SA’s mining address no longer in a prime area
THE president of the Chamber of Mines describes South Africa as “the world’s best mining address”. Sadly, this view is not widely shared. Three of the world’s largest mining companies have recently announced substantial reductions in their operations in South Africa and Southern Africa. Local mining companies are also downsizing their operations.
Anglo Platinum, the world’s largest platinum miner, is selling the Rustenburg mines that until recently were its flagship. BHP Billiton, the world’s largest mining company, is moving all its South African operations into a new management company for assets no longer “world class”. Rio Tinto has sold for a paltry $50m the Mozambique coal assets it bought only a few years ago for $4bn — a staggering loss of shareholder value. Gold producer Harmony is mothballing a shaft. It is also shelving an expansion project that has cost R1.4bn because it is too expensive.
What do these announcements mean for South African mining and our economy? Too soon to panic, say some commentators, as it is only ownership that is changing. Mining of the assets continues. Others have blamed the sales on global factors. For example, coal is falling out of fashion as the higher returns of oil, copper and iron ore make other mining assets appear less attractive.
Some observers even argue these developments should be seen in a positive light. The Anglo Platinum sale will probably provide black economic empowerment opportunities in mining. The company will seek to replace production lost through the sales by expanding production at other mines. So, over time, platinum production in South Africa may actually rise. The BHP Billiton unbundling will create a new global company with very significant assets in South Africa. This, Business Day suggests, will allow the new owners to allocate more attention and capital to the mines in South Africa than when they were dwarfed by BHP Billiton’s vast global holdings of oil and iron ore assets.
However, other commentators lament that not one of its South African assets is viewed as worth keeping by BHP Billiton. The fact that South African mining assets are no longer considered world class, they suggest, is more evidence of the growing crisis in local mining and the difficulty of doing business here. Even though present price weakness may be temporary, no one seems anxious to hold South African platinum, coal, manganese and aluminium assets until the day they are back in fashion.
Moreover, we must not imagine that changes in ownership do not entail costs. The buyers of the platinum mines may obtain an asset cheaply, but they will have to restore it to profitability. In a labour-intensive industry such as mining, this will inevitably lead to job losses. Jobs will be lost, too, at the mothballed Harmony shaft. The hope that these would be replaced by new production has evaporated with the shelving of the expansion project.
Unquestionably, too, the new owners will be financially weaker than the present owners. This is important in mining, which requires constant large injections of capital to keep operating and which is facing falling prices for the commodities it produces. So while Anglo Platinum and its parent, Anglo American, could temporarily sustain losses in Rustenburg provided they were making profits elsewhere, a new operator of a single mine will not have this flexibility. In Mozambique, the Rio Tinto coal assets are not even operational yet. The new buyer will need very deep pockets to fund the large amounts of capital still needed for transport and port infrastructure to bring any coal to market.
Assessing the health of South Africa’s mines is complicated. It is clear, however, that profitability was falling rapidly before the platinum strikes and South African mining output was already 10% below 2005 levels. So we are producing less and falling global prices will drive earnings down further, bringing unwelcome cuts in tax revenue and investment spending.
Strong interventions are required to restore to health a sector that remains by far our largest export earner and one of our largest employers. Yet the government does not seem to recognise this. State plans to boost domestic manufacturing will reduce the profitability of mining further. The government intends forcing domestic miners to sell their output locally at substantially less than global prices. It hopes to buoy manufacturing by making it more competitive in this way and create more, higher-paid jobs.
But such policies will reduce mining revenue and cut the profits of mines, many of which are already losing money. And it is also not at all clear that such policies can achieve their intended outcome of substantially improving the global competitiveness of local manufacturers through cheaper mining inputs. For most manufacturers, iron ore and other mining purchases are a small part of their costs. Other things make South Africa’s manufacturers uncompetitive, as the Harvard economists who examined South Africa’s economic policies warned back in 2008.
Very bright warning lights are flashing about the future of mining. Who in the government has even noticed?