Far reaching: Preparing for a prosperous future as demand for commodities rises

The mining industry in South Africa is the fifth largest in the world, and today it accounts for around 5% of the nation’s GDP. The sector remains one of the country’s most important sources of employment, providing 16.2% – or nearly 1.4m – of the total formal non-agricultural jobs, according to a recent study by Quantec, an economic and financial consultancy, and the Industrial Development Corporation. Given South Africa’s relatively high dependency ratio of 10:1, this suggests that around 13.5m citizens are directly dependent on the income earned within the sector, a fact which explains its prominent position in the nation’s development strategy. The labour unrest that was seen in 2012 highlighted some of the challenges faced by the sector as it adapts to subdued global markets, ageing mines and overburdened infrastructure, but the value of the nation’s non-energy mineral wealth – estimated by Citibank at $2.5trn in 2010 – underwrites the future development of this vital sector.

Sector Structure

South Africa is renowned for its gold, diamond and platinum resources, but its mineral deposits extend considerably further than these important commodities. The Department of Mineral Resources’ (DMR) list of operating mines for 2012 reveals that the nation’s mining activity scope includes 377 diamond mines mostly located in the Northern Cape and North West provinces; 120 coal mines, most of which are in Mpumalanga; 54 gold and silver mines, largely in Gauteng, Mpumalanga and North West; 51 platinum group metals (PGM) mines, the majority of which also produced further commodities such as gold, copper, nickel and sulphur, concentrated in North West and Limpopo provinces; 24 chrome ore mines, mostly in North West province; 14 manganese ore mines, concentrated in Northern Cape; 10 iron ore mines in Northern Cape, Limpopo and Mpumalanga; 21 semiprecious stone mines, largely distributed across the Limpopo and Northern Cape provinces; and smaller numbers of mines specialising in commodities such as uranium, titanium, copper, zircon concentrate, zinc and nickel. Also falling within the purview of the DMR are a great number of clay, sand, granite, limestone, salt, cement, shale, kaolin, gypsum and fireclay operations. Therefore, mining activity in South Africa extends across all five major mineral categories: precious metals and minerals, non-ferrous metals and minerals, energy minerals, and industrial minerals and ferrous minerals. However, in terms of mining revenue, coal, gold, PGMs and iron ore are currently the major contributors to the national balance sheet (see graph).

Coal

Coal is South Africa’s primary energy resource, and currently meets around 77% of the nation’s energy demand, according to state-owned utility Eskom. The roughly 224m tonnes of marketable coal produced in the country each year makes South Africa the fifth-largest coal-producing country in the world. It is also the world’s third-largest coal exporter, with about 25% of its annual production being shipped to destinations in Europe and Asia, particularly to India and China. For decades, the Highveld and Witbank coal fields have been the most productive in the country, and both are part of a coalrich central basin that also includes the Ermelo, South Rand and KwaZulu-Natal coalfields. However, as the nation’s long-exploited fields reach maturity, attention in recent years has shifted towards the Waterberg field, located in the north-eastern Limpopo province. Indeed, Waterberg is now thought to account for more than half of the nation’s estimated coal reserves of 30bn tonnes (see analysis).

New Technologies 

In addition to the shift in geographical focus, new technologies may play a part in the country’s future coal sector. “It is possible that traditional mining and burning will play a smaller role in the future,” Dick Kruger, the deputy head of techno-economics at the Chamber of Mines of South Africa, told OBG. “In-seam gasification is an interesting development here. So far, it has met with mixed success around the world, but Eskom has established a project to look at it that utilises Russian technology. Our coal, however, is very different from Northern Hemisphere coal.”

Eskom’s venture into in-seam gasification stems from its desire to build a 2100-MW power station that uses coal-to-gas technology. While details regarding the trials it conducted at the Majuba power station have not been released to the public, Eskom’s manager for technology, strategy and planning, Barry MacColl, announced in 2011 that the trials had produced satisfactory results. Should Eskom be able to apply the technology to some of the nation’s coal fields, potential benefits include the ability to utilise coal previously regarded as impossible to exploit, as well as cleaner power stations.

