South African Business 2016 edition

OVERVIEW NEED PIC Mining

OVERVIEW NEED PIC Mining The South African economy is literally built on mining, but the once disproportionate predominance of this extractive economic sector has been dwindling in recent years. Sadly, the Marikana massacre of 2012 has symbolised for many the disjunct between labour expectations and the profit targets of the mining bosses, and the vicious circle created by unprecedented demands on the part of workers dependent on the existence of mines for their livelihoods. According to a recent PwC report, the 2015 financial year was a veritable annus horribilis for the South African mining sector. Local cost pressures, labour action, and a continuing downswing in commodity prices have led to shrinking margins and impairment provisions. As mining companies grapple to improve productivity to compete in the demanding global and local mining environment, the spectre of labour unrest continues to predominate. Four gold mining companies were locked in a three-month wage ‘stalemate’ with unions this year. Market capitalisation has been on a downward trend and the 2015 financial year was no exception, with market capitalisation for the top 35 companies falling to R414-billion as at 30 June 2015 from R675-billion as at 30 June 2014. As at 30 September 2015 market capitalisation stood at R304-billion, yielding an aggregate decline of R371-billion from 30 June 2014. Iron ore and coal prices were worst affected. Platinum and gold are at their lowest real prices in ten years, and price recovery is far from certain. Coal is still the highest earning commodity in South Africa. Production has increased marginally in the last few years. Gold production has been on a long decline due to such factors as was ever-increasing mine depths, technical difficulties with start-up operations, and a continually growing base. Platinum production has been plagued by industrial action since 2012 in a low-price environment. Production levels are unlikely to increase unless prices rise significantly. In 2015 the mining sector had its worst cash flow since the financial crisis in 2008. This reflects existing margin pressures and liquidity concerns. Revenue increased by only 4% or R12-billion, while operating expenses rose by 14%, up from 13% the previous financial year. Labour remains the biggest cost component in the local mining industry. The share of labour costs decreased marginally from 47% to 45% in the current year. The 2014 period saw record levels of impairment charges being recorded within the mining industry. In 2015, the industry saw impairment charges as a percentage of capital expenditure reduced to 40%, which is still above the 35% four-year average. Net profit dropped 75% to R2-billion despite a R26-billion reduction in impairment provisions. The earnings before interest, taxes, depreciation, and amortization (EBITDA) margin is 22% in the current year, down 7%. The focus of mining studies is likely to change, as signs indicate a shift from labour-intensive mining to highly mechanised deep-level mining calling for workers with specialised skills.According to Dr Declan Vogt from the Wits School of Mining Engineering, this would entail a shift from culture of compliance to a culture of learning. One mechanised SOUTH AFRICAN BUSINESS 2016 80

OVERVIEW operator will produce a significant portion of the mine’s total production, demanding skill and flexibility tremendously more complex than that of the traditional gold miner. Implementing this requires a new way of thinking, possibly incorporating the Lean principles of teamwork, collective problem solving and meaningful work. Mineral resources South Africa is the world’s number one producer of platinum and chrome, and produces about 40% of the world’s vanadium and vermiculite. The country has large reserves of ilmenite, palladium, rutile and zirconium and 80% of the world’s known manganese reserves are located in the Northern Cape Province. Coal and platinum group metals (PGMs) have overtaken gold as the minerals generating the biggest sales volumes. South Africa is the secondlargest exporter of steam coal in the world. South Africa is the number one producer of andalusite in the world. Mpumalanga accounts for 83% of the country’s coal production and is the third-largest coal-exporting region in the world. With mines in Mpumalanga reaching the end of their lives, the coal reserves of the Waterberg region in Limpopo are attracting attention. Among the companies either actively mining or prospecting are Sasol, Exxaro Resources, Coal of Africa, Eskom and Anglo Coal. Copper mines in Aggeneys in Namaqualand are responsible for approximately 93% of South Africa’s lead production and 12% of all world lead exports. There are 20 chromite mines in North West Province located along a reef running from Brits to Rustenburg and serviced by several ferrochrome smelters. South Africa produces about 70% of the world’s chrome and 40% of the world’s ferrochrome. Effective 1 July 2015, Pan African Resources successfully concluded a gold wage agreement at its Barberton and Evander gold mining operations and entered multi-year agreements with unions. Barberton Mines concluded a two-year agreement with the National Union of Mineworkers (NUM) and the United Association of South Africa (UASA) on wages and other conditions of employment. The average Barberton Mines salary and wage bill will therefore increase for the two financial years ending 30 June 2016 and 2017 by about 9% a year, effective from 1 July 2015. With the Chinese economy slowing down, the demand for the main component of steel is uncertain. There are a number of iron-ore expansion projects underway, most significantly the multi-billion-rand schemes at Kolomela (Kumba) and Khumani (Assmang). A new iron-ore sampling plant at Saldanha, a joint venture between Kumba and Transnet, allows exporters to certify the quality of their product before the ore is loaded on to ships for export. The Northern Cape produces more than 84% of South Africa’s iron ore. China is spending billions of dollars every year on importing the major component of steel production. The Kalahari Basin contains 80% of the world’s manganese reserve, but only 15% of global production comes from this area so there is enormous scope for development. Several new blackowned manganese projects are underway. South Africa has 80% of the world’s platinum reserves and it is the number-one producer and exporter. It is also number one in rhodium, and only Russia produces more palladium. Chinese investors are also putting money into the Wesizwe Platinum project in the North West Province. Production will begin in 2018, after which annual production of 350 000 ounces is expected. Every year Cape Town hosts the Investing in African Mining Indaba, the world’s largest gathering of the most influential stakeholders in the African mining industry. More than 7 000 leading financers, investors, mining professionals and government officials meet at the Indaba to network and broker deals. 81 SOUTH AFRICAN BUSINESS 2016