The African National Congress (ANC) policy conference, held in Midrand at the end of June, has finally canned the proposed nationalization of the South African mining industry but mining executives and investors cannot relax just yet.
That’s because it remains as clear as mud: precisely what government intends doing about the far-reaching policy proposals contained in the document known as the State Intervention in the Mining Sector (Sims).
The outcome is that the pall of uncertainty—which has hung over investors in the mining industry since nationalization was put on the ANC’s official agenda in September 2010, at its national executive meeting in Durban—is going to continue at least until the electoral conference schedule for December.
The reason for this is that Sims makes a number of proposals with far-reaching consequences for the mining industry—platinum miners in particular—with platinum group metals (PGM) being declared “strategic” along with others such as coal and iron ore.
Those proposals involve potential major changes to the way in which the mines are taxed as well as other measures aimed at increasing local beneficiation of certain minerals; greater black economic empowerment (BEE) stakes in mining companies and greater participation by the state in mining through the state-owned mining company (SMC).
The proposals include a Rent Resource Tax (RRT) targeting “windfall” profits which would be levied at a rate of 50% during times when mining companies earn more than a 15% rate of return on their investment.
“Let’s give the ANC leadership credit where it is due. My understanding is that the various fiscal proposals in Sims were not adopted at the conference and have been kicked into touch,” says Peter Leon, a Webber Wentzel legal expert.
“They will now be the subject of further debate between government and the mining industry ahead of the December conference. But the other proposals on beneficiation, the role of the state miner and the increase in BEE stakes in mining companies to 30% were all adopted and are now floating around. That creates more uncertainty which investors do not like, but I would rather have this situation than one where the conference had adopted the fiscal measures proposed in Sims.”
Such uncertainty is toxic to investment in the country’s mining business which typically requires the up-front expenditure of billions in capital projects over a period of years before any returns are made.
Government’s aim—as stated at the head of the Sims document—is to: “Maximize the developmental impact of the People’s Mineral Assets.”
But any regulations imposed which hold back mining development in South Africa will have severe negative impacts on the economy and unemployment if the all-important platinum sector is hit.
The mining industry remains a key component of the South African economy. The most important sector is platinum, which has taken over as the largest employer and biggest earner of foreign exchange, following the decline of the formerly dominant gold sector.
According to South African Chamber of Mines’ statistics, the mining sector spent R484 billion ($58.2 billion) during 2011: R430 billion ($51.7 billion) of which was spent locally with R88.7 billion ($10.67 billion) going to salaries and R47 billion ($5.65 billion) being spent on capital expenditure.
Mining corporate tax payments last year totaled R25.8 billion which amounted to 17.2% of total South African tax receipts.
In 2010, the mining industry employed 498,141 people of which 181,969 worked on platinum mines; gold mining ranking second with a workforce of 157,019.
Despite the development over the past decade of various open-pit operations as well as some shallow, mechanized mines the platinum business remains labor-intensive.
The reason for this is that, as with the country’s gold mines, attempts to apply mechanized mining to deep-level platinum mines have been unsuccessful.
The most notable example was Lonmin which—under previous CEO Brad Mills—tried to implement mechanized mining on some of its shafts. The results were disastrous as costs soared and production dropped.
Mills—who proclaimed himself to be a ‘mechanization zealot’—eventually quit. Most of the operations mechanized have been returned to “conventional” mining systems.
So any setback to the platinum industry is going to have a sharp impact on job levels which is anathema to the ANC—let alone the various unions.
According to the Chamber of Mines, the RRT is “unwelcome and insupportable” because it will impose a significant increase on the industry’s tax burden. It will also have a major detrimental impact on the ability of some mining companies to sustain their operations.
Profits earned in boom times are frequently used to invest in the expansion of existing operations and the construction of new mines.
Stuart Murray, CEO of Aquarius Platinum, spelt it out when I interviewed him last year.
“This is a boom and bust industry. The cycles are getting shorter, the volatility is getting greater and it’s getting harder to get a decent return out of new investments. A platinum mine these days starting out of the blocks probably needs to show a 40% gross margin. That kind of margin may appear obscenely high to someone who makes fridges but it’s not. You need it to cover the risks involved in a project in which you have to sink capital over a 10 year period,” he says.
Aquarius has been the worst hit by the current downturn in the platinum sector, which has forced it to close three of its mines. Other juniors such as Eastern Platinum have delayed expansion programs.
A potentially major development still pending is the outcome of the operational review being carried out at Anglo American Platinum (Amplats): the world’s biggest platinum producer.
Anglo American in its submission to the ANC over Sims said, “The Sims proposals will harm the mining industry without necessarily securing its envisaged benefits.”
In Anglo’s opinion, “with the exception of some noted proposals…the Sims report relies fundamentally on the wrong approach to achieve some laudable goals.”
Despite all the doom and gloom, various junior start-up miners—such as Lesego Platinum; Nkwe Platinum and Sable Platinum—remain intent on entering the business, on the basis that the platinum game is cyclical and the good times will return.
It remains to be seen what they will do should their perception change to one that the outcome of the Sims negotiations results in a higher risk profile because of lower returns in those good times.
Some observers believe the industry should cut production in the face of the current global oversupply of platinum, which has driven down prices but it’s clear the major producers are reluctant to do so. So far, only mid-tier producer Aquarius has been prepared to “bite the bullet”.
Apart from the industrial relations and political consequences there are major costs involved in shutting shafts as well as material financial risks if overhead costs are not removed completely but, instead, get passed onto the remaining operating shafts threatening their viability.
The other key deciding factor revolves around management’s assessment of how long the bad times may last. Lonmin management made it clear, during a recent media visit, that they were reluctant to shut down shafts if they expected the platinum downturn to last only a year.
Lonmin is currently reviewing its position with an announcement due later this year on whether it will hold back on future planned capital expansions.