The 2018 financial year proved to be a challenging year for the mining industry in South Africa says PwC.
Globally, the financial performance of the mining industry improved considerably from the previous year.
That position was largely mirrored by South African bulk commodity producers with iron ore, coal, manganese and chrome performing well.
Unfortunately the aggregated South Africa mining industry, which is more exposed to precious metals, did not enjoy the same benefit from price increases.
These are some of the key highlights from PwC’s 10th edition of SA Mine, a series of publications that highlights trends in the South African mining industry released today.
Michal Kotzé, PwC Africa Energy Utilities & Resources Leader, says:
“2018 can be described as a mixed bag of performance for South Africa’s mining industry, with bulk commodity prices continuing to rise during 2018 from the lows at the beginning of 2016, while precious metals continued to struggle.
“Cost-saving initiatives could not offset the impact of input cost inflation. The increased costs and production challenges meant a weakening in operating results.
"Together with the gold and platinum impairments, it meant that the industry recorded a loss for 2018.”
For the first time since 2012, capital expenditure grew as the completion of long-term platinum and gold projects continues, while older and inefficient shafts are being closed.
While the new mining charter underlined the regulatory uncertainty, the appointment of a new minister of mineral resources in February 2018 brought hope of open dialogue and more certainty to the industry.
Although the gazetted version of the charter is likely to still receive some criticism, there was a concerted effort by industry and government to move closer to each other.
Environmental regulatory changes are also receiving deserved attention.
In this edition, PwC has also included a brief look at the regulatory changes in the DRC and Tanzania.
In 2018 total market capitalisation of the 31 companies analysed in this report recovered to R482 billion (2017: R420 billion).
Although it is a R62 billion increase on the previous year, it is still below the June 2016 level of R560 billion.
Gold and platinum group metals (PGMs) continue to dominate the share of market capitalisation of the companies analysed, but experienced declines of 4% and 5% respectively.
Iron ore saw an increase of R40 billion from 2017 to 2018; increasing the commodity’s percentage share of capitalisation from 13% to 20%. The rest of the commodities remained stable.
Manganese, iron ore and chrome are the only commodities that showed real production growth over the last 15 years in South Africa.
Coal production showed a marginal increase for the first time in three years.
However, it has remained largely flat over the last 15 years. Gold continues its long-term decline.
The ongoing low-price environment for platinum is likely to result in further curtailment of supply in the absence of a reasonable price increase.
Total revenue generated by the companies analysed for the financial year-end 30 June 2018, increased by 8% (R28 billion) from the prior year.
Increased coal and manganese revenues mainly drove this. Coal grew its share of total South Africa mining revenue and leads at 29% of mining revenue for the year.
The increase was driven by good Rand price increases for the commodity, with production marginally up.
Platinum and gold reflected a lower percentage on the back of relatively weak prices and low production for the year.
The rand strengthened in the second half of the year resulting in an average decrease in prices received for gold, platinum and iron ore.
“The decrease in rand prices, as well as weaker production for gold and platinum, are putting deep-level South African gold and platinum producers under significant pressure as reflected in the market capitalisation of these entities,” Andries Rossouw, PwC Partner adds.
Despite various cost saving initiatives, above inflation cost increases continues to put the industry under pressure with a decline in EBITDA.
Capital expenditure recovered from the lowest levels in ten years to reflect a 19% increase. Operating expenses increased by 13%.
Labour costs continue to be the biggest cost driver in the mining industry.
The current year impairment doubled from the previous year mainly because of gold and platinum impairments.
After last year’s net profit, this year’s companies are back in a loss-making position due to the higher impairments and lower EBITDA. The EBITDA margin of 22% is lower than the previous year’s 25%.
Net interest expense increased by R2 billion from the prior year, mainly because of borrowings utilised for business combinations.
The mining companies had an aggregated tax expense of R9 billion down from R10 billion on the previous year, but reflected increased tax payments of R18 billion, a 29% increase on the prior year.
Solvency ratios decreased slightly compared to the previous year as a result of the net loss realised due in the main to impairment provisions recognised.
The aggregated liquidity position is also healthy and better than for the global mine position. Unfortunately, this hides the challenges still experienced at individual company level.
The risk environment
The risks disclosed by global mining companies and those risks disclosed by South African mining companies largely collerates.
However, the following matters stand out from the comparison: South Africa is less prone to natural disasters, although some mines have had to close in the past because of incidences such as flood damage and droughts.
Technology and cyber risks are becoming more prominent in the global mining environment. Market competition is not disclosed in South Africa as a major risk.
The Mining Charter
The revised Mining Charter was released in June 2018 and gazetted on 27 September 2018.
New licence holders are required to have 30% black ownership. An added requirement is that of carried interest (CI). The concept of CI is not new to the mining industry.
Carried interest means shares issued to qualifying employees and host communities at no cost to them and free of any encumbrance.
The cost for the carried interest shall be recovered by a right holder from development of the asset.
Many African countries have provisions in their mining regulations that give government a 5%-15% free stake in mining companies.
However, this has not always proved to have the desired effect, as host states are often of the view that mining companies do not make dividend payments promptly.
In addition, the 20% black female representation requirement has changed from last year’s 25% black female representation requirement.
It is notable that the Mineral and Petroleum Resources Development Amendment Bill, which has been subject to legislative processes since 2013, has been withdrawn.
With the Charter now gazetted, it remains to be seen whether business and government can more effectively work towards a more stable South African mining environment.
Value to mining investors in South Africa
The mining industry continues to add significant value to the country and its people. Stakeholders in the industry include employees and their families, unions, government, shareholders, suppliers and customers.
As reported in company value added statements, employees still take the lion share of value added at 47%, followed by government through direct taxes, as well as payroll and royalties with 24%.
Shareholders got an improved share on the back of improved dividends from bulk commodity producers.
Some 16 years after the enactment of the initial version of the mining code, an economic crisis has hit the Democratic Republic of the Congo (DRC).
During this time, cobalt has become the most expensive material in the portable lithium-ion battery used in smartphones and electric vehicles (EVs), now representing about half of the market for the metal. The DRC has 69% of the global cobalt production share.
A new mining code has been drafted for stronger rules, more transparency, opportunities for local development and an equitable fiscal regime.
However, the final version signed into law in March 2018 is unsupported by many mining companies.
Tanzania recently introduced regulatory changes for the mining sector, which appear to have dampened investor sentiment.
These changes have not come about in isolation as a number of jurisdictions in Africa have introduced more severe regulatory regimes – but it does appear that Tanzania may have gone further than most.
Some of these regulatory changes are the new income tax regime introduced in 2016, increased royalty rates and a new ‘clearance fee’ charged on the export of minerals, restrictions on VAT input credit in relation to the export of unprocessed ore and new local content requirements.