However, mining remains an important earner of foreign exchange for the country and employs one in every 40 working people according to Statistics SA. Love it or loathe it, if government and industry play the ball right, South Africa may reclaim a large slice of one of the world’s richest cakes.