The country boasts an estimated $2.5trn worth of proven mineral reserves, while the mineral resources sector contributes 8% to South Africa’s GDP directly, 17% indirectly and is the country’s second-largest employer with an estimated 14% of total employment.
The sector’s output and performance has, however, been under pressure in recent years. Bottlenecks in labour relations, uncertainty in policy direction and power shortages continue to play a major role in stifling the industry’s recovery.
The sector is also subject to global headwinds, as weak economic performance in commodity-consuming nations leave South Africa’s mining sector exposed to continued suppressed prices, impacting the per unit value of the primary mining sector, which accounted for 38% of the country’s total exports in 2014. However, the fall in the value of the rand against the US dollar may provide the sector with a boost and help raise output, as more local currency is received when selling abroad in dollars.
The sector is composed primarily of four resource groups: coal, gold, platinum-group metals (PGMs) and iron ore. In 2014, total mining production fell by 1.5% compared to 2013, according to Statistics South Africa (Stats SA). Mineral sales fell by 0.3% to R396.5bn ($34.3bn), largely due to a 29% drop in PGM production and a 5% drop in gold production. Declines in the former were mainly related to the five-month-long labour strike in the first half of 2014. The PGM segment’s impact on overall mining production in 2014 was significant – five of the first six months recorded year-on-year (y-o-y) decreases in overall production growth, while in the second half of the year a further two months showed a contraction. The majority of output comes from ageing assets, while overstretched infrastructure and rising operational costs are hampering the stability of key players.
The spectrum of players in South Africa’s mining industry has transformed markedly over the last decade, with the emergence of juniors complimenting the major global companies that have historically dominated the market. While the latter includes over half of the 20 biggest mining companies in the world, the former have grown in production capacity primarily through a strategy of acquiring mature mines from the majors and bringing production levels back up through brownfield re-entry strategies.
With over 50% of the mining sector operating below break-even, according to Monique Mathys, head of economics at the Chamber of Mines of South Africa, majors and juniors alike have felt the impact of adverse market conditions on their share prices. Mining companies in the Johannesburg Stock Exchange (JSE) All Share Index represent 10% of the total, down from 50% in 2012 and 80% in the 1960s. Furthermore, the 19% decrease in the JSE Mining Index from June 2012 to September 2014 spilled over into the subsequent 12 months; the mining index tumbled by over 37% from September 2014 to September 2015, with the impact felt across all commodity sectors. Each one of the JSE’s top-10 mining firms by market capitalisation saw losses in share price over the period.
Mosa Mabuza, deputy director-general of mineral policy at the Department of Mineral Resources, points to gains in cost-efficiency as a potential point of rescue for these companies. “Among companies of the same size operating similar type mines, there is a wide range of cost-efficiency in procurement, asset utilisation and energy-efficiency,” Mabuza said. “Procurement does not present any kind of competitive advantage for these players, which supports the need for centralisation and collaboration amongst companies in the market so that they may lower costs through gains in economies of scale.” The coming year may see juniors increase their share through the acquisition of troubled assets. However, according to Mxolisi Mgojo, CEO of South Africa-based mining company Exxaro, access to capital will be a challenge for junior miners that want to expand and pick up assets divested from major players. In September 2015, it was announced that Anglo American had agreed to sell its three Rustenberg platinum mines to junior Sibanye Gold, the country’s top gold producer, for an initial payment of at least $100m and further deferred amounts based on the price of platinum.
Michal Kotze, Africa mining industry leader at PwC, says that local junior players do not have the global portfolios to de-risk against commodity prices, as Rio Tinto and BHP Billiton have done recently. “Local players are by their very nature more vulnerable to the South African market, which is currently seen as high-risk by global investors due to rising costs and policy uncertainty,” Kotze told OBG.
