Why South African mining is losing its appeal to Australian investors

While nationalisation no longer tops the mining industry’s list of burning concerns, a host of other pressing issues will be jostling for the attention of delegates at the upcoming Mining Indaba 2014 in Cape Town, South Africa.

“The event takes place against the backdrop of labour militancy, poor productivity and above-inflation wage demands, not to mention power shortages, fuel price increases, Black Economic Empowerment (BEE) complexities, corruption, over-regulation and red tape,” says Bert Lopes, Johannesburg office managing partner and head of mining at BDO South Africa.

“Taken together, all these issues paint a precarious picture and will certainly prompt investors to be even more cautious about investing in South African mining,” says Lopes.

“I don’t believe that South Africa is as attractive for Australian companies as it once was,” says fellow Mining Indaba delegate, Sherif Andrawes, partner in corporate finance at BDO Australia. “In the past, Africa in general was seen as having obstacles to overcome in order to do business but South Africa was seen as one of the countries with the least issues.”

According to Andrawes, more recently the advantage that South Africa had over other African countries seems to have been eroded. “This is in the main because of well-publicised workforce issues and sovereign risk issues around resource nationalisation, which may or may not be well founded.”

Despite the sombre mood, Lopes believes it could quickly change if government speaks and acts with conviction. “The industry continues to be hopeful,” says Lopes. “All that is needed for the negative mood to turn very quickly is for government to take one or two critical steps.”

Supportive messages needed from government

What the mining industry most wants from government, says Lopes, is to see clear signs of support for the sector. “Communication from government has been poor. What mining investors need to hear is that government does care about the mining industry, wants to interact with key players and is willing to listen to what industry has to say. Unfortunately, positive sentiment has not been coming through and more often than not the signals are mixed.”

Another area for improvement is government’s ability to demonstrate accountability. “This is not specific to the mining industry but goes to the heart of doing business in South Africa in general,” he says. “Investors in every sector would respond favourably to concrete signs that officials and politicians are being held accountable for their decisions and actions.”

Interestingly, there have been hints of much-needed accountability in local government, notably the recent resignations of city councillors of Madibeng municipality in North West province over the water shortages, says Lopes.

“Such resignations in South Africa are unusual. They might be a drop in the ocean but they nevertheless suggest an attempt to hold people accountable in the run-up to the elections.”

Impact of elections

Lopes says he expects the forthcoming national elections to be a strong discussion point among Mining Indaba delegates, who will be eager to see how government responds to the nationalisation demands of the Economic Freedom Fighters (EFF) political party, as well as how it intends dealing with trade union militancy.

“Nationalisation is not on the [ruling] African National Congress’s agenda, as [Mineral Resources] Minister Susan Shabangu made clear at the Mining Down Under conference in Australia in August 2013. However, nationalisation is one of the issues that the EFF will seize on and the ruling party should not underestimate the negative impact this could have on some voters.”

Of great concern at this stage, given renewed outbreaks of labour strife, is labour and wage instability. “Some real progress here would go a long way towards allaying investor disquiet,” Lopes says.

Andrawes agrees. “A number of Australian companies have experienced recent issues in South Africa, which does not assist in attracting others to the country.”

Further discouraging investors is the dearth of funding for new projects, he says. “Australian exploration companies have had less equity to fund exploration so the move away from South Africa reflects the necessity to utilise these more limited funds in less ‘risky’ areas of the world.”

Lopes says that if the current labour volatility and power supply issues were successfully addressed, investors would be more likely to remember the advantages that South African mining has over other mining nations.

“South Africa has very good infrastructure, including roads and railways, as well as mining know-how, that is lacking in the rest of Africa,” he says. “These are critical factors to take into account in any discussion on the viability of the country’s mining industry.

“There are still good opportunities to invest in South African mining. If government and the private sector would just come to the party and work together, the future of mining would look a lot brighter.”