Dark clouds gather over critical South African employer

South Africa’s mining production has steadily declined over the past two decades, with the country becoming one of the least attractive places to invest. 

The mining sector has been consistently limited by uncertainty surrounding legislation and regulation of the industry, alongside the repeated threat of nationalisation. 

This has also been coupled with volatile labour relations, disputes with surrounding communities, and organised crime. 

As a result, South Africa has gone from one of the best places in the world to invest in opening new mines or expanding existing ones, to one of the worst. 

This is not the only issue the sector faces, as the country has lost its iconic status as the world’s largest gold producer due to its reserves being effectively depleted. 

With the increasing cost of opening and operating a mine in South Africa, there has also been a lack of junior miners being established to fill niches in the industry or take on the risk that a big corporation may not be willing to. 

This is also due to the collapse of the financial ecosystem that supported junior miners in the past, Old Mutual’s chief investment strategist, Izak Odendaal, said. 

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.

In recent years, the sector’s production has been heavily impacted by the collapse of South Africa’s state-owned enterprises (SOEs). 

The declining performance of Eskom, in particular, has made it increasingly costly to operate mining or refining operations in South Africa, with repeated increases in the electricity tariffs caused by the above-inflation increases. 

Transnet’s inefficient operations have also hindered South African miners’ ability to reach the global market, negatively impacting their profitability. 

The collapse of the rail and ports operator has also forced some miners to reduce production so as to ensure their storage facilities are sufficient. 

While these two companies have shown signs of improvement, it will take years before the existing mines in South Africa can operate efficiently at scale. 

The decline in production of the mining sector since 2006 can be seen in the graph below, courtesy of Stanlib chief economist Kevin Lings. 

Longer-term issues

Mining analysts have pointed to longer-term issues within the sector, which have resulted in its decline over the past two decades. 

These analysts, such as Peter Major of Modern Corporate Solutions, pointed to the effect of consistent regulatory uncertainty on the industry. 

“The simplest explanation is that you had an established mining law and protocol system on how to develop and run mines and who owned them,” Major said. 

“That had been built up over 150 years and was working pretty well. It made us the number one mining country on the planet.” 

This changed rather quickly once increasingly severe Black Economic Empowerment (BEE) requirements were placed on the sector, and politicians, who had called for the nationalisation of the industry, rose to power. 

“When the new administration took over, it decided to try to totally revamp mining law in South Africa and copy what other African nations did,” Major said. 

“It said, ‘We will nationalise these mines and take them back. They are no longer private property but are the state’s property.’”

“You can imagine. You put billions into projects for 100 years and are now threatened with state ownership. New investment just stopped. Exploration and expansion just stopped. Why put money in something the state owns?” 

“They were also changing legislation non-stop. You first had to have a BEE partner that owned 25%, and that quickly increased to 30%. And then, they said 70% of the money you spend had to go to BEE suppliers.” 

“As if nationalising property was not enough, they put on all these horrendous conditions that drove capital away,” Major said.

Once the backbone of the local economy, South Africa’s mining output has steadily declined since the 1990s by around 0.4% annually, with gold, in particular, falling off a cliff and declining by 85%.

“The ANC did not realise the consequences of their actions. They are now abandoned mines that could have been generating billions of dollars for the local economy if things were just left the way they were.”