With 3.4% of the global share, South Africa has the ninth-largest recoverable coal reserves in the world, according to the “BP Statistical Review of World Energy 2015”, and a current reserves-to-production ratio of 116 years. Additionally, the vast majority of these reserves lie in close-to-surface plays that are easier to mine. Average production costs for coal in South Africa vary roughly between R56 ($4.80) per tonne in the Waterberg basin and R205 (17.70) per tonne in the Central Basin, according to University of Cape Town’s Energy Research Centre.
Coal production returned to growth in 2014 with a 1.6% upward shift to 260.5m tonnes after having experienced a brief 0.9% contraction from 2012 to 2013. Coal production comes largely from the mature Witbank, Highveld and Ermelo fields in the Central Basin near South Africa’s eastern border with Swaziland. However, with these reserves expected to run out in less than a decade, the industry has turned its attention to inland coalfields in Limpopo Province and around the resource-rich Waterburg basin. For example, Coal of Africa is planning a $400m project in Makhado, Limpopo. The 16-year, opencast Makhado mine will produce 2.3m tonnes of hard coking coal and 3.2m tonnes of thermal coal per year when it comes on-stream in 2018 and will be the largest coking facility in South Africa.
Around 50% of the coal sector’s revenue comes from the domestic market, according to Mathys. While state power company Eskom’s coal off-take agreements with mining companies had historically involved lower prices in exchange for capital investments for the development of the mines, the utility company is now requesting a downward revision of those prices without contributing any capital.
“Any downward revision in off-take prices with Eskom would lead to significant losses for mining companies,” Mathys told OBG. Glencore halted its supply of coal from its Optimum coal mine to Eskom in August 2015 as it was selling to Eskom for less than the cost of production. Its administrators have subsequently filed for business rescue for Optimum. “Major miners will not develop new mines for the domestic market under these conditions,” Peter Leon, head of Africa mining and energy at law firm Webber Wentzel, told OBG. Steep declines in global coal prices down to $50 per metric tonne could prove an inhibitor to further large-scale capital investments in exploration programmes and greenfield projects.
South Africa is the seventh-largest exporter of coal in the world and exported nearly 30% of its production, around 78m tonnes, in 2014. Asia was the largest recipient at 53%, followed by Europe (29%) and Africa and the Middle East (15%). India was by far the largest single-country recipient, with over 40% of South Africa’s exported coal going to the south-Asian nation.
South Africa’s gold production decreased from 160 tonnes in 2013 to 150 tonnes in 2014, according to the US Geological Survey. Average gold production costs in South Africa were estimated at $1150-$1436 per ounce in 2014 by the mining company Gold Fields. Gold’s share of total mining revenue declined from 20% in 2013 to 14% in 2014, with every other major mineral group increased at its expense. The nearly 50% drop in global gold prices from its high in 2011 has been the primary driver of declining revenues; however, the country is still the joint sixth-largest producer of gold in the world and ranks third in reserves, with a global market share of 11%.
Gold production has been on a steady decline in recent years, with increasing depths of existing mines, technical challenges related to new operations, intensifying labour disputes and growing costs serving as the primary impediments to growth. While gold prices remained resilient compared to other commodities in the post-2008 crisis era, the drop in prices in 2014-15 will place increased pressure on the sector as marginal mines lose economic viability. Modernisation of mines by certain companies such as AngloGold Ashanti could provide relief in the short to medium term and help mitigate further declines.
South Africa accounts for almost 70% of global platinum production and holds 95% of the world’s PGM reserves, at 63m kg, according to the US Geological Survey. Most of South Africa’s PGM mines are narrow reef deep level underground mines, which are both capital- and labour-intensive, with the latter particularly impacted by the high rock temperature gradient. The country produced an estimated 110,000 kg of platinum and 60,000 kg of palladium in 2014, a 16% decrease in the former and 21% in the latter compared to 2013. Due notably to labour strikes in the first half of 2014, PGM saw a 132.2% y-o-y growth in production in March 2015, according to Stats SA, propelling total mining production forward by 18.8%, equivalent to the second-highest y-o-y increase since January 1980. However, production still remains far below peak levels recorded in December 2010.
