HomeNewsMining industry sees financial decline due to labour and cost pressure

Mining industry sees financial decline due to labour and cost pressure

National Union of Mineworkers (NUM) strikeSouth Africa’s mining industry continued to be marred by labour unrest in 2014. In addition, local cost pressures and international demand weaknesses resulted in shrinking margins and wide ranging impairment provisions.

The significant decrease in profitability of the industry fuelled the contraction trend in market capitalisation of South African mining stocks. This decrease is in line with international mining counterparts who are also struggling with higher costs and lower prices. A weakening rand tended to shield the South African mining industry from the decline with rand prices remaining relatively flat.

These are some of the findings from PwC’s sixth edition of ‘SA Mine’, a series of publications that highlights trends in the South African mining industry.

Hein Boegman, PwC Mining African Leader, says: “The mining industry still adds significant value to the South African economy with regards to GDP contribution, employment, tax and export revenues. Leadership will be required from all stakeholders to ensure long-term optimisation of the industry as opposed to the threat of instant gratification claims by stakeholders.”

Despite a demanding year, balance sheets generally remained strong, with stable liquidity. However, increased gearing was required for some companies to fund sustaining capital expenditure and in some instances operating losses. The R49 billion impairment provisions raised highlights the difficulty in making long-term decisions in volatile markets.

Market capitalisation

The 2014 financial year saw the declining trend in market capitalisation temporarily halted. Market capitalisation for the top 37 companies increased marginally from R597 billion to R675 billion as at 30 June 2014. Platinum and gold mining companies generally recovered on the back of the weak rand and the hope of a more stable labour environment after the protracted platinum strike that lasted from January to June 2014. Unfortunately since June to September the market has lost a further R130 billion

Contribution by commodity

Despite a slight reduction in production, coal remains the highest earning commodity in South Africa. The increase in the rand price of PGM’s was offset by lower sales volumes resulting in revenue only marginally up on the previous year. The increase in iron ore production, after lower production in 2013 aided iron ore revenues.

Financial performance

“As expected financial performance for the South African mining industry in 2014 was downcast,” says Dion Shango, PwC Energy and Mining Assurance Partner. “However, not all is bad news for the industry.” Revenue increased by R36 billion on last year, with the top 10 companies accounting for 81% (R29 billion) of the revenue increase.

Operating expenses increased by 14%, which is lower than the 16% seen in the previous financial year. However, if the strike-affected companies are excluded from the operating expenses analysis, then the real increase is 16%. Labour costs still remain the biggest cost component in the local mining industry. The share of labour costs decreased marginally from 42% to 40% in the current year.

As anticipated and in line with international counterparts, there were substantial impairments in the current year. At R49 billion, impairment charges were up 137.8% over the prior year. However, net profit reduced by 80% despite an EBITDA improvement of 9% on last year, owing to the R49 billion impairment that has been recognised in the current year.

Integrating risk into business strategy

When one compares the risks facing the mining industry from the prior year to the current year, overall they have not changed. What has changed is the priority of rankings allocated to the different risk exposures. In the current year, most companies’ top exposures include: labour relations, sustainable business plans or budgets, volatility of metal prices and exchange rates, infrastructure access and capacity, and regulatory, political and legal environment.

Shango says: “It is imperative that mining companies rethink risks and the risk landscape in which they operate. Mining companies now need to integrate risk and performance management and they need to evolve risk management to be more predictive in order to anticipate and plan for potential negative events.”

The study also anticipates other aspects that are likely to arise in the coming year. These include: compliance with the Mining Charter, aligning stakeholder expectations, beneficiation of mining output, water scarcity, and the challenge of productivity at mines.

Safety in mines

Safety statistics indicate that there is a higher level of focus in place and this becomes particularly clear when one compares current statistics to historic rates, which show a substantial decrease in fatalities and lost time injuries over the last 10 years.

Improving value to stakeholders

The mining industry continues to add significant value to South Africa and its people amidst recent industrial action and safety stoppages, as well as the continuing decline in commodity prices. The monetary benefit received by each stakeholder in the industry is usually summarised in mining companies’ value added statements.

Employees received 38% (2012: 38%) of value created. If one were to exclude the impressive performance of Kumba Iron Ore from this breakdown, then employees received 48% (2012:46%).

The state received 20% (2013:21%) consisting of direct tax, mining royalties and tax on employee income deducted from employees’ salaries. The actual contribution received by the state is significantly higher with indirect taxes like VAT, import and export duties also being collected.

Distributions to shareholders decreased from 19% to 11% and declined significantly in rand terms. This distribution is skewed by the performance of Kumba Iron Ore and the resulting dividend of R13.7 billion (2013:R18 billion).

It goes without saying that to increase more value for all shareholders it will be necessary to increase the size of the pie. An increase in the number of profitable mines will increase the total benefits received by employees, the Government and investors. It will also provide substantially more resources for mining to spend in and on the communities in the vicinity of their operations.

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