The mining industry is undergoing regulatory and structural changes – Eskom now requires a minimum BEE status of 51% with the outcome being a flood of disinvestment transactions, particularly in the coal sector.
The added pressure associated with global warming concerns given rising CO² emissions, particularly from South Africa’s power utility Eskom, are a contributor to this collective disinvestment environment as well.
AUTHOR: Dean Cunningham, Director at Micofin
Recent transactions that demonstrate this include:
- London-listed Unicorn Capital Partners and its intention to disinvest its Nkomati anthracite asset in mid-2018;
- South 32’s coal disinvestment strategy, announced in 2018;
- Anglo American has sold three of its captive coal mines in 2018 and its suggestion that it will sell its remaining South African coal assets in the near term; and
- Several small-to-medium opportunities which are up for sale and/or under process.
The overall impact is increased room for opportunity (a ‘buyer’s market’) as it is difficult to see South Africa’s demand for coal-generated electricity dwindling significantly in the medium-term. This notwithstanding, the following potential pitfalls apply:
- The introduction of carbon taxes on Eskom, which will ultimately flow through to the consumer (with short-term impact determined by the level of exemptions the utility will be able to secure);
- The possibility of further and potentially escalated demonstrations by Greenpeace on one of the largest global producers of CO², Eskom (as well as mega polluter, Sasol). This could disrupt coal supply (leading to rolling blackouts countrywide), lower growth and escalated job losses.
Ongoing disinvestments will have direct impacts which might include the following:
- Listed mining companies on the JSE could see a meaningful portion of their value transferred into private hands, reducing overall market capitalisation and giving local funds less to invest in;
- Capital flight and continued weakening of the rand against major currencies;
- Accelerated departure of high-quality skills;
- Further erosion of South Africa’s ‘economic powerhouse’ status; and
- On the positive side, a move to empower the local communities and workers.
Disinvestment brings opportunities for some but pricing, quantum of available assets and securing of requisite funding raises important questions.
In general, investment banks have indicated limited support (under prescribed emission standards) going forward for future coal transactions.
Counter to this, Trade, Industry and Competition Minister Ebrahim Patelis insisting that the Industrial Development Corporation (IDC) play a far more assertive counter-cyclical investment role in the flagging South African economy and has formally set a R110 billion, five-year disbursement target for the state-owned development finance institution (DFI).
However, exacerbating the problem is South Africa’s current debt rating of Baa3, the lowest investment grade level, which is due for review in November.
Given the country’s financial woes, particularly with regards to Eskom and other debt guzzling SOEs (with implications for mounting government guarantees), the market understandably looks to be pricing in a downgrade.
International investors, who have in recent months become net sellers of South African equities, will probably sit on the side-lines and wait for discounted opportunities.
Coal is, and will continue to be, a major energy source in South Africa – whether we like it or not, the country cannot function in the near-term without it.
So, what do we need to do to change the perception, and how do we make the coal sector cleaner and greener? In other words, how do we achieve a 180° reversal from the current norm?
The coal industry is highly pollutive in virtually all parts of the supply chain.
However, there is significant local and international innovation in this space that has the potential to significantly reduce the environmental impact of coal mining and its subsequent utilisation.
These new technologies are possibly revolutionary and have the potential to sustain the value of South Africa’s significant coal reserves.
Unfortunately, associated tech start-ups lack financial support and are often considered ‘too risky’ by South African investors and commercial lenders as the technologies are frequently not considered ‘commercially proven’.
South Africans collectively must snap out of the ‘business as usual’ way of thinking if the country is to avoid economic catastrophe.
Both the government and the private sector should be collaborating on providing financial support through the investment in new technologies.
Taking CO² omissions, for example, companies like InfraSalience (a leader in CO² capture and desulphurisation) should be expensively supported with funding to support rapid commercialisation.
South Africa’s mining industry
Fortunately, it’s not all doom and gloom – we still have sectors that remain attractive, particularly those linked to urbanisation and infrastructure development across Africa and Asia.
This is in addition to demand on the back of refurbishment of crumbling infrastructure around the globe.
Here, key commodities include manganese, iron ore, chrome and PGMs. Looking at South Africa’s proximity to Asia and the rest of Africa, these commodities will most likely continue to be in great demand for some time to come.
A good proxy for growth and prosperity is per capita consumption of steel. China over the past 30 years has moved from below 20 to 500 kg per capita.
India is still growing with current kg per capita around 30 with a medium-term target of 400.
Africa currently stands at less than 1 kg per capita and herein lies a great opportunity for these commodities and, indeed, for South Africa.
Coupled with urbanisation and infrastructure is the Fourth Industrial Revolution with some of the aforementioned commodities set to play a role in battery technology for electric cars and various components.
We could, with our skills and technology, vertically integrate from mine to consumer and produce these products from within South Africa.
Alternatively, we should make it economically attractive for global businesses to migrate closer to the source.
South Africa needs to realign its long-term thinking by looking for solutions from within.
With a wide portfolio of domestic commodities, it only makes sense that we support initiatives, take ownership, fix what is broken and embrace new technologies and ideas.
About the author
Over the past 12 months Dean Cunningham has been the orchestrator of a number local transaction in the downstream and energy and utilities sectors - coupled with Micofin and its strategic partners’ (Wood, Practara, NEXUS Intertrade and Africa House) objectives to takes skills, technology and capital to opportunities outside of south Africa, with a firm understanding of doing the work and creating jobs at home.
One of these projects is in the Middle East and the production of magnesium metal and the other in supplying construction materials in Mozambique.
In addition, Micofin is currently negotiating with a global technology partner to set up operations in South Africa to convert raw materials into a number of downstream products, this process is ongoing.