OBG talks to Sipho Nkosi, Chief Executive, Exxaro Resources

Interview: Sipho Nkosi

How would you rate South Africa’s competitiveness as a global coal producer?

SIPHO NKOSI: South Africa, through early investments in rail lines and power stations to create domestic demand and scale, was able to bring its costs of production down and grow its exports. However, today the dynamics have changed, because rail and power capacity saw little investment during the global commodities boom. Most of the more easily extracted coal is being depleted, and new coal reserves are located far away from the existing main rail lines. The quality is also starting to deteriorate; a lot of washing and beneficiation is required before the coal can be sold to export markets. Moreover, our ability to beneficiate competitively is compromised because we are no longer a cheap-energy country. Overall, we are slipping spots in global export rankings.

What impact are carbon tax discussions having on investments in coal-powered stations?

NKOSI: I subscribe to the view that each and every country needs a diverse energy mix with a component of fuels, nuclear, coal, renewables and hydro where possible. While South Africa is endowed in some locations with adequate sun and wind, renewable power is substantively more expensive to generate and its potential limited to off-peak supply for now. A country would be remiss not to exploit what it has most in abundance to make it globally competitive, because it is important not to let valuable resources lie unused. But in order to become a more accepted commodity, coal – as with other fossil fuels – has to and can be produced and consumed in a manner that is more environmentally friendly. Using clean coal technologies such as desulphurisation and underground gasification is key to this effort. And the world’s major coal producers and consumers have to collaborate further to ensure that advancements in cutting-edge environmental technology are applied throughout the value chain in the future.

Has the rejection of recent calls for nationalisation restored investor confidence?

NKOSI: In the eyes of an investor, the very fact that nationalisation was vocally pushed for by quite a lot of people, means it remains a threat irrespective of the official policy. Investors want certainty. Even if a country demands majority state ownership in mineral assets, I will invest so long as I can model that at 49% ownership I am still able to generate positive returns, and that my 49% will not be reduced. So it is less about ownership than it is about clarity and the ability to plan for the long term.

Mining, as it is associated with land, is an emotional issue in any country. But in South Africa, it is a particularly contested territory, due to the role mining can and should play in redressing some of the inequalities of the past. Unfortunately, many previously disadvantaged people do not see major changes in their personal lives 19 years into democracy. And so long as the country fails to deliver economic gains for the masses, calls for mine nationalisation will always drum up popular support.

To what extent are wage increases affecting capital allocation decisions in the sector?

NKOSI: As an industry we have tried very hard to pay salaries above inflation, as we cannot ignore that people were not fairly compensated in the past and that we must level the playing field. Because many of our workers do not have high levels of education or skills, we employ as many people as possible. And when we aggregate the percentage wage increases over a large workforce, labour costs become a substantial overall input cost. In Australia, which we benchmark against, our counterparts are running mines with dramatically fewer, but far more skilled, employees. We cannot replicate this practice, even if makes more operational sense, because we have to be sensitive to the fact that we have high national unemployment and mining is an industry that can employ people in mass.