Mining

Dark clouds gather for one of South Africa’s biggest employers

South Africa’s mining industry is under increasing pressure, with uncertainty surrounding government policy following last month’s elections exacerbating long-standing issues in the sector. 

The country once had a reputation as a mining powerhouse, dominating the production of minerals from gold to diamonds to platinum. 

However, volatile labour relations, disputes with surrounding communities, organised crime, and regulatory uncertainty have hobbled the industry. 

Last month’s election has added to the uncertainty, with some political parties calling for the sector to be nationalised. 

These calls have thrown fresh uncertainty into the future of one of South Africa’s most important sectors and a key driver of economic activity. 

Efficient Wealth’s Dr Francois Stofberg warned that political uncertainty has already hit South Africa’s financial markets and could begin to impact other parts of the economy depending on the new governing. 

He said investors are understandably hesitant to invest in South Africa, and foreign investors, in particular, view radical policy shifts negatively. 

Both the newly-formed MK Party and EFF have called for the nationalisation of key industries but have focussed specifically on the country’s historical wealth creation machine – mining. 

Stofberg warned that the potential for such policies to become a reality would lead to foreign capital leaving South Africa and a significant contraction in investment. 

Analysts are particularly concerned about the potential impact on the local mining sector, which is a cornerstone of the economy. 

Nationalisation could deter foreign investment and reduce output, impacting global commodity markets. 

Implementing these policies would create a generally hostile business environment, scaring off foreign investors and even making local companies think twice before investing in South Africa. 

Old Mutual Wealth’s Izak Odendaal

Old Mutual Wealth investment strategist Izak Odendaal said the recent failed bid from BHP Billiton to acquire Anglo American is emblematic of the collapse of South African mining. 

As part of its bid, BHP demanded Anglo dump its South African iron ore and platinum operations. This would have resulted in the new entity having no operations in South Africa. 

BHP had already gotten rid of its South African assets years ago when it spun off South32. 

Odendaal said it is impossible to look past the fact that South Africa is viewed as an unattractive mining country due to various factors. 

Volatile labour relations, community disputes, organised crime, regulatory uncertainty, and delays in process applications are some of the reasons global miners do not want to invest here. 

This has been compounded by recent infrastructure bottlenecks, with Transnet’s inefficiencies limiting the export of minerals vital for companies and South Africa’s foreign exchange earnings. 

The Fraser Institute ranks the attractiveness of mining jurisdiction annually. Its rankings show South Africa’s steady decline from a powerhouse to a pariah. 

In the latest ranking, South Africa finds itself among the ten least attractive mining destinations. 

Odendaal also warned that investors have already shown signs of being unwilling to fund new miners and new exploration. 

He said the financial ecosystem that used to support these ‘startups’ or new projects has largely disappeared. 

Investors have limited appetite for supporting early-stage mining companies or the buildout of a new mine. With the added difficulty of operating in South Africa, foreign investment has almost been wiped out. 

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

The evidence is in the form of declining mining production—the volume of stuff pulled out of the ground—over the past twenty 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. 

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