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South Africa Set to Transform Mining Sector to Calm Investors' Fears

The 21st Investing in African Mining Indaba in Cape Town was the world's largest ever mining investment conference, with delegates and government figures keen to find a new way forward for South Africa's troubled resources sector.

Photo: Mining: South Africa’s most lucrative sector.
Mining: South Africa's most lucrative sector.
Photo: Mining: South Africa’s most lucrative sector.
Mining: South Africa's most lucrative sector.

Mining is central to South Africa's economy. According to Department of Trade and Industry figures, South Africa's mineral resources are estimated to be worth US$2.5 trillion. The extractive industries contribute US$23 billion to the nation's annual economy (8.6% of GDP). The sector employs more than 500,000 people directly and an equivalent number indirectly. It also attracts 12% of South Africa's total investment by revenue.

Despite the inherent value of these resources, the mining market is cyclical in nature and, currently, the cycle is unfavourable to mining companies. Commodity prices have been on a downward trend since 2013, with industry leaders and investors continuing to face uncertainty as the industry struggles with a weak commodity price environment. There are also a number of other challenges waiting in the wings, including subdued global demand, the threat of strikes, an ailing infrastructure and possible power cuts.

This year's Investing in African Mining Indaba considered a range of policy and regulatory challenges, as well as opportunities in the sector. The conference, held at the International Convention Centre in Cape Town, brought together 7,000 mining industry bosses, political leaders, investors and bankers from 110 countries. Hosted by Euromoney, the mining indaba was billed as the premier global gathering of the captains of the mining industry and associated policymakers.

State of the Minerals Sector

In his welcome address, Jonathan Moore, Managing Director of the Investing in African Mining Indaba, cited the Bloomberg Commodity Index, which records 2014 global commodity prices, as being down by 17% on the previous year. Consequently, it is expected that the market for South African minerals will continue to be tough in 2015, with the country's major trading partners – China and Europe – still struggling with slow levels of growth. The main factors behind the slump are slowing demand in China for metals, with the country's era of double-digit economic growth now seemingly over, and a global oversupply of minerals. Speculators say that it may take several years before commodity prices recover.

While the mood at the conference was generally pessimistic, the market is set to get a boost, however, from the economic recovery in the US. A number of economists also hinted at the potential for platinum prices to pick up as a result of rising automotive sales in key markets. Chris Griffith, CEO of Anglo American Platinum, however, took a more upbeat longer-term view of the industry's prospects, suggesting platinum prices could go higher. To the relief of some delegates, he said: "The fundamentals are now in place for a better outlook for the platinum sector."

There is no getting away from the fact that the current cycle generally weighs against African mining companies, and the mood at the conference was that the mining industry has to reinvent itself. The platinum miner Lonmin, for instance, posted a pre-tax loss of more than US$320 million in 2014. Peter Major, Head of the Mining and Resources division at South African consultancy firm Cadiz Corporate Solutions, believes that the mining environment in South Africa has changed already, but for the worse. He said: "South Africa was once the perfect environment for deep mining – but this has changed, particularly since 2004." He said one of the key reasons the sector was being held back was that investment deals were simply taking too long to conclude.

Against this background of unstable market conditions and uncertainty in the industry, one of the major talking points at the indaba was that international investors – and mining companies – are clearly concerned about a number of issues emerging in South Africa's maturing minerals industry. For decades, South Africa has been the preferred global investment destination for minerals. But there is now a sense that investors may well transfer their capital elsewhere, unless industry, government and organised labour collectively address a number of issues.

One example of this was highlighted by Mark Bristow, Chief Executive of Randgold Resources. He said his company was now investing outside of South Africa, with projects in Mali, Côte d'Ivoire, Senegal and the Democratic Republic of Congo. It was widely seen that such reluctance to invest on the part of investors would have a negative impact on the long-term state of the industry in South Africa.

South Africa's Minister of Mineral Resources, Ngoako Ramatlhodi, tried to allay delegates' concerns, emphasising that South African mining is open for business. As part of his keynote address, he said: "South Africa is ready for investment. We are leaving no stone unturned in providing a stable environment for investment."

While, in an environment of uncertainty, Ramatlhodi clearly wants to provide investors with regulatory certainty, for attendees one major question remained – can the government achieve this?

Winds of Economic Change in Africa

As an expert in advising African governments on regulation and investment oversight, former UK Prime Minister Tony Blair was invited to address the conference. In his keynote speech, Blair referred to the general economic change that has been sweeping across the continent. He said: "If you take the continent as a whole today, and compare it to where it was 20 years ago, the progress has been enormous. Over the next decade, Africa will continue to change significantly.

"The outside world is looking at Africa more positively. At the same time, African countries are more prepared to resolve some of their own issues. Economic relations between Africa and the developed world today are now characterised more by partnerships and less by the old 'donor-recipient' relationship.

"These economic relationships, however, require a good regulatory framework if they are to be successful, and the need for investors to support local capital infrastructure projects is crucial. There is a great opportunity for mining companies that are making investments and they have to invest in infrastructure in order to make mines productive, and to collaborate with governments to ensure that any such infrastructure is used to the benefit of the economy."

Photo: Ramatlhodi: “Reassuring investors”.
Ramatlhodi: "Reassuring investors".
Photo: Ramatlhodi: “Reassuring investors”.
Ramatlhodi: "Reassuring investors".
Photo: Blair: “Greater transparency”.
Blair: "Greater transparency".
Photo: Blair: “Greater transparency”.
Blair: "Greater transparency".

