THE local mining industry experienced a significant decrease in profitability in 2014, but the weakening rand tended to shield the industry‚ PricewaterhouseCoopers (PwC) said in a report on Tuesday.
However, this was only a temporary respite because it would lead to inflation and cost pressures.
SA’s mining industry also continued to be marred by labour unrest. “In addition‚ local cost pressures and international demand weaknesses resulted in shrinking margins and wide-ranging impairment provisions‚” PwC said.
PwC mining industry leader for Africa Hein Boegman said the mining industry still added significant value to the South African economy in terms of contributing to gross domestic product‚ employment‚ tax and export revenue.
“Leadership will be required from all stakeholders to ensure long-term optimisation of the industry as opposed to the threat of instant gratification claims by stakeholders‚” he said.
The report said a significant decrease in the profitability of the industry fuelled the contraction in market capitalisation of South African mining stocks‚ but it was temporarily halted in 2014. The decrease was in line with international mining counterparts that were also struggling with higher costs and lower prices.
The total revenue for the mining industry, as reported by Statistics SA, was R351.3bn, marginally higher than the R345.4bn the previous year, but down from R358.4bn in 2012.
PwC energy and mining assurance partner Dion Shango said coal accounted for the biggest chunk of this year’s revenue generation at 29% (R101.4bn), up 1% from last year (R96bn).
Gold production remained stable, but in terms of revenue decreased from 20% last year (R70bn) to 14% (R48.1bn). Gold was the smallest revenue contributor.
Platinum mining, which was rocked by a five-month strike earlier this year, had its lower production balanced by the weaker rand, so platinum group metals accounted for 23% of total mining revenue for 2014 (R81.9bn), up 1% from last year (R77bn).
“We see an environment where an increasing cost base and shrinking margins … are threatening the future of mining companies in SA.”
The biggest operating costs were labour at 40%, mining supplies and consumables at 21%, and water and electricity utilities at 10%.
Mining companies were seen to be cutting back on exploration in an attempt to reduce costs. However, this could have long-term consequences for sustainability.
The mining companies surveyed said the greatest risks their businesses faced were from labour unrest, volatile prices and foreign exchange rates.
Infrastructure access and capacity were also problems, including constraints on power and the regulatory uncertainty the industry faced.
At the end of this year, mining companies would have had their compliance with the Mining Charter evaluated.
PwC assurance partner Andries Rossouw said businesses were uncertain what sanctions would be applied if their Mining Charter obligations were not met.
As such, mining companies needed to integrate these risks.
Mr Rossouw said there was a need to align productivity with wages at all levels. In wage negotiations, however, “the p-word” (productivity) was often overlooked.
At supervisory level, training could substantially help to increase productivity, giving workers a wider understanding of the effect of what they did underground and how it reflected on the company’s bottom line.
Mr Shango said that in terms of market capitalisation, the JSE mining index underperformed when compared with the JSE all share index. When compared with global mining industries’ performance, however, there was an “almost perfect correlation”.
Looking ahead, the industry — and SA as a whole — still faced the problems of unemployment, poverty and inequality and needed to address them. While the industry remained in a fairly strong position financially, an increasing cost base would be likely to erode margins.
Companies needed to be cautious when implementing cutbacks as they could compromise long-term sustainability. The platinum industry, in particular, could look forward to increased productivity since the Association of Mineworkers and Construction Union strike was resolved, but the low platinum price was unsustainable.
Low iron ore and coal prices remained a concern as they indicated that there was a lag between supply and demand, Mr Shango said.
The mining industry needed to find a balance between preserving funds and making strategic investments for its long-term future.