In response to headwinds in the domestic business environment and a 30% y-o-y drop in global platinum prices in August 2015, some firms are looking at shallow mines. With more than 65% of South Africa’s existing platinum operations unprofitable at current prices, shallow mines that use less power and require only 20% of the labour force could lead to much lower costs and a return to profitability.
Iron Ore & Manganese
South Africa has the 13th-largest crude ore reserves in the world, at 1bn tonnes, of which 650m tonnes is iron content, according to the US Geological Survey. Iron ore cost R331.55 ($28.60) per tonne to produce in 2014 at Kumba Iron Ore’s Sishen mine and R269.13 ($23.30) per tonne at its Kolomela mine in 2014. The country’s production grew by 12.6% in 2014, according to Stats SA, while the US Geological Survey estimated the gains at around 8%, with a total production of 78m tonnes in 2014. Iron ore is the country’s fourth-largest mining commodity by index weight, according to Stats SA.
The index of South African mining production is published monthly and shows the importance of each mineral group in total production. Despite its strong position, from January to June 2015, iron ore’s adjusted index of volume production decreased by 9.5%, with May and June losing 15.5% and 21%, respectively, compared to 2014. Part of the downward pressure comes from external headwinds. Global output of steel increased y-o-y by just 1% in 2014, due to a slowdown in economic growth in China, which represents 48% of the global market for steel.
In addition to iron ore, South Africa has an estimated 150m tonnes of manganese ore reserves, over 25% of the global total. Production of the commodity rose to 4.7m tonnes in 2014, up 9.3% over 2013 figures. These increases continued into the first half of 2015, with y-o-y increases in monthly production volume of between 19.5% and 60.5% for each month. In July 2015, Australia displaced South Africa as China’s top import source for manganese ore. Most iron ore and manganese reserves are found in the Kalahari Basin in the Northern Cape Province.
South Africa’s diamond reserves were estimated at 162m carats (cts) as of 2012. The country has benefitted from rising demand from East Asia and the Middle East and easily operable open pit mines. While diamonds accounted for just 2.75% of the mining sector’s weight based on 2012 figures, according to Stats SA, the sector experienced 46.3% growth in its index weight in the first half of 2015.
The promising initial indicators for 2015 follow on a drop in production in 2014, when 7.43m cts were produced compared to 8.14m cts a year previously. That said, the total production value was 3.3% higher in 2014, at $1.22bn. Additionally, exports jumped from 8.4m cts in 2013 to 10.4m cts in 2014, and export values from $1.5bn to $1.7bn.
Production in 2014 was under half of the 15.6bn cts produced in 2005, although the value was almost equal to the $1.3bn derived in the earlier year, due principally to the per ct value jump to $164.76 in 2014, up from $84.78 in 2005. Volatility in diamond prices is common; between 2009 and 2010, South Africa lost 6.5% on its per carat value due to the global economic downturn and a glut of supply that peaked in 2008.
Labour and workforce issues are particularly challenging in South Africa, a country which has a rich history of trade unions. This has been especially noticeable in recent years, with the mining sector having been struck repeatedly by industrial actions.
Labour accounts for approximately 40% of the mining sector’s total costs and around 50% at deep-level conventional PGM mines, according to a PwC 2014 report. Webber Wentzel’s Leon estimates that the mining sector’s labour costs have grown twice as fast as the inflation rate over the last five years, while the Chamber of Mines estimates that labour costs have increased 180% in the last decade.
Part of this is a result of more aggressive bargaining from two separate unions: the National Union of Mineworkers (NUM), an organisation which is part of the Congress of South African Trade Unions; and the Association of Mineworkers and Construction Union (AMCU), which broke away from NUM in 2001 and now represents a majority of works at a number of large PGM mines. In April 2015, NUM, which represents 57% of the gold sector’s labour force, announced it would submit demands to the gold sector calling for a 75% rise in basic pay for entry-level workers. The AMCU, meanwhile, led a five-month long platinum strike in 2014 and has called for a more than doubling of the wages of its lowest paid miners.