Gold

In 1970 South Africa’s production of 32m gold ounces represented 67.7% of the global total of mined gold, marking the high point of the industry. Since then production levels have fallen significantly, and by 2011 the country was only the fifth-largest gold producer in the world – contributing 7% of the global total for that year. Nevertheless, buoyant gold prices mean that it remains one of the nation’s most valuable commodities, second only to coal in terms of its contribution to the nation’s mining revenue in 2012. Favourable pricing, however, has not lessened concerns regarding the future of gold production in the country: new finds are rare, and research conducted in 2009 suggests that the nation’s reserves are considerably smaller than previously thought, revising down the official estimate of 36,000 tonnes (or 40% of the global total) to below 3000 tonnes.

Whatever the true figure, gold miners in South Africa have been compelled to excavate to unprecedented depths in an attempt to maintain production levels: the TauTona gold mine west of Johannesburg is, at 3.9 km deep, home to the world’s deepest mining operations, having taken the record from the nearby East Rand gold mine in 2008. In this context, some have interpreted the sale by Gold Fields, the world’s fourth-largest bullion producer, of its two oldest South African mines in late 2012 as an indication of the segment’s decline. Significantly, Gold Fields chose to retain its most mechanised facility, South Deep. Labour unrest spread into the gold segment from the platinum segment in October 2012, and as a result, national gold output fell by 46% for that month. Upward pressure on salary levels is expected to be one of the most significant challenges faced by the gold segment in the short-to-medium term (see analysis).

PGMS

South Africa’s third-largest mineral export by value in 2012 was PGMs, a segment that, since 2005, more frequently occupied the top position. The Bushveld complex, comprising a series of distinct layers, three of which hold economically viable concentrations of platinum and related metals, was first mined in 1897 and is the locus of South Africa’s PGM wealth. The PGM resources of the complex were identified in the 1920s, and today platinum and palladium production from the Bushveld accounts for 75% and 40% of global production, respectively. Despite the successful exploitation of South Africa’s platinum resource over the past several decades, estimates regarding remaining PGM reserves offer more reassurance than those for gold. The most recent calculations, undertaken by the University of Witwatersrand and largely based on geological data from mining companies, placed proven reserves of platinum and palladium at 6323 tonnes and 3611 tonnes, respectively.

Other Options

In addition to these figures, the study established probable or inferred reserves of 29,206 tonnes for platinum and 22,115 tonnes for palladium, findings that are considered reliable due to the “remarkable continuity of layers with the Bushveld Complex”, according to a report from Johnson Matthey Precious Metals Marketing.

Given that these resource estimates were calculated using an assumed maximum depth of 2 km, it is quite possible that South Africa’s PGM reserves Annual revenue per commodity, 2010-12 may rise significantly in the future. Technological advances in the gold segment have brought deposits of nearly 4 km depth into the economically viable range, despite the increased working temperatures and costs of transportation.

Narrow reef formations, however, have compelled many of South Africa’s PGM mines to maintain labour-intensive technologies, such as rock drilling and blasting using hand-held pneumatic drills and explosives. The demanding nature of the job and the relatively low salaries commanded by rock drillers, about R10,000 ($1219) per month at Lonmin’s facilities, were contributing factors in a series of wildcat strikes that afflicted the platinum segment in 2012. The Marikana miners’ strike of August 2012 resulted in the deaths of 36 miners as well as a number of security personnel, establishing the question of employee remuneration as one of the central challenges facing the industry in 2013 (see analysis). However, new and existing PGM mines are both turning to more modern technologies in increasing numbers, at least where conditions allow. These include the use of low-profile drilling machines, loadhaul-dump vehicles and ultra-low-profile equipment that can operate in stopes that are less than a metre high, such as those introduced by Impala Platinum (Implats) several years ago.

Iron Ore

Iron ore represented South Africa’s fourth-largest mineral export by value in 2012. The principal deposits of iron ore in South Africa are the banded iron formations of the Transvaal Supergroup in the Northern Cape province, although the Bushveld Complex, home to the nation’s PGM deposits, also contains significant iron ore. According to the Chamber of Mines, the nation’s iron ore reserves amount to some 9.3bn tonnes, the sixth-largest in the world. However, this figure rises to 24.6bn tonnes if the lower-grade potential resource at Bushveld is included, according to a 2005 Department of Minerals and Energy report. Iron ore production levels in South Africa currently sit at around 48m to 50m tonnes per year, with Anglo American subsidiary Kumba Iron Ore accounting for about 75% of that output. From the Northern Cape export ore is transported 800 km by a dedicated rail line to Saldanha Bay on the Atlantic Coast, while the remainder is kept within the domestic market to be utilised in steel production.

