While South Africa’s industry appears mired in gloom, elsewhere on the continent things look considerably brighter

By Gavin du Venage

The mood was curiously upbeat at this year’s African Mining Indaba in Cape Town, the region’s largest trade fair. With South African mining in the doldrums, the event drew energy instead from the gathering opportunities that lie much further north.

More than 7,500 delegates and 1,500 companies attended this year’s event, making it the biggest ever, according to Indaba Managing Director Jonathan Moore. Unlike previous years however, the talk was less of South Africa, the continent’s mining giant, and focused more on its upcoming challengers such as Ghana, Sierra Leone and Kenya.

South Africa’s mines are caught between declining profitability, a saturated playing field dominated by majors, uncertain legislation and as became tragically obvious last year, the worst labor unrest since the fall of apartheid in 1994.

Last August a wildcat strike called by a breakaway union of workers at Lonmin’s operations in the Marikana area of Rustenburg, in the heart of the country’s platinum belt, led to 34 miners being shot to death by police. Images of the clash were captured by media crews and carried worldwide.

The incident is illustrative of the position in which South Africa’s mining industry finds itself. South Africa has around 80% of the world’s platinum reserves. It has long been a hope of the government and mining companies that platinum will take the baton from gold, as shafts go ever deeper in search of declining gold reserves.

The Marikana shootings were whispered about in the corridors of the Indaba and reflected prominently in speeches given at various forums. The shootings, however shocking, merely drew attention to the longstanding underlying malaise the industry faces. A fall in commodity prices driven by Europe’s weak economy—together with above inflation wage cost increases over most of the past decade—have pushed platinum producers to the edge of sustainability.

As a result, foreign investment in the country fell by 44% in the second half of 2012 compared with a year earlier, according to PricewaterhouseCoopers, the global financial services firm.

Just weeks before the Indaba, Anglo America Platinum announced it would cut 14,000 jobs to save costs, sending a shockwave through the industry and the government. Angloplat is not the first to announce pit closures—Australia’s Aquarius began selective mothballing six months ago—but it is one of the largest producers of PGMs and its announcement carried a substantial psychological impact.

Following the Angloplat announcement, the country’s Minister of Mining, Susan Shabangu, threatened to seize the rights to idled mines. She has since moderated her comments after the government and Angloplat agreed to a 60-day cooling off period and to hold talks on the issue.

It’s hardly surprising therefore that Shabangu’s speech at the Indaba was one of the best attended events. So was that of the CEO of Anglo American, Angloplat majority shareholder, Cynthia Carroll. The opinions of the two women at the top of the South African mineral food chain mattered, even if one of them was in all likelihood addressing the forum for the last time.

As expected, Shabangu touched on the raucous debate over nationalization, which caused bitter dissension within the ruling African National Congress and sent shivers of fear throughout the South African industry.

“Nationalization is not an option for our country,” she said. The ANC had struck down nationalization at its elective congress in December, and the matter should now be left to rest, she said.  “In this regard, I appeal to you not to try to resuscitate this debate in different forms and guises, which may invariably be marred by differently unhelpful interpretations.”

Shabangu noted that without private sector capital, the industry would not survive. However, she defended plans to go ahead with state-owned mining ventures. “There is room for both private and public returns, indeed these are interdependent.”

Turning to the dire position in which the platinum industry finds itself, Shabangu said government was aware of the situation—a departure from earlier, more belligerent statements on the issue.

“We understand the pain faced by the platinum sector; we are part of it as government, as a country, and we need to find lasting solutions among ourselves. It is not their problem, it is our problem as a whole, as a country, and we have to share that problem in finding a common solution in that.”

The minister went on to list the few bright spots on the horizon. The number of mines in South Africa had increased from 993 in 2004 to almost 1,600 in 2011. Associated revenue generated grew from R98 billion in 2004 to R370 billion by the end of 2011. Employment, Shabangu said, grew in the mining industry from just less than 449,000 in 2004 to a little above 530,000 in June 2012, before it started to regress slightly in the third quarter of last year.

Shabangu deviated from her set speech to thank her bête noir, Carroll, for her service to the industry, perhaps an acknowledgement that she would miss her old rival’s contribution to the frequently vigorous sector debate. “I’d like to thank Cynthia Carroll for her years of dedication and service,” she said. “She will be missed.”

The reception to Shabangu’s speech was muted. “We are viewing it with skepticism,” said Abrie Olivier, (Southern African mining leader at Deloitte) at the conference following the minister’s talk. “There have been inconsistent messages from the government about the challenges the industry faces, and about which direction policy will take.”

While Shabangu’s presentation was ‘mildly positive,’ it still left the industry unclear about what the government intended to do regarding labor issues, and how far down the road it would go to wrest more earnings from miners for the national coffers.

The minister’s speech did little to shed light on the contentious draft Mineral and Petroleum Resources Development bill. The proposed law would license as yet unspecified minerals that would need ministerial consent before they could be exported. This could force coal and iron ore exporters, for example, to beneficiate their produce if they are to be granted an export license. Production levels and price would also be subject to government regulation.

