March/April 2013

Labour pains

South African miners get creative in the face of an uncertain future

By Anna Reitman

The mood was cautious at February’s annual African Mining Indaba. The event, trumpeted as one of the world’s largest mining investment conferences, was held in Cape Town, South Africa, a country marred by recent unrest in the mining sector.

In the aftermath of the violence at Lonmin’s Marikana mine last August, South African equity market losses intensified, with Standard Chartered Bank reporting US$858.8 million in outflows in September and October due to low economic growth and the impacts from strikes. Hardest hit at the moment are platinum and gold producers, with Anglo American Platinum (Amplats) reporting an eight per cent drop in equivalent refined platinum production year-on-year, mainly due to lost production relating to labour issues.

Johnson Matthey, a platinum group metals (PGM) manufacturer and Amplats’ refining and marketing agent, reported in its interim statement for the period of October 1, 2012 to January 29, 2013, that sales in its precious metal products division fell seven per cent to US$192 million during that time. According to a company statement, lower production volumes, particularly from Amplats, more than offset the benefit of slightly higher average PGM prices.

Platinum, of which South Africa is by far the world’s largest producer, has taken a wild ride since August 2012, jumping from around US$1,400 per ounce to over US$1,700 after the violence at Lonmin, then tumbling to just over US$1,500 by December. Now, prices are being driven more by demand expectations, said Robin Bhar, head of metals research at Societe Generale. Platinum rose upwards again to mid-US$1,700 in early February until sentiment on economic growth soured around the world. By early March, spot platinum was at mid-US$1,500.

At Indaba, keynote speaker David Humphreys, principal at DaiEcon Advisors, told delegates that resource-rich countries are increasingly asking how to leverage minerals to further their own national economic development, even as the investment community is becoming more risk averse and the mining industry more cost-conscious.

Speaking to CIM Magazine, Humphreys pointed out that while labour issues in South Africa may be holding the world’s attention, rising labour costs, political uncertainty, power shortages and bureaucratic burdens existed long before Marikana erupted. “South Africa has been lagging behind the curve in terms of attracting investment interest during the years of peak prices for some years now,” he said.

Miners and developers across the country are tackling these problems in a variety of ways. For instance, Gold Fields restructured by spinning out mature assets into a new company, Sibanye Gold. “Given the labour and political issues that have been making headlines, there is going to be a segment of Gold Fields investors who don’t want South Africa exposure,” said James Wellsted, head of corporate affairs at Sibanye.

The company will also consider courting Asian investors. CEO Neal Froneman arrives from Gold One, a miner that saw 90 per cent of its shares taken up by a Chinese consortium. “Big state shareholders from China have a long-term view towards investment and could be beneficial in terms of mitigating political risk,” Wellsted explained.

Outside of gold and platinum, other companies are finding themselves caught in the crossfire. DiamondCorp is developing the Lace mine in Free State. The project contains 14 million carats of diamonds in kimberlite and tailings, and DiamondCorp expects to produce from tailings in the second half of this year.

“We are operating at shallow depths using mechanized mining so we have not had the labour problems that others have suffered, but certainly it had made putting our financing package together a protracted affair because investors had concerns,” said DiamondCorp CEO Paul Loudon.

The company benefited from off-take agreements with jeweller Tiffany and support from state-backed Industrial Development Corporation that contributed US$24 million of its total US$34.8 million in financing, Loudon added.

These kinds of initiatives seem to back up government statements in South Africa’s budget: the best way to increase tax revenues is to “grow the economy more rapidly.” But with a revenue shortfall of US$1.8 billion due to production interruptions from strikes and low commodity prices, observers are questioning how the country will continue to deliver on its national development plan, which aims to eliminate poverty and reduce inequality.

In its South Africa - Deficit Surprise report, Standard Chartered Bank said fears about a radical shift in government economic policy look overdone, adding conservative spending plans are a hallmark of the budget: “While tax reviews were promised, the absence of any headline-grabbing measures on mining taxation, despite expectations to the contrary, is also notable.”

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