Mutually beneficial: The sector is attracting interest, notably from China

Investment by international mining companies has long formed a key part of the country’s economic backbone, with extraction often receiving the largest share of foreign direct investment (FDI). While its share of total FDI stock in South Africa remains solid, capital flows into extractive industries were hit hard by the global economic crisis and declined significantly in 2010, compounded by investor uncertainty over ageing infrastructure and electricity and water shortages, as well as calls for nationalisation of the mines from radical elements of the ruling African National Congress (ANC).

REASSURANCE: The government has sought to reassure investors, firmly denying that nationalisation is ANC policy, although concerns remain about the possibility of increased fiscal burdens in the future.

The industry looks to have a more optimistic view of the coming years, however, thanks in part to increased infrastructure works. The outlook will no doubt become rosier should the government agree on a clear, market-friendly mining policy at its National Policy Conference in June 2012. Announcements from De Beers Group, the world’s largest diamond miner, about significant investment plans and growing interest from Chinese companies, will further help shore up confidence.

INVESTMENT STATUS: FDI in the mining and quarrying sector as a proportion of total FDI stock has performed well, increasing to 33.4% in 2009, making it the largest recipient. Mining still accounted for 20% of private investment in the economy in 2010, as well as 12.1% of total investment, in spite of a decline in overall FDI from a peak of $9.64bn in 2008 to $1.57bn in 2010. South Africa ranked seventh in the top contenders for mining investment in 2008, with investment of $22bn – both foreign and domestic – representing a 6% share of the sector’s global total.

The country ranked top on the continent for new FDI projects for 2003-10, but its decline through the end of the period was at odds with other developing economies, for which inward FDI continued to rise. The business environment was a leading factor for this counter-cyclical movement. A perception of investment risk was shaped by the ongoing debate about mining nationalisation, infrastructure and labour issues, and disputes over mining rights led by global majors Lonmin and Anglo American, in which both firms questioned the granting of rights to small, politically connected firms. A subsequent six-month moratorium on the award of prospecting rights (to allow for the resolution of disputes) also affected FDI inflows.

Mining FDI has played – and the government hopes it will continue to play – a critical role in the South African economy: the sector remains a significant foreign exchange earner, while in 2010 mining directly accounted for 8.6% of GDP. Driven in part by FDI, the sector is a major employer with close to 500,000 direct employees, but its contribution to total national employment has fallen from 3.9% in 2001 to 2.3% in 2009. In 2010, only around 8% of the industry’s R441bn ($53.99bn) total expenditure was moved offshore, meaning 92% of the value was captured in South Africa.

REMAINING OPTIMISTIC: While the recent slump in FDI inflows to the South African mining industry is widely acknowledged, there is optimism within the government that investor concerns can be allayed and significant new investments attracted as economies recover from the downturn.

Reinvigorating the country’s mining industry is a key government priority. The ANC has assured investors it is committed to developing an investment-friendly policy framework, as well as ensuring satisfactory expenditure on necessary supporting infrastructure.

In addition to oft-repeated assurances that mining nationalisation is not ANC policy, the government has also sought to negate rumours that a surprise windfall tax on resource assets is due to be levied, telling mine operators any changes to the tax regime would take place in the long term and with industry consultation.

GETTING RESULTS: The mining industry’s competitiveness and ease of doing business has improved as a result of the introduction of a one-stop shop for mineral rights, environmental authorisations and water licences, which has reduced the turnaround time for processing prospecting and mining permits.

Significant investments in road and rail will also serve as sweeteners to interested companies. President Jacob Zuma announced in February 2012 state-owned logistics and transport operator Transnet will spend R200bn ($24.48bn) on iron ore, coal and manganese export lines over a period of seven years.

Moreover, if carefully laid plans to develop beneficiation activities across the country are successful, South Africa will soon be able to offer interesting downstream investment opportunities, as well.

KEY PROJECTS: A number of key announcements were made in 2011 relating to confidence-boosting investments planned for the extractive sector in the coming years. In September 2011 South Africa signed a memorandum of understanding with China, with the emerging Asian power agreeing to support $2.5bn of investment in the country. China is a major market for South Africa’s minerals exports, which have grown by a compounded 50% a year for the last four years.

South Africa is trying to attract investment in downstream beneficiation activities, with a view to adding value locally. Chinese companies have reportedly shown more appetite for entering South Africa’s mining industry since the September 2011 agreement.

Already a number of Chinese firms are heavily invested in mining production, such as Wesizwe Platinum, part of which is jointly held by China’s largest platinum producer Jinchuan Group and the China-Africa Development Fund. In addition to the 45% stake in Wesizwe bought by the consortium for $227m, the partners are securing $650m in financing to develop the Frischgewaagd-Ledig platinum mine and have loaned $27m to a black empowerment entity to buy a stake in Wesizwe. The state-owned China Metallurgical Group Corporation also entered the market with a 2010 deal to build an iron-titanium mine.

Established players in the industry have also increased capital expenditure. Global diamond leader De Beers Group – which has been a full member of the Anglo American Group since the Oppenheimer family was bought out in November 2011 – announced just before the takeover that it planned to raise investment in its flagship Venetia mine from R5bn ($612m) to R15bn ($1.84bn). Operated by subsidiary De Beers Consolidated Mines, the open-pit Venetia mine is one of the world’s top deposits and South Africa’s largest producer of diamonds; the proposed investment should help extend the mine’s life to 2050 by converting it to an underground mine over the next seven to eight years.

The country’s reserves of iron ore also present much potential for growth, with production predicted to double over a the next decade. Several international firms are developing projects in this area.

ATTRACTION: South Africa continues to work towards the wholesale recovery of its mining industry, with the renewal of significant FDI inflows critical to that end. Investor confidence has been badly shaken, but developments over the past year will help shore up confidence, encouraging existing and new investment. The mature mining industry will face strong challenges from other emerging and frontier markets on the continent, but if the government can stabilise mining policy, ensure security of tenure and develop a market-friendly tax regime, the sector looks poised for continued growth.