The bill also requires that the minister give permission for the “transfer of any interest in a listed company” engaged in mining or exploration. This opens the possibility of each and every share trade of miners on the Johannesburg Stock Exchange needing official blessing before being executed.

Such wide-ranging and ambiguous regulations did little to raise South Africa’s attractiveness to outside investors. According to Deloitte, South Africa is expected to receive only 1.2% of global mining investment this year, while traditional rival Australia is expected to haul in 26%. “The investment pipeline is not what it should be,” Olivier said.

Hard Talk
Carroll, the soon-to-depart Anglo American CEO, was for her part equally gracious—at first. “Susan Shabangu has always spoken from the heart, as someone committed to the development of her country,” said Carroll. “As always, it is both a pleasure and an honor to be sharing the platform with her.”

Once the pleasantries ended, however, she came out swinging. “The first truth is that there is no future for any society without law and order,” she said, in a clear reference to government’s feeble response to the previous year’s unrest.

The strikes and damage to equipment cost local industry in the region of US$1.5-billion and a loss of more than 300,000 oz of platinum—an 11-year-low, according to the South African Chamber of Mines.

“Public order is the bedrock without which civilization collapses,” Carroll said.

Carroll also touched on the looming possibility of shaft closures and retrenchments. Business, she said, needed to remain profitable in order to survive: “At times that requires tough choices. And tough choices can be unpopular.”

However, the boards of Anglo American and Anglo American Platinum were totally committed to ensuring a sustainable platinum business for the future, she said. Anglo American alone had invested more than US$15-billion since 1999, and the two companies planned to invest another US$12-billion over the next decade. South Africa had US$2.5-trillion in mineral reserves, but accessing them would require changes to the way mining was run.

“This is an industry in crisis,” Carroll said.

Some might not agree with Carroll. Almost unnoticed within the platinum sector is the continuing development of the Bakubung mine, by Chinese-owned Wesizwe platinum.

“We are looking at the long term,” Wesizwe CEO Jianke Gao said at the sidelines of the conference. “We are not letting current events in the industry influence our plans.” Wesizwe is China’s first venture into the platinum sector, after the China based Jinchuan Group acquired the asset several years ago.

The mine is targeting 350,000 oz/y, and will be an underground operation. The shaft sinking contract was awarded in March last year, and the shaft is expected to be completed by 2014.

Gao says that platinum’s main market, Europe, may be soft right now but future demand, particularly from China, is likely to pick up. He points out that Beijing is implementing ever-tighter environmental regulations that include emissions controls. Sooner or later, all cars sold in China will require platinum-based catalytic converters.

The Bakubung mine is still four to five years away from production, he said, time enough to take the lessons of the industry’s current troubles on board. The company even has a few things it can teach the experienced South Africans.

“We have mines that can deliver 4 million metric tons (mt) of ore with 2,000 employees, but our studies show that in South Africa it takes 3,500 workers to deliver only 270,000 mt,” Gao said. “So you can see that there is a lot of room for improvement.”

Chinese mining engineers have been brought in and their collaboration has increased the shaft-sinking rate of the operation. As Gao points out, China too has a tradition of mining that goes back centuries.

The company received approval in December for a US$650-million standby facility from the state-owned China Development Bank. This will not be enough to see the project through to completion, but the company has plans in place to ensure that it has enough capital to cover every phase of development.

Gao added that Wesizwe is evaluating the building of its own smelter to serve the expected 30-year plus lifespan of the mine. The company was also talking to existing smelter plants and would make a decision on whether to construct its own, or use existing facilities, soon.

Going North
But if South Africa’s industry appears mired in gloom, elsewhere on the continent things looked considerably brighter. Africa lags behind the rest of the world in terms of direct investment, but it’s looking more attractive to mining capital than it has for many years.

“If you’re a serious mining company, you can’t ignore Africa,” said Magnus Ericsson, director for the Raw Materials Group, a Stockholm-based consultancy, in a keynote address. “There are two major underexplored areas in the world, Africa and Siberia, and Siberia is closed. We’re seeing explorations shifting from places like South Africa to Gabon, Cameroon and other countries.”

Because Africa has lagged behind world investment, there is now a scramble to catch up as investors look for better returns from the saturated established markets in the West.

“Africa’s share of world output is around 10%, and most of that is still from South Africa,” Jamal Saghir, the World Bank director for sustainable development (Africa) said at a briefing.

He said Africa had received only a fifth of the estimated $1 trillion in global investment over the past decade, but this share was expected to increase significantly. Demand for resources would continue to grow and this would put an upward pressure on prices.

Although there were easier places to mine—Europe, Asia and North America—these regions were suffering from reserve exhaustion, as well as mass urbanization, which meant cities now stood on ground still rich in resources.

With few options—and Africa holding an estimated one third of global resources, the continent would see an increased competition from investors for access to its resources.