The iron ore segment was also negatively affected by the labour unrest that was seen in 2012, with Kumba reporting a loss of 2.2m tonnes of finished ore as a result of employees on strike. Nevertheless, at the start of 2013 South Africa became the third-largest supplier of iron ore to China, with exports increasing to 40.6m tonnes – a rise of 12% over 2011. Moreover, the outlook for future iron ore production in South Africa remains positive. In 2011 Kumba announced that it expected iron ore output to more than double by 2020 to between 120m tonnes and 124m tonnes.

Diamonds

Diamond mining in South Africa dates back to the late nineteenth century, when the discovery near Hopetown of the famous Eureka Diamond by Erasmus Jacobs kick-started an era of prospecting that has continued to the present day. South Africa’s diverse range of diamond deposits supports a similarly disparate array of mining operations, including open pit and underground kimberlitic mining, alluvial mining and offshore marine mining. The domestic diamond industry suffered a setback in 2009 as demand in Europe and the US fell in the wake of the global financial crisis, a trend that compelled De Beers – the largest diamond miner in the country – to close a number of shafts. By 2010, however, production levels had staged a recovery, with year-on-year output increasing 45.1% to 8.8m carats. In 2011 South Africa was ranked as the fourth-largest diamond producer in the world, behind Russia, Botswana and Canada, with a total annual production of 8.2m carats, valued at $1.73bn.

Major Players

South Africa’s mining industry is dominated by large enterprises – both domestic and foreign. According to the Chamber of Mines, half of the world’s top 20 mining firms maintain operations in the country, including BHP Billiton, Rio Tinto, Xstrata and Barrick Gold. The country has produced its own heavyweights too, frequently with primary listings on the Johannesburg Securities Exchange (JSE) and secondary listings in London, New York as well Operating expenses of leading mining firms as other markets. The largest of these listed firms, with a market capitalisation on the JSE of R162bn ($19.75bn) in September 2012, is Kumba Iron Ore, which recently replaced Anglo American Platinum in the top spot. The company has existed in its modern form since 2006, when the iron ore assets of Kumba Resources were unbundled on the JSE, although its genesis can be dated as far back as 1932 with the establishment of an iron ore mine in the Limpopo province to supply the Pretoria Works steel plant. Current shareholders include Anglo American Platinum, which retains a 65.2% stake, and the Industrial Development Corporation – the state body charged with supporting strategically important projects in South Africa – which holds 12.9% of the firm. The company produces magnetite and hematite, which are the two most important ores for steelmaking, with an overall grading of 65.2% iron (Fe), although the company produces two unique lump ore products graded at 64% Fe and 66% Fe.

Joint Ventures

Anglo American Platinum, with a market capitalisation of R115bn ($14.02bn) in September 2012, is the nation’s second-biggest mining firm. The company produces approximately 40% of the world’s newly mined platinum each year, and within South Africa it has established wholly owned operations at numerous locations in the Bushveld Complex, including the Khomanani, Dishaba, Thembelani, Khuseleka, Batho Pele, Mogalakwena, Siphumelele and Tumela mines. In addition, the company has entered into a number of joint ventures in the platinum segment with smaller firms, which include African Rainbow Minerals (ARM), Royal Bafokeng Resources and Eastern Platinum, as well as a pooling and sharing arrangement with Aquarius Platinum covering shallow reserves that are contiguous with Aquarius’s Rustenberg mines.

The company also carries out smelting and refining operations through its Rustenberg Platinum Mines subsidiary. In January 2012 Anglo American Platinum announced that it had completed a review of its business, which it began in February 2012. Consequently, it intends to close four mine shafts in Rustenberg and sell its Union mine operation further east with a view to saving R3.8bn ($463.22m) annually. The company has said that it will aim to “create at least 14,000 new jobs to balance the number of jobs that may be affected by the restructuring”, which are likely to be derived from the infrastructure and housing segments. The move has drawn public criticism from Susan Shabangu, the Minister for Mineral Resources, as well as senior members of the governing African National Congress.

