An unusually long running strike at South Africa’s platinum mines has finally come to an end, and while the effects of the five-month action will likely be felt by the industry for years to come as it tries to recoup losses, it may have helped potentially expand the scope of smaller mining firms in the sector.
The Association of Mineworkers and Construction Union (AMCU) declared the strike officially over on June 23 after striking a deal with Anglo American Platinum, Lonmin and Impala that will see wages for the lowest paid miners increase by about $94 a month over three years.
The end of the strikes is welcomed on multiple fronts. Labour negotiations in South Africa – where trade unions benefit from widespread support and an active membership – can often be protracted but the most recent strikes was particularly arduous. Production losses as a result of the strike by the 70,000 miners are estimated at almost $2.2bn, according to the mining companies involved.
The impact had knock-on effects for global markets, given that South Africa is the world’s largest platinum producer, as well as for domestic headline growth. The drop in output from the mining sector – with mining and manufacturing accounting for a fifth of South Africa’s economy – was one of the underlying causes behind South Africa's slowdown in the first three months of the year, with the economy retreating 0.6% quarter-on-quarter for the first time since 2009.
In a country where income disparity remains high, labour representation is crucial. Even so difficult wage negotiations in recent years have proven especially problematic. Labour unrest, along with factors such as continued disruptions to electricity supplies and tight monetary policy, were among the reasons cited by the World Bank in June for lowering its growth forecast for 2014, with the bank saying the economy would expand by 2% this year, from a previous forecast of 2.7%.
The strike also impacted South Africa’s sovereign ratings. Standard & Poor’s downgraded its credit rating by one notch to BBB-, just one step away from junk status, while rival agency Fitch lowered its financial outlook to negative in mid-June, signalling the possibility of a rating cut in December.
However, the strike may have helped open the door to further changes in the composition of the mining sector.
The challenges related to production disruptions have, according to local media, prompted some of the larger operators to consider reducing their local exposure. Anglo American, the world’s largest producer of platinum, is in talks to sell some of its platinum mines in South Africa as part of a wider programme to sell-off underperforming assets and raise up to $4bn according to a report in the Sunday Times.
South African investment bank, RMB, has been lined up to run the auction with mines in the Rustenberg region earmarked for disposal, according to the report at the end of June.
Crucially, despite the strike, there has still been significant interest in the blocks. Potential suitors could be companies such as Sibanye Gold Limited, the country’s largest producer of gold, according to Deutsche Bank in a report from mid-June. The company has indicated previously it is interested in diversifying its activities away from its focus on gold and into platinum.
Potential upside to divestment
Smaller mining firms might be the beneficiaries of a sell-off by the majors. Many of them, which were established under the provisions of Black Economic Empowerment (BEE) legislation, have already moved to buy up assets, a trend that could gain momentum if the larger operators do look to divest further.
Optimum Colliery and Exxaro were both beneficiaries of divestments from big firms but since then have grown themselves; in the former case, by becoming part of Glencore and in the latter, by growing to become a much larger player.
A similar trend emerged in Nigeria as international oil companies reduced their onshore holdings to target offshore blocks, allowing indigenous firms to move into the space and expand their activity – with some notable successes, such as Seplat, which recently raised $500m with an IPO in London.
Of course, the emergence of a larger base of domestic mining firms will not resolve some of the sector’s more prominent challenges and limited reserves could make the smaller mining firms more vulnerable to prolonged bouts of industrial action. With several operators shifting towards greater mechanisation, capital costs are also likely to be significant.
Ultimately, while the strike was severe and will have a significant impact on annual performance, leading operators to focus on recouping losses over the short-term, the impact it may have on the composition of the sector could help strengthen prospects over the long-term. By diversifying production and encouraging a larger and more flexible collection of companies, South Africa’s mining sector could potentially gain new momentum.