“We have also seen an emerging new trend toward increasingly stable governments and open economies. This is something we have to watch very carefully,” Saghir said.

Currently, about a dozen countries derived half their earnings from mineral exports. They would soon be joined by more, said Saghir. Gradually, he noted, aid would be replaced by trade as the foundation for the GDP of most African states.

But to achieve this, a substantial investment in infrastructure and logistical chains had to be made—up to US$100-billion, he added.

Down Under No More
Leading the charge in Africa are the Australians. At least 207 listed Australian companies are engaged on the continent, and they are responsible for almost 70% of all exploration activity, according to the Australian Securities Exchange (ASX). Together they account for 1,300 projects in total.

This is a far cry from the days when London, Toronto and Johannesburg dominated the continent. “Africa is important for us, and looking more attractive than it has for a long time,” said John Madew, Australia’s Senior Trade Commissioner for Sub Saharan Africa.

He noted that Australia has become the single largest participant in the Indaba, and had brought 54 companies to the event, under the banner of the trade commission.

Already A$24-billion had been invested by Australian companies, with another A$20-billion pending. Last year seven initial public offerings of Africa-focused companies were held on the ASX, raising a total of A$17-million. In follow-up raisings in 2012 another A$750-million was raised by ASX-listed companies active on the continent.

Some of these include familiar names, such as BHP Billiton, Rio Tinto and Newcrest. But most are junior explorers and mines that have moved to Africa in search of virgin deposits. For juniors, the continent is especially enticing because unlike mature mining destinations such as Canada, South Africa and even homeland Australia, they do not have to jostle elbows with the bigger players.

“A junior miner’s business is to go out and explore—and there is a lot of unexplored territory in Africa,” said Madew.

Africa remains a tough place in which to operate however, as the lingering shadow of fired Rio Tinto Chief Tom Albanese, which hung over the event like a ghost, would no doubt have testified. Lack of infrastructure, energy and shifting legal requirements keep many mining bosses awake nights.

Randgold Resources CEO Mark Bristow used the event to speak out against creeping resources nationalism. The company, with assets in Mali, the Côte d’Ivoire and the Democratic Republic of Congo, is already paying substantial dues to the various governments.

“The host country is already a significant, if not the main beneficiary, of its mining activities,” Bristow said. “That is why it is disturbing that there is a growing tendency among the sub-Saharan mining countries to want more without giving anything back. Even a moderate change in their current codes will diminish these countries’ abilities to compete for direct fixed investment or to encourage reinvestment.”

Mali, the most recent hotspot, has proven especially troublesome—not because events affected mining operations much, since most are to the south and west of the country, away from the conflict zone. But it has had a knock-on effect on sentiment for companies operating in the country.

“Our share price took a knock, which is a bit sad,” said Bruce Mowat, group exploration manager for Mali-focused Resolute Mining, manning the company’s booth. The Australia-listed gold producer has two operating mines in Africa, including an 80% holding in the Syama project in the south of Mali, a joint venture with the government. The mine produced 140,000 oz last year, at a cash cost of around A$784/oz.

“We’ve been in Africa 16 years, and our shareholders know that things like this do happen. So even though our share price has been affected, our investors mostly stick with us,” said Mowat.

Ease of Access
The lack of institutions on the continent is frequently cited as a hindrance to doing business in Africa, but for some companies at least, this can be in their favor. More than a few junior miners noted that ministerial access was simply a matter of showing up at the right door—no appointment needed.

“You can’t even get an appointment in South Africa with a senior government official, because the majors get all the attention,” said Thapelo Mokhathi, director of Shumba Coal, a Botswana-focused junior explorer.

A South African himself, and having worked for more than 13 years in the country’s mining industry, he decided a few years ago to look beyond his homeland’s borders for opportunity.

“It’s a lot easier to do business in Botswana. The regulations are fewer and the field is open to new entrants. South Africa is a mature market so there are not many new opportunities for new companies.”

Other countries are making themselves attractive too. Ghana is now Africa’s second largest gold producer, and Ethiopia is pushing to become a major exporter of potash. While lack of infrastructure remains a formidable hurdle, West Africa has the potential to rival Australia as the world’s go-to source for iron ore.

Given the drift across South Africa’s borders it’s perhaps no surprise some local commentators have suggested a change of venue for forthcoming Indabas, all of which have been held in Cape Town. David Gleason, the doyen of South African mining writers, suggested in an editorial carried in Business Day, the Johannesburg daily, that it be moved to a more appropriate venue such as Nairobi in Kenya. Hotels were fleecing conference goers, he noted, raising prices up to 60% for the event: “This is a case of the flea biting the dog to death,” he wrote.

Despite these criticisms the 2013 African Mining Indaba lived up to its name as a continental affair, and is likely to be the voice of Africa-focused mining for years to come.

Gavin duVenage covers Africa for Engineering & Mining Journal (E&MJ). He can be reached at: gavinduvenage@gmail.com.