Acquisitions

With a market capitalisation of R112bn ($13.65bn) in 2012, AngloGold Ashanti is the third-largest mining firm in South Africa. While the company’s primary listing is on the JSE, it is also listed in the UK, US, Ghana and Australia, and carries out mining operations in 10 countries on four continents. Established in 1998 through the consolidation of seven South African mining firms, it has marked nearly every year since with an acquisition, which has frequently been abroad. In the domestic sector it runs six deep-level mines and a surface operation in the Vaal River and West Wits regions. Between them, they produced 1.62m ounces of gold in 2011, which accounted for 37% of the company’s global production, as well as 1.3m pounds of uranium as a by-product. At the close of 2011 the company estimated its mineral resource in South Africa to stand at 97.63m ounces.

Platinum

Implats is South Africa’s fourth-largest player, with a market capitalisation of R88bn ($10.73bn) as of September 2012. The company mines, refines and markets the PGMs it extracts from its operations in South Africa and Zimbabwe. In South Africa its operational unit is registered simply as Impala, the lease areas of which sit on the western limb of the Bushveld Complex and in the springs east of Johannesburg. The company was created in the mid-1960s to house Union Corporation’s platinum interests, and by the early 1990s it was producing around 1m platinum ounces per year. Currently, the company possesses mining and prospecting rights for a total area of 260 sq km, while operations consist of 15 shaft systems. In 2012 Impala milled nearly 11m tonnes of ore to produce 750,100 ounces of platinum. As of early 2013 the firm was in the middle stages of a capital programme designed to extend the lives of the existing shaft systems and develop several new ones – including the construction of three new deep-level shafts (10, 16 and 17).

Rounding out the “Big Five” in the mining sector is Gold Fields, the operations of which extend to Ghana, Australia and Peru as well as the domestic sphere. Its South African operation is located at South Deep, which is 45 km south-west of Johannesburg, and is carried out through Newshelf, a 90%- owned subsidiary. The mine is an intermediate to deep-level project, and consists of two shaft systems and a central metallurgical plant for ore processing. Gold Fields is currently executing a development plan that will see ore production capacity at South Fields increase to 330,000 tonnes per month by 2015, giving it an annual production rate of 700,000 ounces per year, which it expects to be able to maintain up until the year 2057.

At the same time, the operator is seeking to reduce its exposure through unbundling local assets and laying more focus on lower cost and lower risk operations. One such step taken in February 2013 was to move both KDB and Beatrix mines under the helm of Sibanye Gold (a separately listed company). Accordingly, the new set-up is aimed at ensuring cash flows from the two mines can be better utilised to preserve longevity of the mines themselves and boost dividend payouts to shareholders.

Smaller Players

Beyond the five largest operators, a number of sizeable players account for a considerable share of sector activity: Exxaro Resources (market capitalisation R58bn, or $7.07bn), formerly part of Kumba resources, is a coal and heavy minerals company headquartered in South Africa and operating domestic facilities as well as projects in Asia, Europe and Australia; Assore (market capitalisation R46bn, or $5.61bn) is a mining holding company which focuses on base minerals and metals, principally through its 50% stake in Assmang; ARM (market capitalisation R35bn, or $4.27bn) possesses the other 50% stake in Assmang, and is a niche mining company formed in 2004 to establish interests in South African and other African mining operations; Harmony (market capitalisation R30bn, or $3.66bn) is a gold producer of global significance, operating 10 underground mines, one open-pit operation and several surface sources in South Africa, as well as a number of projects in Papua New Guinea; and Lonmin (market capitalisation R15bn, or $1.83bn), formerly the mining division Lonrho, is one of the world’s largest primary producers of PGMs, having extracted and sold 702,000 platinum ounces in 2012, despite the tragic events related to the strikes that took place at its Marikana facility.

Performance

After the global economic crisis of 2008, commodity prices staged a modest recovery between 2009 and 2011. However, this price recovery slowed over 2012, with gold the only commodity that managed to gain value. This, combined with a faltering economic recovery in export markets such Europe and labour unrest at home, made the 2012 financial year a more challenging one for South Africa’s miners. While balance sheets have generally remained strong, the market capitalisation for the top 39 mining companies declined by 9% from R910bn ($110.93bn) in 2011 to R833bn ($101.54bn) in 2012, according to international professional services firm PwC. A depressed platinum price had adverse effects on platinum mining firms such as Anglo Platinum, Impala, Lonmin, Royal Bafokeng, Aquarius and Northern, which among them lost 25% of their market capitalisation.

