The Mining Indaba, which is the biggest mining conference in Africa, takes place in Cape Town as it has for the past 17 years from 7 – 10 February. This is where the mining companies and top people in mining as far as Africa is concerned – the geologists, engineers, lawyers, stock-brokers, professional advisors and funders – get together. And it will be interesting to see what message comes out of the Indaba regarding the South African mining industry specifically. I say this because right now, according to all reports and Omega Investment Research’s own experience, investors are turned off and the mood within the industry is pessimistic.
This is surprising in one respect – because as every South African schoolboy knows or used to know – throughout the world this country is recognised as a treasure trove. It boasts an abundance of mineral resources, producing and owning a significant proportion of the world’s minerals. In fact, South Africa’s wealth has been built on the these resources – nearly 90% of the platinum metals on the earth, 80% of the manganese, 73% of the chrome, 45% of vanadium and 41% of the gold. The only thing we do not have is crude oil and bauxite. Also legendary are the country’s mining skills – South African service providers are active all over the continent.
So at a time when resource commodities have been hitting the highs, South African mining companies should at least be smiling on the way to their banks. Not the case.
This negativism is to some extent externally determined – there simply isn’t the investor appetite out of Europe which created the mining industry in South Africa and was responsible for its growth through most of the 20th century. And the reasons for this gloom are really quite obvious:
Firstly, mining in South Africa – given the depth that we are now reaching – is very costly – compared for example to Australia or Canada or China.
Secondly, the deeper our mines have become, the more dangerous mining has become, and in a world where safety in mining is increasingly important, accidents cause close-downs, close-downs cost production and production affects investor perceptions and interest.
Thirdly, there is a question of infrastructure and power. Not only is there a looming shortage of electricity but the cost of electricity has escalated. The mines are big consumers and the electricity cost to some of them has increased by 30-40% over the past 12 months.
Fourthly, South Africa used to be credited with excellent mining laws in the early days of mining in this country. If anything, laws and regulations favoured mining employers and the mining industry because of its importance as a contributor to GDP and to general employment. But the balance has shifted over the last ten years, with policy becoming less supportive.
Fifthly, community and environmental considerations (for example, the acid water issue) have come to figure more importantly and Black Economic Empowerment (BEE) has tended to increasingly complicate mining mergers and acquisitions and how licences are granted. Added to this is talk of nationalisation of the mines by in particular younger generation politicians in the ruling party that naturally has a cautionary effect on foreign investors – bearing in mind that investment in mines is in its nature long-term. You put a lot of money into the ground and it takes a long time to get it out.
To blame negative investor attitudes on the government alone is not fair. It’s a chicken and an egg situation, because major South African mining groups, often more through their action than their words, don’t exactly encourage foreign investment. Harmony chairman Graham Briggs has made it perfectly plain that any future new investment Harmony makes will be out of South Africa; and AngloGold Ashanti, in establishing their first gold mine in 10 years, is putting it in Australia. Yet the irony is that, as we remarked above, South Africa is the treasure trove of minerals – a point very powerfully made by the Chicago guru David Hale, probably one of the most knowledgeable people about mining and minerals in Africa.
What is to be done? Like other complex matters, there are no quick fixes. However, the Mining Indaba in Cape Town, which gives all government spokespersons in Africa the opportunity of spelling out their approaches and policies, could produce positive results. Firstly, South African government spokespersons need to spell out policies that are clearly transparent in respect to the award of licences and permits; and secondly, they need to clear up the situation in respect to nationalisation and the ownership of mining assets. (President Zuma has said that the ANC’s policy is not one of nationalisation, and yet he appointed a committee to explore this possibility!)
We have some striking examples just to our northern borders of how easy it is to chase away foreign investment and destroy industries. In a climate where the government’s mantra is jobs, jobs, jobs, this is not a time for uncertainty. Government spokespersons will therefore have their opportunity at the Indaba to state their case. And let’s hope the Mineral Resources Minister Susan Shabangu, who got off to a promising start and has done well in the portfolio, really carries through on this occasion – particularly as we know that she takes her responsibilities very seriously.
Denis Worrall is the chairman of Omega Investment Research. He can be contacted at: [email protected]