Tough times for South Africa’s miners

South Africa’s mining industry has long been one of the economy’s most visible drivers, but uncertainty over legislation and a difficult operating environment are taking their toll.

Changes in exogenous factors, alongside a still pending overhaul of the sector’s legislative framework, have impacted capital inflows in recent years, although there is hope that the new regulations will be finalised soon. In mid-January, President Jacob Zuma vetoed the ratification of the Mineral and Petroleum Resources Development Amendment Bill, opting to send it back to parliament. Concerns were raised over elements of the bill that were potentially in conflict with the constitution and which risked putting South Africa in breach of international agreements.

All about pricing

Sticking points include measures aimed at creating value-added components from the minerals sector, known as beneficiation. The clauses are widely considered to be in conflict with the terms of the General Agreement on Trade and Tariffs (GATT) and the Trade, Development and Co-operation Agreement, on the grounds that they could amount to quantitative restrictions on exports.

President Zuma’s decision to reject the bill – a move widely supported by private mining companies due to the lack of clarity over its potential impact − sparked speculation that the government planned to amend one of the most contentious elements: the potential for key minerals to be designated of strategic importance to the nation. Such a move would pave the way for the Mineral Resources Ministry to set domestic prices for the minerals, with the aim of supporting local industry expansion.

In its present form, the legislation allows for minerals categorised as strategically important to be sold at mine gate prices, putting them on a par with international export market prices, minus transport charges. The industry had given its agreement to the clause, which would permit local industries to access materials at cheaper rates than their overseas rivals without significantly impacting earnings of miners.

The move to return the legislation to parliament prompted media speculation that the Department of Trade and Industry was looking to make broader changes to the pricing structure. Reports included claims that the department was looking to replace the mine gate price with a development price, which would require miners to sell minerals below the rates set out in the legislation.

This drew sharp criticism from industry representatives, who see development pricing as tantamount to subsidising other sectors. The Chamber of Mines chief operating officer, Roger Baxter, told local media, “A developmental price implying a less than market-related price for metals sold into the domestic market is a deal-breaking issue for the mining industry.”

The government moved quickly to defuse speculation over the planned amendments. On February 18, the chairwoman of the Mineral Resources Parliamentary Portfolio Committee, Sahlulele Luzipho, said the review of the legislation would focus solely on four recommendations to ensure the act met constitutional requirements.

Demand down, competition up

Reassurance would be both welcome and timely for the mining sector that has faced a series of challenges. A report by financial services firm KPMG, released in mid-February, warned that capital inflows into the mining sector in South Africa and some other parts of the continent had tapered off in recent years in line with a worldwide reduction in investment into the extractive industry. Quoting statistics from the United Nations Conference on Trade and Development (UNCTAD), the mining sector still received 26% of all foreign direct investment in Africa, but the funded projects made up only 8% of all FDI projects on the continent in 2013.

While reduced demand for minerals globally has weighed on the industry’s performance, KPMG identified the “higher risks potential relating to policy uncertainty or market instability” as a reason for weaker investor sentiment. Among the hurdles in South Africa have been prolonged strikes by trade unions, with production losses reaching $2.2bn according to the mining companies involved.

In addition, demand for many of the commodities that underpin South Africa’s extraction sector has fallen, resulting in lower prices. Iron ore, copper and coal prices are well down on their 2014 levels, with little sign that the losses will be reversed any time soon. Domestic cost pressures have also weighed on miners, with multiple rounds of load shedding making power a structural issue affecting operations.

The cumulative impact of these issues has prompted some of the larger operators to overhaul their local activities. Industry leaders Anglo American and BHP Billiton have begun restructuring their South African operations with a view to reducing their exposure to the market and limiting the impact of legislative changes or pressure on broader corporate earnings.

Anglo is looking to offload majority ownership of three mines, Kriel, New Denmark and New Vaal, and sell some of its platinum mines. BHP Billiton plans to spin its South African assets − along with others around the world − into a new company with further details to be published in March. While BHP would exit South Africa, the new entity, to be known as South 32, would keep a substantial presence.

However, any scaling back could open doors for smaller miners, including indigenous firms. Many of them, which were established under the provisions of Black Economic Empowerment (BEE) legislation, have already moved to buy up assets, a trend that could gain momentum if the larger operators do look to divest further.