However, diversified companies such as Kumba Iron Ore, Exxaro Resources and Assaro were less affected, increasing their market capitalisation by 13% and replacing the platinum producers as the dominant players within the top 39. Rising gold prices as a result of European uncertainty and unrest in the Middle East helped to buoy gold miners in the otherwise unfavourable environment, with both AngloGold and Gold Fields showing gains in market capitalisation over 2012. In terms of commodities, coal regained the position it lost to platinum in 2005 as the highest revenue-earning commodity produced in South Africa. The weak recovery of platinum demand in global markets, as well as the consequent decline in domestic production, have been largely responsible for this change.

In 2012 coal accounted for 26% of mining revenue, gold contributed 22%, PGMs 21% and iron ore 19%. Iron ore was the only commodity to show increased production levels during 2012, largely thanks to increased output at Kumba’s Sishen facility. The depressed platinum price and lost ounces due to labour unrest were largely responsible for a decrease in platinum production, while gold production fell despite buoyant prices as a result of increasing mine depth and the associated technical difficulties.

However, despite predictions that the slowdown in overall mine production seen at the end of 2012 would continue into the next year, South Africa’s mining production increased by 7.3% in January 2013 compared to the same period in 2012 thanks to iron ore and diamonds. Monthly production data will be watched closely throughout 2013 as the industry continues to grapple with the issues that were highlighted during 2012’s strikes.

Oversight

Despite its robust performance in a challenging environment, mining’s current contribution to GDP of around 5% represents the lowest input in two decades. The reversal of this declining trend has become a government priority, and the DMR is the agency with the principal responsibility for addressing it. The DMR oversees the mining industry, and it has been headed by Minister of Mineral Resources Susan Shabangu since May 2009. Its activities can be divided into three broad streams – regulation, promotion and policy formulation – for which it has developed two distinct branches. The Mineral Regulation Branch’s primary function is to administer the Minerals and Petroleum Resources Development Act (MPRDA), passed by parliament in 2002 and implemented in 2004.

The MPRDA introduced a radically new regime to the sector, by abolishing the property-law-based system of the apartheid era and introducing a system based on conditional state licences. One of the aims of the new legislative framework is to affect sectoral transformation – part of the wider national effort to bring about a more equitable distribution of the nation’s wealth. The MPRDA, therefore, enshrines equal access to resources, regardless of race, gender or creed. Under its provisions, new-order rights are allowed to be registered, traded and transferred, while existing operators are guaranteed security of tenure. Prospecting rights, meanwhile, are valid for up to five years and may be renewed for another three on request, while mining rights are valid for up to 30 years, which may be extended for a further 30 years with approval.

Wider Regulations

Although the MPRDA represents the principal regulatory framework of the sector, several other pieces of legislation provide yet more regulatory depth to the industry. The most salient are: the Precious Metals Act 37 of 2005; the Skill Development Act 97 of 1998; the Diamond Amendment Act 29 and the Diamond Second Amendment Act 30, both of 2005; the Employment Equity Act 55 of 1998; the Revenue Laws Amendment Act of 2005; and finally, the Preferential Procurement Policy Framework Act 5 of 2000.

Policy And Promotion

The DMR’s Mineral Policy and Promotion Branch was established in 2005, and performs a wide range of functions, including reviewing policies and legislation (both existing and pending), amending legislation and conducting research. Its principal point of reference regarding policy formulation is the Amended Mining Charter of 2010 (more formally known as the Broad-Based Socio-Economic Empowerment Charter for the South African Mining Industry).

The latest version of the charter follows an assessment of the 2002 Mining Charter that showed that numerous targets had not been met, most significantly a black ownership level goal of 15%, which was to be achieved by 2009. The new iteration of the charter sets a goal of 26% black ownership of the nation’s mining assets to be attained by 2014, calls for the elimination of hostels on mine sites and introduces a sustainability component that provides for the assessment of the environmental, health and safety performance of mining companies.

Moreover, those who are found to be in breach of the new charter might now face penalties as a consequence, including the revocation of a mining licence. The increasing role of environmental regulation in the sector has resulted in the development of a dedicated directorate within DMR’s Mineral Policy and Promotion Branch charged with researching, developing and promulgating environmental policy and legislation. Promotion of the mining sector, meanwhile, has been distributed across three directorates: mineral promotion, mineral economics, and small-scale mining and beneficiation economics.

