Much is being made in the media these days of the dismal and rather frightening predicament in which the South African mining sector finds itself.
The impact of growing negativity in the industry – spurred on by an ominous combination of rising costs and dropping commodity prices, and further inflamed by a deteriorating labour situation – is spreading ripples of discontent and uncertainty, both locally and abroad, in the country as an investment destination.
Latest example of the situation comes from AIM-listed and London-based iron ore and manganese miner Ferrex plc. The company focuses on Africa, and has projects in Gabon, Togo and South Africa.
The Malelane operation in South Africa is Ferrex’s third and largest development project, and up to now the company has implemented a defined exploration and development plan aimed at advancing the project up the development curve and into a low-capex, open-pit development project in the mid-term.
But now Ferrex managing director Dave Reeves tells me of a dramatic and deliberate change in strategy, fasttracking its Mebaga iron ore project in West Africa at the expense of placing its Malelane operation on the back burner.
Given the disturbances, labour unrest and violence in the South African mining industry over the past year to 18 months, the country has not been the flavour of the month for investors, even though they might like the project itself.
“To be quite frank,” says Reeves, given the current investment climate in South Africa, we see more value coming out of our projects in Togo and Gabon.
“It’s really a shame,” he continues – “South Africa has the resources, the skills and the infrastructure, but it desperately needs the stability that is so vital to ensure the sustainability of the country’s mining industry. In a nutshell, there’s a lot more confidence towards West Africa right now than there is towards South Africa.”
“So what,” you might say. “It’s not as if Ferrex is a multi-billion dollar major.” But that’s not the point. It’s not that a single company loses a certain amount by being put on hold – it’s far more significant that negativity towards South Africa as an investment destination is growing.
In Zimbabwe earlier this year, newly indigenised Caledonia Mining Corporation – a Canadian-based and African focused gold mining and exploration company – came out with another telling fact. Vice president, corporate development and investor relations, Mark Learmonth made the point that as South Africa seems to be becoming less stable, people are beginning to reappraise their assessment of risk and reward in Zimbabwe. Their perception is that while Zimbabwe is still a higher risk destination than South Africa, this risk appears to be diminishing, and it’s also a very cheap option. On the other hand South Africa appears to be getting more risky, and it is very expensive,” he explains.
Moving into the international arena, while global foreign direct investment (FDI) dropped by 18% in 2012, the flow to African countries increased by 5% to US$50 billion.
So says United Nations trade body UNCTAD’s “World Investment Report 2013”, which is filled with interesting facts about impressive FDI increases in various parts of north, west, central and east Africa, yet does not hesitate to point a finger at South Africa’s loss of almost 25% of its FDI in the past year.
Not that it was alone by any means: FDI outflows from African countries almost tripled in 2012, to US$14 billion, the report says. Unlike inflows, outflows increased in all African regions, resulting in a record total.
Energy resources such as recently discovered gas reserves in Tanzania and oil fields in Uganda have attracted FDI to East Africa, with inflows expanding from US$4.5 billion in 2011 to US$6.3 billion in 2012, the report says.
Even more impressively, inflows to Mozambique doubled to US$5.2 billion, attracted by the country’s huge offshore gas deposits. Meanwhile by contrast, FDI outflows from South Africa rebounded sharply to US$4.4 billion, returning the country to the position of largest source country of FDI in Africa.
It was against this background that President Jacob Zuma – speaking this week at the launch of the construction phase of the De Beers Venetia US$2 billion underground diamond mine – said that the South African mining sector was poised for growth, had a bright future, and was an investment destination of choice.
I’m afraid that I find myself struggling to go along with that point of view, but I am in full agreement with his next words. He proceeded to condemn violence in the mining industry, saying such incidents “have no place in a democratic society like ours.
“Working together, we have to ensure that our mining sector grows even further, and we must therefore provide the right environment for growth,” the President insisted. “This includes the implementation of transformation measures and the promotion of labour market stability in our mining sector,” he concluded.
Yes please !