What are the Big Risks to ZA Mining?

Today we look at mining, with this week’s publication of Ernst & Young’s report on “Business risks facing mining and metals 2013-2014”. At the media briefing on this I was struck that the issue of labour unrest did not appear to be a global trend, even though it is such a concern for ZA. So I asked Abbey Chikane, Africa Leader: Mining & Metals at Ernst & Young Advisory Services for his insight into the current risks facing miners here and around the world…..

Q: The big concern in ZA is the looming winter of discontent and industrial strife on the mines. But it’s not in the global top 10. Are we unique? Or is the labour unrest exaggerated?
A : Labour unrest and wage discussions influence the cost of doing business and the levels of productivity. South Africa’s exposure to labour unrest and wage increases differ slightly from its global counterparts due to the significance of the work forces. It is critical to manage these relationships, but at the same time, due to the squeeze in margins, it is important for all stake holders, including employees, to reconsider and reset their expectations.

Q: Your team said it takes at least 10 years to build a mine. And that confidence is needed to invest. So are we going to see any new mines in ZA?
A: New mines as well as expansion of existing mines are dependent on availability of capital, demand for the product as well as economic viability. For certain commodities such as thermal coal, manganese etc, the demand is still strong in South Africa, but export markets are perhaps softer. There haven’t been many new gold mines for quite some time, although there has been expansionary investment in maintaining the production of existing mines. As for platinum, there are currently quite a number of mines being built, and there are also quite a number of new applications, but these mines are planning to apply new mining methods that are more cost efficient.

Q: Capital allocation is the major global challenge, according to this new report. What does this mean and what is the situation in ZA?
A: South Africa, just like the rest of Africa, should focus on enhancing its attractiveness and competitiveness as an investment destination. This can be achieved through transparency, predictability and stability of policies and the economic environment, availability of reliable infrastructure (electricity, transport, logistics etc) and availability of skills to operate future mines.

Q: The third concern globally is resource nationalism – what does this mean, and does it include nationalization which has been a big issue in ZA?
A: Resource nationalism refers collectively to all forms of government participation. The three most prolific forms of resource nationalism are (1) increased taxes and royalties, (2) mandated beneficiation, (3) equity ownership. Resource nationalism is still very much a key item on the strategic agenda, but in light of the current more pressing issues such as capital allocation and maintaining operational productivity and profitability, resource nationalism has moved to number 3. In South Africa, further resource nationalism strategies will be dependent on Judge Dennis Davis’ findings and outcomes of government’s review of the tax system in South Africa.

Q: You appeared to suggest there is a problem with high wage expectations in a low skilled workforce. Is this correct and how does mechanization help the employer and threaten jobs?
A: The wage demands have to be considered in the context of cost management and maintaining productivity. Any increase in cost without a corresponding increase in productivity will lead to margin erosion and inflation. Over time, inflation significantly impacts the competitiveness of companies and economies.

Q: You also referred to the recent high turnover of CEOs in most of the majors…. Is this unusual, and is it a worry?
A: Several major mining companies as well as junior mining companies have appointed new CEOs. Investors are focusing on return on investment, and there have been large scale impairments across the globe and relatively weak share price performances. These pressures have contributed to the current capital dilemma.

Q: There was also talk of a great opportunity to diversify the mix of ZA commodities to produce more relevant metals and minerals for industry. Platinum and gold do not build bridges and factories…. Is this diversification practical?
A: The practicality of this should not be considered without considering the potential and the risk of relevance. Precious metals are an important part of our mining industry, but by focusing efforts to explore, find and produce other commodities, the mining industry will be less exposed to commodity-specific issues and will be able to operate in a more stable economic environment. This will also allow mining companies the flexibility to transition their focus between various commodities, depending on which commodities offer the greatest current return. In turn, this could offer to alleviate labour and employment pressures and provide workforce flexibility without compromising levels of employment.

Q: Is the volatility of the rand scaring off investment?
A: The volatility of the rand is creating challenges in terms of long term planning. Mining is a global industry, and weaknesses in currencies in which the commodities are produced usually only provide short term benefits. In the long term, weaker currencies create policy, inflation and competitiveness pressures.

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