Beneficiation

One of the most significant policy issues addressed by the DMR in recent years is the question of downstream activity in the mining sector. The government’s broader economic strategy, the New Growth Path, released in December 2010 and aimed at creating 5m new jobs by 2020, established mining’s downstream sector as a key priority for development – and the DMR’s policy response to it was quick to follow.

The “Beneficiation Strategy for the Minerals Industry of South Africa” was released in June 2011 and, while acknowledging that the country had improved the ratio of beneficiated to exported primary products since the 1970s, pointed out that these ratios were “well below the potential suggested by the quality and quantity of its mineral resources endowment.” The strategy devised by the DMR is intended to realise this potential, while complementing the government’s wider industrial policy as outlined in the Industrial Policy Action Plan 2012/13-2014/15, which calls for the long-term development of beneficiation projects, the enhancement of mineral export value, increased sources for the consumption of local content and the creation of sustainable jobs.

The DMR identifies two energy commodities in its strategy: coal, which might be beneficiated to produce feedstock for plastics and fertilisers; and uranium (or thorium as an alternative), which is now imported in enriched form for power generation purposes. Non-energy commodities identified as possessing potential value chains include: titanium and the production of titanium dioxide; PGMs and their utilisation in the production of autocatalytic converters and diesel particulate filters; gold and diamonds and the establishment of jewellery hubs throughout the country; and iron ore, chrome, manganese, nickel and vanadium, the downstream production of which might include steel and stainless steel, machinery and equipment, consumer goods and construction inputs.

Royalties

One of the most significant changes introduced by the promulgation of the MPRDA was a provision for a royalty system, later established by the Mineral and Petroleum Resources Royalty Act of 2008 and its supporting legislation. The act provides that a royalty is payable by an extractor and sets out a range of royalty rates from 0.5% to 7%, depending on the mineral, to be levied on gross sales. The implementation of the new royalty system was delayed until 2010 to give mining firms time to make preparations for it, and in the first year of its application the South African Revenue Service collected more than R6bn ($731.4m). However, the question of royalties and taxation rose to prominence once again in 2012.

While the government has made assurances that the nationalisation debate that had spread alarm through the industry over the year was settled by a number of unequivocal public announcements, it is nonetheless desirable to address the twin problems of poverty and inequality, which have become sources of considerable public discontent.

In early 2013 South African President Jacob Zuma stated that the current mining royalty system would be reviewed, while Minister of Finance Pravin Gordhan has announced that he will commission a study of current tax policies in 2013. Changes to the royalties paid by mining firms in South Africa, or the introduction of a resource tax that has been mooted in the past, will carry significant implications for mining firms already struggling to maintain profit and production levels (see analysis). In seeking to reform its royalty system South Africa joins a procession of global reformers; over the past 20 years 110 nations have replaced or significantly amended their mining laws. Many of them, such as Australia, Argentina, Canada and the US, have imposed royalty systems, although there is a lack of uniformity regarding rates. Others, such as Chile, Greenland, Mexico and Sweden have not imposed a royalty tax.

Proposed Legislative Changes

At the close of 2012, the cabinet approved a number of amendments to the MPRDA and released them for public comment, the deadline for which passed in February 2013. The amendments have raised concerns within the industry that the government is seeking a greater amount of control over the mining sector.

An amendment that grants the Minister for Mineral Resources with discretionary powers over beneficiation has been interpreted by some in the industry as a means by which the government might exercise control over the pricing of coal in order to boost the domestic steel industry. The proposed legislative changes also seek to replace the “first-in-first-assessed” principle of the MPRDA related to mining rights with ministerial discretion. A third amendment would provide the state with a free-carried interest in exploration and production activity, thereby granting it a share in the profit without a contribution to capital development costs.

MIGDETT

Industry developments such as the labour unrest of 2012, the possibility of new taxation schemes and the legislative amendments revealed by the government are all of considerable interest to South Africa’s mining companies. In making representations to government regarding these and other issues they have a number of channels open to them, such as direct contact with the ministry or group representation through the Chamber of Mines.

