/ 10 February 2023

Mining companies aren’t buying what the SA govt is selling — yet

Although mining companies have enjoyed the bounty of the 2020s commodity boom, they have not been immune to the impact of the public sector’s failures. Photo: Supplied


This year’s Mining Indaba took place after another red-hot year for commodities, which ought to have inspired South African mining companies to put some of their extra cash into expanding local operations. But continued global uncertainty and the country’s deteriorating energy and logistical infrastructure have seemingly poisoned the chalice, leaving miners more risk averse than ever.

As expected, the standout theme of this year’s conference was the country’s Eskom and Transnet-related deterioration, which has dented investor confidence. 

Although mining companies have enjoyed the bounty of the 2020s commodity boom, they have not been immune to the impact of the public sector’s failures. Their exposure to Transnet’s breakdowns especially has cost mining companies dearly, as they have failed to take full advantage of higher commodity prices.  

Data released by the Minerals Council South Africa this week lays bare the problem. Mining production fell by an estimated 6% last year, compared to the previous year, putting the average volume of mining sector production below pre-pandemic levels.

Export values grew to R878 billion last year, from R856 billion the year before but, according to the council, this was purely because of an improvement in commodity prices. Export volumes were stagnant. 

The council estimates that rail and port constraints cost the industry R50 billion last year, up from R35 billion the previous year.

President Cyril Ramaphosa, who attended the indaba days before he was set to deliver his State of the Nation address, acknowledged the constraints, noting the current period was a challenging one for mining.

“However,” he said, “we have the means to overcome our difficulties and forge a brighter future for this industry. As the world changes, mining is changing with it, and the industry stands ready to seize the opportunities the future presents.” 

But some miners are not convinced the government will move fast enough to ensure the South African industry makes a comeback. 

According to Henk Langenhoven, the Minerals Council’s chief economist, commodity prices are easing, but they will not necessarily fall off anytime soon. This is because continued uncertainties — including the ramifications of Russia’s war in Ukraine and the ramping up of demand for green metals — stand to extend the commodity price cycle.

“But if we can’t sort out these electricity issues, and the logistics issues, there may be an inflection point, where the positive quickly switches to a negative,” Langenhoven said.

A troubling feature of the recent boom years is that it hasn’t translated into investment. 

On top of greater investment, commodity cycles should encourage more exploration. However, that hasn’t happened either, Langenhoven pointed out. 

“So, it seems to me that the weight of all these uncertainties is just too much,” he said, noting that market volatility — which makes it difficult to guess what commodity will be in demand and by whom — has probably made this situation worse.

When asked whether South African miners are more risk averse now compared to during other commodity cycles, Langenhoven said: “Definitely. If you look at it over longer periods of time, that is exactly the case.”

Veteran mining analyst Peter Major agreed South African mining companies are averse to expanding and investing further locally.

“All of our miners are risk averse to investing and operating in South Africa — more so than ever. That is why they are often making crazy investments or proposals overseas. They are just so anxious to get a large part of their asset base overseas, often almost regardless of the cost or risk. This is sad but quite understandable,” he said.

“They don’t trust the ANC government and at least overseas the companies feel they have more security and control over their money, assets and operations — and especially their future.”

Andrew Lane, Deloitte’s energy, resources and industrials lead, was less willing to label the country’s miners as risk averse. 

“We are an industry that understands risk. We take big risks. We take geological risks and regulatory risks,” he said. “I don’t think the industry is risk averse. I think what I am seeing is that there are options that are less risky than South Africa,” Lane said. 

“If you’re going to come in and commit a large amount of capital for a 20- or 30-year return, do you necessarily have confidence that some of these critical issues are ever going to be solved?”

Langenhoven echoed this sentiment: “Miners never sit still. They go and they fix the problem. 

“They are going to other jurisdictions that know how to mine and that don’t have this administrative or political layer of uncertainty.”

One company that has recently cemented its diversification to another, less challenging, jurisdiction is Thungela Resources. Last week, the country’s largest coal exporter announced its decision to fork out R4.1 billion for a majority stake in Australia’s Ensham coal mine.

Coal miners have made a killing over the last year, as concerns over energy security drove demand for their commodity. But, according to Thungela chief executive July Ndlovu, structural constraints (as well as the green transition push) have caused coal miners to withhold investment in South Africa.

The acquisition will give Thungela the opportunity to create distance between it and South Africa’s structural constraints, though Ndlovu maintains the move “isn’t a vote of no confidence in South Africa, per se”.

Major has called the government’s myriad mining-related policies and their implementation “economic and environmental sabotage”. 

“It has throttled and strangled mining, the country and individuals’ lives so much that it’s not possible to see anything ever recovering. Certainly not in our lifetime and quite possibly never,” he said.

On whether there is still time to repair some of the damage done to the mining industry over the years, Major said: “As long as there is one person alive, it is not too late to try. Late is always better than never. But ‘too late’ is close to ‘never’. 

“The government’s goal should be to make South Africa the world’s number one mining investment destination. This sounds preposterous now, I know. But if we ended up being in the top 10, that would be a monumental achievement.”

A major area of opportunity for the African mining industry is transition minerals and metals. The indaba took place amid growing calls for clean energy, with countries and mining companies embarking on decarbonisation programmes. 

The continent has 30% of the world’s mineral reserves, including those essential to the green transition and increased technology, according to the South African Institute of International Affairs. The metals needed to support the energy transition are cobalt, copper, nickel, graphite vanadium and platinum group metals. 

South Africa’s struggle to attract exploration, however, could delay its ability to take full advantage of this.

According to the Minerals Council’s Tebello Chabana, South Africa has a very small share of the global exploration spend. One reason for this, he noted, is the country is one of the few in southern Africa without a functioning cadastral system — a database of all properties under mining or prospecting rights.

“It’s a management tool for government and business. Investors wanting to get into the sector need to understand where they can possibly get into business, what partnerships they can forge. So, that is absolutely essential,” Chabana said, adding that there are other legislative roadblocks to encouraging exploration.

In his address, Ramaphosa noted the department of mineral resources and energy is in the process of procuring an off-the-shelf cadastral system, which can be customised to South Africa’s needs.

“This [cadastral system] is essential for the operation of a modern mining rights administration system which, in turn, is vital for the growth of the industry. These are some of the efforts we are undertaking as South Africa to improve the business operating environment for a sector that is the lifeblood of our economy and that of the continent,” he said.

Miners have welcomed the long-awaited cadastral system announcement, Lane said. “Finally, the penny has dropped. I think they [the government] have realised they have to attract exploration spend.

“They have realised that the cadastral system is one of the issues holding back exploration. There are other issues, like bureaucracy.”

But Major is sceptical about the government’s ability to deliver the system. “If it is coming, that’s good. But they have been talking about it for 15 years,” he  said.

South African miners, Major said, have not quite bought into Ramaphosa’s ability to make good on his aspirations for the industry and the country’s economy. 

“They want to. They haven’t slammed the door but they haven’t opened the cheque book. They haven’t opened the wallet, because they have heard it too long now.”