Despite an extremely challenging year, South Africa’s mining companies remained resilient and performed on all fronts.
Stakeholders benefited from the improved profitability with mining companies strengthening their true social licence to operate in supporting their employees and communities in which they operate.
The mining industry weathered the COVID-19 storm, mostly unscathed, and certainly better than many other sectors.
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Mining companies have continued to enjoy the gains in commodity prices, assisted by a weaker rand, as platinum basket prices increased and investors turned to gold as a safe investment amid concerns about the COVID-19 pandemic and global trade tensions.
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These are some of the highlights from PwC’s 12th edition SA Mine, a series of publications that highlights trends in the South African mining industry released by PwC.
Andries Rossouw, PwC Africa Energy Utilities & Resources Leader, says:
“South Africa’s mining sector continues to be a meaningful contributor to the economy and has weathered the COVID-19 pandemic in many respects – showing good profitability and retaining strong balance sheets.”
“The long-term future is unknown however as there is little consensus on how the pandemic will impact the mining industry. The pandemic highlighted the absolute need to build back better and Mining will play a key role in that recovery.”
In 2020, total market capitalisation increased to R1,280 billion from R840 billion.
This total is a R439 billion (52%) YOY increase from 2019, largely attributed to the increase in market capitalisation of companies within the gold and PGM sectors.
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Gold and PGM accounted for 80% of the market capitalisation of the companies analysed this year and continue to dominate the sector.
The total revenue generated by the South African mining industry for the year ended 30 June 2020 grew by 4%. This was mainly driven by PGMs, gold and iron ore, which saw increases in revenue for the 12-month period.
PGM generated the largest portion of revenue (28%),demonstrating a 56% increase from the previous year, overtaking coal for the first time since 2010. Gold mining companies had an increase of 35% in revenue. Revenue for the ‘other mining’ segments increased by 7%.
The impact of the COVID-19 pandemic was evident from April 2020, with reductions in revenue being seen across the industry. South African PGMs and gold are mainly mined in deep-level underground mines and were therefore hardest hit.
PGM and gold producers indicated that they expect to reach full production levels by the end of the calendar year.
For the SA Mine entities, cash generated from operations after working capital changes increased by 50% from the previous year. The gold and PGM sectors were the largest contributors, each contributing R24 billion to the increase in cash generated from operating activities.
Capital expenditure grew with a net increase of 5%
Impairments decreased by 50% when compared to the prior period which resulted in a R5.9 billion charge to the income statement.
The average EBITDA margin of the mining companies included in this analysis was 34%, a 1% increase from the previous period.
Net profit grew by 60% as a result of the increase in PGM and gold prices in the current period. The aggregate tax expense for the mining companies was R37 billion with an effective tax rate of 26%. Furthermore, distribution to shareholders increased to R43 billion (2019:R18 billion) on the back of improved free cash flows and higher commodity prices.
Production decreased by 8% YOY, with a 44% decrease in production noted in April 2020 as a result of the pandemic – the most significant of which was due to reductions in gold, diamonds and PGM outputs. Production levels increased in May 2020 following the easing of lockdown restrictions.
An opportunity to build back better
Companies and investors have increasingly been recognising the importance of prioritising environmental, social and governance (ESG) matters on the corporate agenda.
Our report identifies four key ESG focus areas that should be top of mind for any company that wants to build back better and ensure a just transition to a new economy and enhance their social licence to operate.
These are: 1) supply chain resilience; 2) measuring impact; 3) climate-related risks; and 4) resource efficiency.
We have analysed the published reports of the mining companies considered in this publication to assess the degree to which they are ESG issues into decision making.
Luyanda Mngadi, PwC Assurance Partner and SA Mine 2020 Project Leader, comments:
“Our analysis shows that while mining companies are often at the forefront of ESG efforts, they are weak on their reporting when it comes to setting targets and measuring themselves.
“The COVID-19 pandemic called for a renewed focus from government and business to better peoples’ lives and support local communities. As such, this shows a need for ESG to be considered in its entirety.
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“The pandemic highlighted the absolute need to ‘build back better’. Mining will play a key role in that recovery. It is therefore unfortunate that despite the increased profitability, capital expenditure only increased marginally. Whilst a cautious approach is understandable, impediments to investment need to be removed.
“Liberalisation of the energy market to ensure reliable and cost competitive electricity is essential for mining and potential beneficiation opportunities. We believe hydrogen can play a transformative role in this regard.”
Progress in the regulatory environment should continue with a need to streamline processes and improve transparency for existing and potential investors.
The mining tax environment should be considered as a whole, with an opportunity to incentivise exploration expenditure. Enabling infrastructure, supporting supply chain and mine- to- market logistics would provide immediate recovery benefits and enhance long- term sustainability.
Investment can only be attracted if the SA mining industry can be cost competitive with its global peers.
The case for hydrogen
In South African mining, hydrogen has been receiving attention for quite some time. There have been several transport initiatives in the sector that are heavily focused on the use of PGMs in the catalysts of fuel cells.
Although these pilot projects are a good start to bringing hydrogen technology into mining, the focus of their application is quite narrow, looking at decarbonising only the transport portion of a mining operation.
There exists a far larger opportunity to leverage the cross-sector benefits of hydrogen on a microgrid scale, creating a fully green and resilient mining operation.
Now may be the opportune time for mining companies to consider the vast benefits of hydrogen given that the cost of renewable hydrogen production is expected to fall by up to 60% over the next decade.
Creating value for stakeholders
The mining industry continues to add significant value to the country and its people. As a result of the COVID-19 pandemic, mines were requested to invest even more in their local communities and support structures.
As reported in company value added statements, employees continue to take the major share of value added at 38%, followed by government through direct taxes (11%), employee taxes (7%) as well as royalties (3%).