Director: Corporate-911
Traditionally, the mining industry is the most significant contributor to GDP growth in South Africa. This has been a factor since the platinum and diamond rushes of the 1860s and the Witwatersrand Gold Rush of 1886. Our seemingly endless resource of these precious commodities, added to significant global demand, saw South Africa establish itself as the continent’s largest economy for many years.
However, the mining industry has faced significant global challenges. There has been decreased global demand due to scaled-down infrastructure build programmes and environmental pressure for the industry to reduce its carbon footprint.
South African miners are also facing significant headwinds on the local front. A recent PwC report points out that the South African mining industry has lost R100bn in profits in 2023. These losses clearly indicate that we need to move towards a diversified economy, or at least an economy that focuses on exporting commodities that will power Net Zero economies.
A significant contributor
If we go back to 2016, we can see the significant influence mining has had in South Africa.
According to statista.com, the mining industry contributed R220,1 billion to South African GDP; this increased to R225,4 billion in 2017. Predictably, this dropped to R194,8 billion in 2020 during the height of Covid-19 restrictions; there were two years of increases following this, where the industry contributed R218,1 billion and R202,6 billion in 2021 and 2022.
However, a lot has changed over the past year. The Ukraine war has caused a significant global economic squeeze, with many economies facing spiralling interest rate increases. Further, South Africa is facing the worst period of loadshedding since the practice was introduced in 2008. Transnet is floundering and cannot deliver commodities to key export terminals. These last two factors are causing significant issues for miners.
Significant losses
The News24 article points out that an analysis of 29 domestic mining companies showed a net profit plunge to R108 billion in their latest financial years, down from a record R206 billion.
In the report, titled “SA Mine: Adapt to thrive”‘, PwC noted the factors hitting the industry include productivity and infrastructure constraints, such as load shedding and poor rail performance, decreases in certain commodity prices, and increased costs.
Image By: Mining MX
The article adds that Transnet Freight Rail’s deteriorating performance, especially on the critical export coal line, has been a key challenge.
Load shedding has hit production, although to a limited extent.
The News24 article points out that Andries Rossouw, PwC’s Africa Energy, Utilities and Resources Leader, said in a statement on 3 October that a weaker Rand may have provided some relief, but this has been offset against more expensive imports, and higher prices for inputs such as chemicals and equipment.
Retreat from record
The article points out that PwC noted the sector’s regression comes after two years of record performance and shareholder returns, and R108 billion still compares favourably to the R32 billion recorded in 2019 or the R11 billion loss in 2018.
As concerns mount that South Africa is facing a fiscal crisis, the mining sector’s downturn will be felt by the government, which benefitted from windfall taxes and royalties from the industry in the previous two years. The sector’s reported tax expense dropped to R48 billion, a 34% decline.
The article adds that miners’ tax returns have also continued to be a key driver in balancing the national trading account. South African Revenue Service export data shows that the value of mined material exports amounted to R575 billion in the first six months of 2023, equating to around 58% of total exports.
And despite the dramatic drop in profit, SA miners have maintained strong balance sheets with little debt and are even investing in the sector.
Investment pressure
The article points out that there are early signs that the significant drop-off in prices of platinum group metals and coal from record prices could limit future investments.
South African miners are also faced with illegal mining, jeopardising the safety and viability of some mining operations and a shortage of critical skills within the sector.
The effect on the sector is cause for concern for not just the 478 000 people that the mining industry formally employs, but also for communities dependent on mining.
“The socio-economic environment in which mining companies operate in South Africa is often characterised by high levels of unemployment, low skills and poverty,” said Rossouw, “The consequences of any challenges to mining could result in a dire situation for the nation’s economy and security, including the social well-being of society.”
Vuyiswa Khutlang, PwC South Africa energy, utilities, and resources partner, said in the statement that a lack of exploration in South Africa and the lag between investment decisions and new production could hamper the industry’s long-term sustainability.
Plenty of blame to go around
There is plenty of blame to go around when it comes to the current situation that the mining industry finds itself in.
Obviously, the lion’s share of the blame needs to go to Government. Investment in Eskom and Transnet should have been ongoing since the ANC came into power in 1994 so that we avoided the Energy and Logistics Crises, which are currently burdens that are significant to overcome. This is the first reality that we need to address.
Image By: Austin Distel via Unsplash
The second reality we need to address is the Government’s short-sightedness regarding commodities that will drive future economies. Hydrogen is a byproduct of gold mining, and South Africa has the potential to be one of five countries that can be a net exporter of green hydrogen. A report by the Department of Science and Innovation points out that the establishment of the H2 Valley in South Africa could potentially add $3.9 billion – $8.8 billion to GDP (direct and indirect contributions) by 2050; that is R74,7 trillion to R166,6 trillion (correct as of 4 October 2023) to GDP in direct and indirect contributions. Further, the valley could create 14,000 to over 30,000 direct and indirect jobs annually during this period. Why is this being ignored?
Miners are not blameless when it comes to their challenges. An article by Eyewitness News alleges that mining houses are dropping the ball regarding their environmental rehabilitation investments and are turning to the business rescue profession, citing constrained cash flow as a reason for this. If done correctly, these environmental rehabilitation investments would close all entrances to abandoned mines, effectively placing a significant hurdle in the path of illegal mining syndicates.
At the end of the day, the losses faced by mining companies are not sustainable, and it will not be long before more mines become financially distressed. While this is good news for BRPs, it is not such good news for the profession. Business rescue aims to return companies to profitability. However, with the current challenges impacting the mining operating environment, there will be no reasonable prospect of saving many of these mining companies. They will quickly be upgraded from business rescue to liquidation. And this will devastate the economy.
Urgent intervention is needed.
