How SA mining is trailing behind the rest of the world
The annual PwC report reveals how rocketing costs are causing SA to lag behind the rest of the world
Globally, the commodities cycle has turned positive; prices are rising, revenues are rocketing and mining companies are on track for a stellar year.
But in SA, the millstones of cost and regulatory uncertainty have prevented the sector from lifting on the rising tide.
PwC’s annual report, "SA Mine", found that the 2018 financial year was a mixed bag for the 31 local mining companies it surveyed. Michal Kotzé, PwC’s leader on Africa energy, utilities and resources, says the global mining perspective was "fairly positive", but in SA things were different. "The bulk commodities — iron ore, coal, manganese and so on — performed well. But the industry is still dominated by precious metals, which have gone through a tough time," he says.
For SA, revenues were up 8% to R398bn in 2018, from R370bn last year. The largest revenue generator was coal, driven by higher prices, while declining revenues from gold producers dragged everything down.
Globally, revenues grew much faster, rising 23% in the 12 months ended December to $600bn.
Still, for SA investors the returns have been notable. The SA mining index has, for the first time in a decade, outperformed the JSE all share index (Alsi), though it’s worth noting that the Alsi has experienced a particularly difficult year.
The collective market caps of listed SA mining companies grew by R62bn to R480bn — which sounds respectable until you remember their valuation of R560bn in 2016.
The discrepancy between the local and global picture is even more stark in terms of profitability. In a global context, profits surged 126% from $27bn in 2016 to $61bn in 2017, and are forecast to rise to $76bn this year. But in SA, the figure plummeted 169% from a net profit of R16bn last year to a net loss of R11bn in 2018.
In large part, this was because writedowns in the sector grew 109% to R46bn. "Impairments have doubled … largely in the gold and platinum sectors," says Luyanda Mngadi, mining assurance partner at PwC. "Nearly R200bn in impairments have been recognised over the past five years."
SA companies have not been able to keep a lid on costs like their global counterparts have. Operating costs in SA rose 12% last year, nearly half of the increase being due to wages. The payroll bill rose despite a drop in staff numbers from 500,000 in 2014 to 470,000 now. Mngadi says more restructuring is likely, which will further trim employee numbers.
But costs are only half the problem. A murky regulatory environment remains a key risk for miners. Still, the gazetting of the mining charter last month has been welcomed by the industry after years of policy paralysis. Though the charter is not without its "sticking points", SA was on the right track, says PwC partner Andries Rossouw.
What the industry saw as a reprieve followed when mineral resources minister Gwede Mantashe formally requested withdrawal of the much-delayed (and potentially unconstitutional) Mineral Resources & Petroleum Development Amendment Bill from parliament.
Not that regulatory risk is a problem unique to SA. In the Democratic Republic of Congo, home to 69% of the world’s cobalt production, the government signed a new mining code into law in March without support from the mining industry. The document hiked taxes and royalties and scrapped a "stability clause" that promised mining companies a moratorium on new legislation.
So is there any cause for optimism? It’s a mixed picture.
Rossouw notes there is concern that higher coal and iron ore prices are not sustainable, and he says that if platinum prices remain low, more high-cost platinum mines are likely to close.
Mngadi says the commodities cycle is not yet near the top, meaning higher prices could boost performance considerably next year.
And let’s not forget, 2019 is an election year in SA. This creates all sorts of socioeconomic risks, especially in a low-growth environment — including the likelihood of increased protest action.