“As mining companies continue to be squeezed by rising labour costs and depressed commodity prices, the eventuality will be workforce downsizing,” Leon told OBG. “This has already started with some 50,000 job losses over the last three years and more to follow.” In response to wage hikes and labour disruptions, the mining sector cut 35,000 jobs in the two years leading up to May 2015, or roughly 5% of the workforce. The gold and platinum sectors accounted for the largest share of this, with 23,100 and 10,800 job cuts, respectively. Kotze expects commodity prices to remain under significant pressure due to slow demand and level of global supply. This could result in further jobs being cut in the near future. A 2013 mining survey by the Fraser Institute, which included 742 participants and 96 countries, ranked South Africa as 93rd in terms of labour regulations, employment agreements and work disruptions.
The mining sector is regulated by the Department of Mineral Resources, with the Ministry of Petroleum Resources Development Act, the Mining Charter and the Broad-Based Black Economic Empowerment (BBBEE) policy being the key regulations governing mining activities. Enacted in 2004, the Mining Charter prescribes that by 2014 the sector should have achieved 26% black ownership – an industry-sponsored component of the government’s BBBEE initiative. However, disputes over the Mining Charter’s language and how black empowerment ownership levels are measured have come to the fore.
The Chamber of Mines has sought to make it so that granted mining rights or converted old-order rights will not be forced to restore black ownership to the mandated 26%; however, black empowerment requirements could change significantly as a result of the BBBEE Amendment Act that came in force in 2014. The amendment states that all empowerment levels in all sectors must be in line with the BBBEE’s ownership levels by October 2015.
The BBBEE’s codes of good practice are more sophisticated and detailed than the Mining Charter, according to Leon, and there are multiple levels of verification of compliance. Under the BBBEE policy, companies have to achieve a minimum score in a number of categories to be compliant, including in procurement, ownership and skills development, whereas the Mining Charter allows more flexibility in how you achieve the 26%. “With the proposed new mining charter in 2015, there is uncertainty as to whether the new standard will be brought in line with the BBBEE codes of good practice,” Leon told OBG. Eskom has already begun imposing 50.1% black ownership on coal suppliers in some instances. “Significant changes in black empowerment levels could see a number of mining companies scale back on their investments in South Africa and would almost certainly halt any new capital investments,” Leon added.
While access to reliable and affordable power remains the biggest operational challenge to the mining industry, a major bottleneck to increasing commodity exports – particularly for coal – is the dearth of railway infrastructure to transport mineral output to ports.
In this respect, state-owned Transnet is investing $18.8bn in a rail expansion plan to help increase exports of commodities. However, Transnet’s monopoly over ports has hampered the competitiveness of South Africa’s commodities on the global market, said Leon. The cost to export from South Africa rose by 20% from 2010 to 2014, according to the World Bank, and is more than 50% higher than competing mineral exporting countries such as the US and Australia.
“Government has acknowledged these issues and targeted improved efficiency and more reasonable charges in the national development plan but nothing has happened yet,” Leon told OBG. The capacity of the port terminals is also straining under the load. Over 90% of 2014 coal production was exported through the Richards Bay Coal Terminal (RCBT). Although it has a capacity of 91m tonnes per year, a continued 1.5% increase in usage, as was seen from 2013 to 2014, would see the terminal’s capacity exceeded by 2030. This would require the Durban or Maputo terminals to take on more of the load, or to re-start plans of increasing RBCT’s capacity to 110m tonnes.
As the market continues to battle rising costs due to protracted labour negotiations and a struggling power sector, mining companies will have to find innovative ways to combat falling revenues from a global commodity market that is likely to remain depressed in the short term. Financial turbulence and volatility will likely see continued fluctuations in share price and may see further sales of aging assets take place, while capital investments remain subdued. That said, South Africa continues to host some the best mineral reserves in the world, and the efficiencies gained now will translate into higher profits once global commodity prices begin to rise.