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Is there an opportunity to build back South Africa’s mining industry?

South Africa’s mining industry may have shown resilience and weathered the COVID-19 storm but companies will need to focus on their strategies, particularly when it comes to environmental, social and governance (ESG) matters.

This is according to a recent report by PwC on the state of country’s mining industry. The report paints the sector in a positive light stating that despite an extremely challenging year, mining companies remained resilient and performed on all fronts.

This article first appeared in Mining Review Africa Issue 11, 2020
Read the full digimag here or subscribe to receive a print copy here

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.

Read more about the impact of COVID-19 in the mining industry

It must be noted that the South African economy was already in a recession prior to the COVID-19 pandemic with the country’s GDP contraction for three straight quarters ending March 2020. During this time, the mining sector’s contribution to GDP declined year-on-year (YOY) in each of the recessions three quarters.

The second quarter of 2020 started with a hard lockdown and mining production decline by 51.2% and sales by 28.8% YOY in April as government regulations limited economic activity to essential services only, with only coal mines operating at full capacity.

The decline in mineral output and sales eased to 27.6% YOY and 12.2% YOP respectively under Lockdown Level 4 as more mines were allowed to open.

The majority of mines were allowed to return to 100% capacity in June under Lockdown Level 3 though production and sales were still down 28.2% YOY and 14.2% YOY respectively, due to logistical constraints and international market conditions.

Despite a somewhat bleak outlook, 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 haven investment amid concerns about the COVID-19 pandemic and global trade tensions. Some of the reports key are:

Market capitalisation

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. Gold and PGM accounted for 80% of the market capitalisation of the companies analysed this year and continue to dominate the sector.

Read more about PGMs

Financial performance

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%.

Read more about gold

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 year.

Production

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.

The hydrogen alternative

The report states that 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.

Read more about mining in southern Africa

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.

As such, 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,” the report states.

Responsible mining

According to the report, companies and investors have increasingly been recognising the importance of prioritising environmental, social and governance (ESG) matters on the corporate agenda.

The 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.

However, the 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.

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.

Furthermore, progress in the regulatory environment should continue with a need to streamline processes and improve transparency for existing and potential investors.

The further report states, “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.”

Click here to read the full report

Gerard Peter
Gerard Peter is a content creator and media strategist with more than 23 years' experience in new and traditional media.

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