Exploring and developing new resources are needed to up mining output
New future will require far-reaching and urgent action by all interested parties, making the new Mining Charter most welcome
There are two distinct futures for mining in SA.
Along the current trajectory, mining output and employment will continue to decline as mines steadily mine out a shrinking pool of accessible, financially viable resources.
In a more optimistic future, output and employment in mining can be grown, or at least sustained, by exploring and developing new resources.
The extent of effort, thinking and coordination required to manifest this brighter future must not be underestimated. It will require far-reaching and urgent action by all interested parties. The recent announcement of the new Mining Charter is therefore most welcome. The final version has clearly emphasised the importance of competitiveness considerations in the government’s thinking.
But it is only a step in the right direction. All interested parties should continue to work towards reforms that facilitate the sociallysustainable financial competitiveness of SA mining investments, because conditions in SA do not enable large-scale exploration and development of new resources.
There are numerous policy, geological and financial reasons for this, all of which have been well-documented. It all boils down to the competitiveness of potential mining investments. Modern mining has become a complex and competitive question of optimal capital allocation. Mining ventures require enormous investments running into tens of billions of rands over multiple decades.
Mining development only occurs if these significant capital investments can be made safely at an appropriate level of risk-adjusted return. And the numbers do not stack up in SA’s favour.
The picture varies by mineral class. SA’s gold is now some of the world’s most expensive to extract due to geological complexity and high per-ounce labour costs.
The country faces a similar cost-curve challenge in platinum. SA is consequently losing out in the stiff competition among mining countries for new investments in these mineral classes, illustrated by the decline in SA’s share of mining capital expenditure (capex) in recent years.
Unfortunately, some competitorcountries go much further in facilitating the financial competitiveness of their mining industries. Numerous countries offer, for example, extensive tax incentives and long-term regulatory guarantees.
Chile offers long-term tax agreements that fix tax rates for mining investors at a competitive rate to ensure stability. Canada has an attractive flow-through share scheme that allows parent companies to offset the losses of risky mining exploration activities in subsidiaries for tax purposes. In Botswana, almost all regulations are written in law, limiting the scope for administrative discretion and increasing investor certainty.
The key leading mining indicators suggest that SA has not kept up with these developments. Perhaps the most important indicator, investment in mining exploration, illustrates the challenge quite clearly. SA now attracts less than 1% of global exploration expenditure, down sixfold from its historic highs.
The implication is obvious: if no exploration occurs, no resources are found and no development can take place. Exploration is furthermore considered as a vote of confidence by mining investors. Exploration is an inherently risky endeavour. It requires significant investment. It often fails. But in the small percentage of cases in which a viable resource is discovered, the regulatory and financial environment must be in place to allow for profitable extraction. Without this assurance, it is simply not viable for an investor to risk capital on exploration.
Placing SA on the path to a more optimistic mining future requires concomitant action from all interested parties to create a globally competitive mining environment that can attract investment, particularly in exploration, to drive growth in the industry.
Global best practice, taken together with the SA context, suggests six key action steps for this to become a reality:
- Establishing investment-friendly mining policy
SA operates within a global mining ecosystem. As such, all investment decisions are inherently global in nature that deeply consider the regulatory environment in each jurisdiction before capital is allocated. To participate competitively in this ecosystem, SA should install a combined set of mining policies encompassing tax, environmental, administrative and community inclusion regulations that are globally competitive.
- Legislating for policy certainty
SA’s mining regulatory framework is inherently uncertain. Mining charters can change. Mining ministers can change. As such, the regulatory environment within which an investor operates could potentially change dramatically during the lifetime of an investment in an SA mine. This increases risk perceptions and heightens the level of return required before a mining investment can occur in SA. International global best practice is to legislate as many regulatory elements as possible to lock down regulatory requirements in concrete terms that are less likely to change.
- Creating a best-practice independent mineral rights office
Successfully applying for an exploration or mining right is the first step in any mining investment. The global best practice suggests that a fully functional, objective, online-accessible and speedy application process is best for facilitating investment.
- Re-evaluating SA’s geology
Up-to-date and accessible geological information is the lifeblood of any exploration effort. SA’s geological data should be updated and made fully accessible. This requires significant government investment in exploration, but can also benefit from mining industry cooperation.
- Building infrastucture to unlock growth
In some cases, resources are known to be financially feasible, but extraction levels are capped due to the availability of transportation infrastructure. Making the relevant infrastructure investments now can unlock growth in output and employment in the long term.
- Creating a technology ecosystem
SA has some of the world’s largest, but most complex, ore bodies. Accessing these ore bodies efficiently will require investment in mechanised mining and other advanced techniques.
Industry, the government and labour can cooperate to foster these developments and their responsible implementation as required. SA can and will move beyond the current trajectory if all stakeholders work together to build a globally competitive mining industry.
This week’s Mining Indaba provides an excellent opportunity to drive this agenda to the benefit of everyone involved. We hope that all interested parties will continue to emphasise a continual drive for improved competitiveness of their own operations — and of the entire mining ecosystem — to ensure the financial viability of mining in SA.
• Kuipers is partner and managing director at Boston Consulting Group.