/ 14 February 2013

Industry hits the right notes, but is it enough?

The who's who of the world's mining industry descended on Cape Town last week for the 19th Mining Indaba. Themed "Investing in Mining", the four-day 19th Mining Indaba last week was jam-packed with presentations by industry leaders and commentators, and supplemented by an impressive exhibition showcasing mining companies and many members of the industry's supply chain.

The focus of the largest mining investment conference in the world was the after-effects of Marikana. Now recognised as a watershed moment in the mining industry, Marikana forced the sector to look very seriously at the way it operates, from a socio-developmental and an operational perspective.

The consensus was that Marikana changed things forever. Not only did the disaster taint the image of South African mining for international investors, but it forced the industry to admit it had, as outgoing AngloGold Ashanti chief executive Mark Cutifani said, overlooked the workers and forgotten the local communities — a major operational mistake.

The urgent need to ensure sustainability, improve beneficiation, improve skills and upgrade the living standards of local mining communities were all emphasised, with an underlying focus on the importance of continued investment in the industry.

Minerals Resources Minister Susan Shabangu highlighted the need for closer collaboration with government in a symbiotic, mutually beneficial relationship in her opening address. "Our government is fully conscious of the reality that mineral development cannot happen unless capital is invested by the private sector. There is room for both private and public returns," she said.

Her address put the lid on the nationalisation debate, squashing months of fear and speculation in the mining and investment industries. She said that mine nationalisation was not, and never would be, on the government's agenda.

Investors' relief was tempered by uncertainty over pending legislation. An amendment bill designed to "remove ambiguities in certain definitions" of the mineral and petroleum resources development act, which governs the acquisition, use and disposal of mineral rights in South Africa, was put forward last year.

The draft amendment is considered by many in the industry to add further regulatory uncertainty and investor concern, and to possibly have a detrimental effect on the mining sector.

The draft bill proposes that the minister consents to the transfer of any interest in a listed company that holds a prospecting or mining right. The amendments also remove all compulsory time periods for applications for mining rights, instead leaving timing to ministerial prescription by regulation.

The draft bill was approved by cabinet in December and put out for public comment. Last week that window ended and the bill will now go to parliament for debate. Legislation is only one of several challenges facing South Africa's mining industry. The threat of a "super-tax" on the sector, labour disputes and increases in energy costs of 16% a year for the next five years will contribute sizeable operational costs to an already strained sector.

Market commentators fear investor confidence will waiver over concern that government has not shown itself to be strong enough to appropriately handle the challenges. South Africa was brimming with investment potential, but economic stability and regulatory consistency had to be assured, said Control Risks' managing director for Southern Africa, David Butler.

"The resources are there, and all the means to make use of them. But what investors cannot bear is indecision in policy," Butler said. "The manifestation of resource nationalism in the form of additional taxation or in another form — what matters most is that investors know what the rules are, so they can build a business model and get their investments working. Indecision and mixed messages just scare investors away and the impact on industry would be enormous."

Investors in a high risk, high cost industry required regulatory certainty.

Chamber of Mines chief economist Roger Baxter said it was not that companies did not want to be regulated, they just wanted "smart tape, not red tape".

Cutifani highlighted the underperformance of the mining industry on the JSE, down 30% in real terms in the last six years, compared with the All Share Index growing by 60% since 2007, as a concern. He said that it was up to the mining sector to change that, and called for the industry and government to engage in consultation and cooperation going forward.

"Industry and government leaders must stop shouting at each other. We must put our differences aside and start talking in a way that will change the industry for good. The threats to take away mining licences are out of order."

Outgoing Anglo American chief executive Cynthia Carroll said mining had a vital role to play in helping South Africa tackle its challenges of poverty, unemployment and inequality, in that it generated 18.7% of the country's gross domestic product in 2011.

Mining directly employed more than 500 000 people, and was indirectly responsible for a further 840 000 jobs — which, through the dependency ratio, sustained 13.5-million people, just over a quarter of South Africa's total population.

She said that in 2011, out of the country's total mining industry expenditure of R437-billion, at least 89% was spent in South Africa. For the country to succeed, it would need to foster an environment that was conducive to business and attractive to international investors, she said. Stable labour relations, the maintenance of law and order, and an environment of regulatory stability were vital for this to be achieved.

There would be much debate and discussion among industry stakeholders in 2013, said Control Risks's Southern African analyst for global risk analysis, Simiso Velempini. "There's no doubt this will be a challenging year for the mining industry. Demand has dropped, particularly in the platinum sector, global prices are down, and there's a very credible prospect of mass retrenchment looming.

"The government will have to deal with these issues and make important policy decisions — all in an election year. "The challenge will be separating the rhetoric and pre-election politicking from any tangible legislative changes that will have an effect on the operational environment," said Velempini.

Mining the numbers

• The number of mines in South Africa has increased from 993 in 2004 to around 1 600 in 2012.

• In 2011, out of a total South African mining industry expenditure of R437-billion, no less than 89% was spent in the country itself.

• In 2011, the mining sector's R282-billion worth of exports accounted for 38% of total South African exports.

• Revenue generated in nominal terms increased from R98-billion in 2004 to R37-billion by the end of 2011.

• Employment in the mining industry grew from less than 449 000 in 2004 to more than 530 000 by June 2012, and was directly responsible for a further 840 000 jobs.

• Mines spent R46.5-billion of capital in 2011, paid R25.8-billion in tax and R16.2-billion in dividends.

• About 30% of South Africa's petrol, diesel and chemicals were produced from locally mined coal and 13% of the world's catalytic converters were made in South Africa using locally mined platinum.

Sources: Minister of Minerals Resources Susan Shabangu, Anglo American chief executive Cynthia Carroll and Chamber of Mines Facts & Figures 2011

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