Blair also advocated better governance in African state institutions, including greater transparency, the need to crack down on corruption, and more predictability for investors in the taxation system. Perhaps most importantly, Blair underlined the need for an improved business environment for investors in Africa, hinting at the sometimes strained relations between the authorities and business. He said: "It's important that government listens to business and business listens to government, and together try to construct the right environment in which people will come to invest. Overall, though, there remains a healthy demand for investment in African mining, despite the gloomy commodity outlook and a number of associated risks."

Power Crisis

South Africa's electricity crisis was also high on the agenda at the mining conference. At present, Eskom, the state-owned power utility, is struggling to provide a constant supply of electricity, leading to blackouts, while its ageing power stations are woefully in need of upgrades. The shortage of electricity, which has led to scheduled power cuts to businesses since late 2014, is having a damaging effect on mining operations, but perhaps even more so on investor confidence.

In his official welcome address, Ramatlhodi sought to reassure investors and mining companies that the government would provide a stable investment environment and that it was taking steps to remedy the embarrassing shortage of power. There was, however, little substance in his speech as to how government planned to tackle the problem and, overall, there remains a perception that not enough is being done. The construction of the new power stations needed to increase capacity is running behind schedule, with analysts at the conference maintaining that, in the interim, the power crisis will continue to be a threat to mining growth and foreign investment in South Africa.

While the minister maintained the government's intention to provide regulatory certainty for those investing in the country, many at the conference were unconvinced. Instead, there was a belief that, in light of the failing power supply, there is a clear risk South Africa may lose its dominance in African mining, with new projects likely to start up elsewhere across the continent.

Labour Disputes

South Africa's mining companies and investors are worried about the possibility of further labour disruption in 2015 following last year's protracted strikes across the platinum belt. The 2014 industrial action lasted for five months – the longest walk out in South Africa's history – and cost the industry an estimated US$3 billion. The mining industry wage-negotiation season begins in April and there are fears of more potential strikes, with concerns growing about the tension between the two main rival unions in the industry.

Ramatlhodi also sought to reassure delegates that the government is trying to resolve these labour challenges. With wage talks set to begin soon, he called for the parties – organised labour and industry leaders – to take a realistic approach to the negotiations.

In reference to the violent platinum-sector strikes of 2014, Ramatlhodi promised decisive government action should there be a repeat. He said: "We are firm on discouraging violence between the unions. When people break the law, we will arrest, charge and send them to jail. There is going to be no turning back on that."

He said it was also the ethical duty of mining management to be more transparent in the way it dealt with its workforce and union representatives.

Greater Value from Africa's minerals

South Africa is a primary exporter of unfinished cheap mineral products. It then buys back processed goods manufactured from the same metals at a hugely inflated price. The Department of Trade and Industry is on a mission to put an end to this practice and is looking to extract greater economic value from its domestic reserves before they are exported. The South African Department of Trade and Industry believes that beneficiation – or extraction – in the minerals sector has not yet reached its full economic potential, and it is now considering moves to remedy this.

This urgent objective was reiterated by President Zuma in his State of the Nation Address to South Africa's Parliament on 12 February. He referred to the beneficiation of South Africa's mineral wealth as a key way to create local jobs and gain greater value from mineral reserves.

Sharing Mineral Wealth

South Africa's government is keen to promote the transformation of mining, one of the country's oldest and socio-economically most important industries. To an extent, mining is the democratic era's 'enemy' – the symbol of white-owned capital that goes back to South Africa's apartheid era. This legacy has left an indelible mark on the South African mining sector. The government's goal of achieving greater inclusivity in the industry hinges on just how the economic opportunities from mining can benefit the population at large, ensuring a lasting benefit to the people and the economy. Fundamentally, this initiative relates to just how the industry is governed.

For the government, the aim of this transformation is to enable mining communities to enjoy a greater share of the value of the industry and for the sector to be more sustainable. This much-mooted transformation was brought into sharp focus at the Alternative Mining Indaba, taking place just a few blocks away from the site of the main conference. This unofficial event sought to draw attention to the socially exploitative effects of mining, and saw its organisers and delegates protesting against the lack of demographic representation in mining, while also calling for better corporate governance of the industry.

In a separate interview, Fatima Haram Acyl, the African Union's Commissioner for Trade and Industry, said that the African mining industry should now be seeking to empower local communities. Speaking to the South African Broadcasting Corporation, Haram Acyl said that the voices of the mining communities needed to be heard more and that policies needed to be put in place that helped translate mineral wealth into community development. Otherwise, she said, African mining nations risked falling into the trap of the "resource curse".

The African Union wants the mining sector to be well governed and sustainable, while creating wealth that is socially inclusive, socially responsible and environmentally friendly. Its Africa Mining Vision programme seeks to create inclusive economic benefits for local mining communities and promote sustainability in mining through the "transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable growth and socio-economic development".

In terms of corporate ownership in the mining sector, Ramatlhodi is on a mission to make sure that mining companies meet their black empowerment responsibilities. Mining companies in South Africa are compelled by law to be 26% black-owned and to buy 40% of their supplies from black-owned companies. It's currently alleged that a number of companies are failing to meet these empowerment status targets.

Photo: Delegates mingle at the 21st Investing in African Mining Indaba.
Delegates mingle at the 21st Investing in African Mining Indaba.
Photo: Delegates mingle at the 21st Investing in African Mining Indaba.
Delegates mingle at the 21st Investing in African Mining Indaba.

Investing in African Mining Indaba 2015 took place at the Cape Town International Convention Centre from 9-15 February 2015. The event attracted 7,000 delegates from 110 countries.

Mark Ronan, Special Correspondent, Cape Town

Content provided by Picture: HKTDC Research
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