Mining’s big problems in South Africa – and how it helps valuations

Stats SA revealed that mining production decreased by 4.5% year-on-year in September 2022, worse than market expectations.

The largest contributors to the decline were iron ore, down 23.1%, and gold, down 12.4%.

It was the eighth consecutive month of decline in the volume of mining production, which did not bode well for the industry.

Commenting on the latest numbers, mining analyst Peter Major said there is nowhere to hide from the problems in South Africa which hamper mining production.

Major highlighted the headwinds mining companies in South Africa face, including:

• Load-shedding
• The mining mafia
• Poor railroad infrastructure
• Poor shipping ports
• Poor roads

Major said mining is particularly hard hit by load-shedding. “Mining needs constant electricity day and night. It risks lives at the bottom of shafts,” he said.

“Mining needs railroads to transport their products and roads to get the supplies they need to operate.”

He said there is nowhere for the South African mining industry to hide, which is clearly illustrated by the eight straight months of falling production.

“If that is not a warning light for every member of parliament and government minister, then nothing is,” he said.

High prices for mining assets

The result of South Africa’s poor infrastructure and mining-unfriendly business environment is good news for current mines.

“Because South Africa’s mining environment has been devastated, there is no long-term confidence to sink a new shaft or develop a new mine,” Major said.

It means existing mines are trading at a tremendous premium because of their assets which are difficult to duplicate.

“If you are buying an existing mine in South Africa, it is producing from day one to help you to replay your debt,” he said.

In the old days, mining magnates took shareholder money and sank new shafts, which took seven years before producing anything.

“It was a high-risk exercise, but the business environment was stable, and the government was on their side,” he said.

“The old government adjusted their tax rates and decreased royalties to encourage mining investments to create jobs and grow the economy,” he said.

The situation has changed. The new government is not creating a business-friendly environment to attract investments and create jobs.

“The current environment is a result of bad policies and bad legislation which is cannibalising existing mines instead of creating new ones.”