This is according to advisory firm PwC’s eighth edition of the SA Mine report, which highlights the trends in the South African mining industry.
PwC Africa mining industry leader Michal Kotzé notes that South Africa’s mining industry has faced tough times in which companies had no choice but to cut back on new developments, re-focus on profitable production rather than maximum production and to save costs.
“The long-term nature of mining investments translates into a significant lag in the supply response to price changes. This lag contributes to the cyclical nature of the mining industry. Although there is no consensus, we have probably reached the bottom of the cycle, but may stay here for some time,” says Kotzé.
The 2016 financial year saw an increase in market capitalisation mainly as a result of the notable increase in the market capital of gold mining companies and a small increase in the market capital of platinum mining companies.
The market capitalisation of the 31 companies analysed in the report increased to R560 billion, or by 45%, as at 30 June 2016, compared with R386 billion as at 30 June 2015.
Market capitalisation grew further to R578 billion as at 31 August 2016, resulting in an aggregate increase of R192 billion, which is 50% more than as at 30 June 2015.
Contribution by commodity
Coal maintained its strong position as the highest earning commodity in South Africa. Although the share of revenue decreased marginally to 29% from 2015 to 2016, total coal mining revenue increased by R1.3 billion from a high base of R104.4 billion in 2015.
The share of mining revenue from platinum-group metals grew from 25% to 27% in 2016 – an R8.6 billion increase from R87 billion in 2015, while gold’s share of revenue also increased from 15% in 2015 to 20% in 2016, primarily on the back of stronger gold prices and the weakening rand.
In contrast, iron ore’s share of mining revenue continued its downward trend from 14% in 2015 to 10% in 2016.
Andries Rossouw, PwC assurance partner says last year reflected the worst free cash flow position since the financial crisis in 2008, however, 2016 showed an improvement largely due to cash management practices.
Revenue increased by a mere 2% (R7 billion) from the prior year. The platinum companies’ revenue increased by 11% (R12 billion), as a result of higher production after the strike impacted prior year.
Gold also showed an increase on the back of higher gold rand prices while other commodities reflect a decrease mainly as a result of lower iron ore prices, says Rossouw.
Operating expenses increased by R12 billion, which is a 5% increase from the prior year. This figure excludes the impact of higher platinum production and associated costs, which means that it in essence stayed flat.
“This increase in operating expenses is substantially lower than the 14% increase in the prior year and well below the 10% increase experienced over recent years and is testimony to the various savings initiatives implemented by management, including reduction in marginal production, renegotiation of supply agreements and a reduction in overhead structures,” adds Rossouw.
Labour costs still remain the biggest cost component in the local mining industry with the share of labour costs increasing by 5.2%. However, excluding the impact of platinum it actually reflected a 2% decrease as the impact of staff reductions start to show, he notes.
The continuance in low commodity prices has resulted in another record year for impairments in the industry, with a total of R60 billion in impairment provisions. R157 billion was impaired over the last five years, almost wiping out the last three years of capital expenditure in the mining industry.
This is the first year since the start of this publication in 2009 that an aggregated net loss of R46 billion was reported by the industry.
Rossouw also notes that the earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 20%, which is 2% lower than in the previous year, is not sustainable.
While a large number of companies have made an effort to restructure their balance sheets, preserve cash and contain costs, Rossouw notes that liquidity is still a major concern, as reflected in a number of integrated reports, where strategies to address the matter have been shared.
Despite this, successful capital raisings and debt restructurings have provided hope that investors continue to have faith in the industry, he says.
Integrating risk into business strategy
Given the current economic uncertainty and slump in commodity prices, the mining industry is faced with a number of challenges and risks that need to be effectively addressed to ensure the survival of the companies and the industry.
In the current period, companies are increasingly focusing more on their risks mainly due to the impact of the changing environment forcing management to make tough operational and financial decisions to ensure sustainability.
There were limited changes in the risks recognised and compared to the prior year, when the highest-ranking risks included labour relations, sustainable business plans or budgets, the volatility of metal prices and exchange rates, infrastructure access and capacity, the regulatory, political and legal environments, higher input costs and skills availability.
In the current year, most companies’ top exposures also include liquidity and capital management, renewed focus on the cost of mining, water scarcity and climate change.
Improving value to stakeholders
Despite the challenges it faces, the mining industry continues to be a significant contributor of value, but the monetary benefit received by each stakeholder in the industry has declined.
“It goes without saying that to increase more value for all shareholders it will be necessary to increase the size of the pie. This will be a challenge given the current landscape of ever-increasing costs, reducing margins and increased volatility,” says Kotzé.
“Creating an environment with adequate infrastructure, less rigorous policy, and a skilled yet flexible workforce will provide substantially more resources for mining to spend in and attract investment, as well as benefitting all stakeholders,” he concludes.