A more likely forum for the more significant industry concerns is the Mining Industry Growth, Development and Employment Task Team (MIGDETT), which was established in late 2008 as a response to the challenge posed to the industry by the global economic crisis. The body was formulated under the aegis of the DMR, and includes representatives from a number of interested parties from government (the presidency, treasury, Departments of Public Enterprises, Economic Development and Trade and Industry), organised labour (the National Union of Mineworkers, Solidarity and UASA), and the industry (the Chamber of Mines and the South African Mining Development Association). The work of MIGDETT has been credited with helping to salvage 50,000 mining jobs in the wake of the global financial crisis, and it has since focused on its new ambition to develop the industry for sustainable growth. However, while the body retains its position as the principal forum for stakeholders in the industry, Anglo Platinum’s decision to restructure its business in South Africa without engaging with it has undermined the overall authority of MIGDETT, say some in the sector.

Infrastructure

An evolving regulatory landscape, restive employees as well as the possibility of rising labour costs are some of the more significant challenges facing the mining sector. Overburdened infrastructure has also emerged as an obstacle to development in recent years.

Much of South Africa’s existing rail network was developed to ship mineral imports from the remote locations where they are often found in to transport hubs on the coast. Transnet Freight Rail, a division of the state-owned rail operator Transnet, operates the heavy haul rail lines that many in the industry feel have been allowed to deteriorate over a period of decades. Limited rail capacity on heavy-haul lines has compelled mining companies to truck product to its destination, a practise that has had an adverse effect on the nation’s road network.

However, in response to industry concern, Transnet has targeted three of the most strategically important rail lines for upgrades and capacity expansions: the Richard’s Bay export line, which transports coal from Mpumalanga; the Port Elizabeth export line, which carries manganese; and the heavy-haul line to Saldanha Bay port, which transports iron ore form the Sishen mine. Transnet has earmarked around R200bn ($24.38bn) for the planned developments.

The upgraded iron ore line to Saldanha Bay is expected to boost the region’s iron-ore transport capability to 100m tonnes per year, an increased capacity which will prove useful to the R8.5bn ($1.04bn) Kolomela mine opened by iron ore producer Kumba in June 2012. The manganese export terminal in Port Elizabeth is due for an upgrade from its nominal capacity of 5m tonnes to 12m tonnes, while the rail line that feeds it will benefit as well from an improvement. In January 2012 Transnet and Swaziland Railway announced a cross-border project that will see the construction of a 14-km connection between the two countries, a development that will improve access to the Waterberg coalfields where much of South Africa’s future coal production is expected to take place.

Power Concerns

The availability of power is another concern for the mining sector. South Africa’s industries are the largest customers of the state electricity provider, Eskom, and primary mining operations, as well as the beneficiation processes that the government is keen to promote place a huge demand on the system. In 2008 the nation’s power supply proved unable to cope with the rising demand, and the country was subject to rolling blackouts that compelled mines and smelters to suspend operations for days. Mining firms have cooperated with Eskom to cut electricity usage since then, achieving a 10% reduction in the period after the blackouts.

The power supplier is working to install additional capacity through the construction of new power stations. However, the time required for such large-scale infrastructural development means that the availability of power will remain a large challenge for the industry into the long term. The related issue of electricity pricing has also troubled the industry in recent years, and will continue to do so for the foreseeable future. Electricity tariffs in South Africa have risen by about 170% over the last five years, and in 2012 Eskom sought permission for annual price rises of 16% over the next half-decade.

After consulting with interested parties, like industry, business and civil society groups, the national energy regulator in 2013 granted permission for an 8% annual increase for the next five years. Eskom may appeal the decision or apply for an upward revision of the increase if it faces increased costs, such as a higher than budgeted coal price, but even the currently proposed tariff increase will challenge marginal mining operations.

Outlook

According to the Chamber of Mines, almost one-fifth of the nation’s economy can be attributed to South Africa’s mining sector, despite comprising only 5% of the nation’s GDP. The government’s most challenging task over the coming years will be to stage the interventions in the sector which it has proposed without further exacerbating the challenges of labour, infrastructure and power that the industry is currently addressing.

While these challenges are considerable, the nation’s resource base and the rising demand from the some of the world’s more buoyant markets offer some promise to the sector: the critical minerals demand for established export markets such as China is expected to rise in late 2013 or early 2014, which bodes well for segments such as copper, while the anticipated rise in steel demand as markets around the world regain momentum underlines the potential benefits of the government’s beneficiation strategy. Wage negotiations are expected to make for a challenging year ahead, and infrastructure obstacles will take continued investment to clear, but with so much at stake the common interest of government, labour and industry might find agreeable terms while still keeping the industry globally competitive.

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The Report: South Africa 2013

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