South African mining collapse

South Africa’s reputation as a mining powerhouse has fallen apart over the past decade, as issues such as volatile labour relations, disputes with surrounding communities, organised crime, and regulatory uncertainty plague the industry. 

This is feedback from Izak Odendaal, an Investment Specialist at Old Mutual Wealth, who explained that BHP’s attempted purchase of Anglo American without its South African assets is emblematic of this collapse. 

Odendaal’s comments follow Anglo’s board’s rejection of a proposed merger with BHP Billiton. The board said the Australian company’s offers undervalue the miner and are unattractive to Anglo shareholders. 

BHP’s bid pointedly excludes Anglo’s South African iron ore and platinum operations. This is partly because the copper assets are in Chile and Peru, not here.

Thus, the proposal would have required Anglo American to complete two separate demergers of its shareholdings in Anglo American Platinum and Kumba Iron Ore to shareholders. 

Odendaal said other potential suitors, such as Glencore, might be keener on the local operations. 

However, it is hard to escape the fact that South Africa is viewed as an unattractive mining country. 

The challenges are massive, including volatile labour relations, disputes with surrounding communities, organised crime, regulatory uncertainty, unreasonable delays in processing applications and infrastructure bottlenecks. 

The Fraser Institute, based in Canada, conducts an annual survey on the attractiveness of different countries as mining jurisdictions. These days, South Africa ranks among the ten least attractive mining destinations.

The financial ecosystem that supported junior miners in years gone by has also largely disappeared. 

Local investors have limited appetite for supporting early-stage mining companies, and global investors have little appetite for investments in South Africa. 

Little exploration is done despite geologists estimating that a rich natural bounty remains. 

The evidence is in the form of mining production – the volume of stuff pulled out of the ground – that has declined over the past 20 years. 

Excluding gold, which is largely mined out, makes the picture somewhat better, but not much. 

In contrast, Australia, not facing the same physical and institutional bottlenecks as on this side of the Indian Ocean, has managed to steadily double output over this period.

This contrast is shown in the graph below.