SA mining shares continued to outpace the broader JSE in a year marked by the country’s hard economic lockdown, with strong performances in revenue, cash and dividend generation raising the prospects for greater merger and acquisition activity.
In its assessment of 25 mining companies listed on the JSE and with assets predominantly in SA and Africa, which means companies such as Anglo American, BHP, Glencore and South32 are excluded, PwC notes the strong financial performances, most notably of gold and platinum group metals (PGM) miners in the year to end-June 2020.
Their market capitalisation increased by 52% to R1.28-trillion — the highest level in at least a decade — led by gold and PGM miners, which accounted for 80% of the total.
The SA government imposed a hard lockdown of the economy at the end of March to curb the spread of the coronavirus.
“Based on the overall impact of the lockdown on monthly levels of economic activity, as well as the outlook for the lockdown at a provincial level, PwC expects the SA economy to contract by 9.3% in 2020,” it says in its SA Mine 2020 report, noting that it expects positive quarter-on-quarter growth in the second half of the year.
“The overall recession could be smaller — a contraction of around 7.8% — if the country avoids a second wave of infections, avoids regular electricity load-shedding, and eases the remaining lockdown restrictions at a faster rate,” it said, warning that if these events transpire the economy will shrink 12%.
PwC stressed the need for “correct policy decisions” to pull SA out of its economic predicament. It expects the economy to grow by 4.5% in 2021, coming off the low base of 2020.
SA has lost 2.2-million jobs to the effects of the lockdown on businesses. PwC expects the country to end 2020 with a 1.4-million decline in formal and informal employment, and the economy adding 615,000 jobs next year.
For the mining sector, lockdown restrictions were gradually eased and all mines were allowed to return to full capacity in June, one of the first major sectors in SA’s economy allowed to return to prelockdown levels.
The negative consequences on mineral production and sales were felt in April, when output fell by nearly half, before slowly recovering as restrictions were lifted in phases.
The revenue of the mining companies surveyed grew to just shy of R542bn in the year to end-June compared to R518bn the year before.
PGM prices increasing by more than a quarter meant these metals dominated revenue, displacing thermal coal in the top spot for the first time since 2010.
Spending on personal protective equipment grew R2bn to R66bn for the year as companies bought equipment to keep about 240,000 employees safe when they returned to work.
Mining companies were able to convert higher revenue into improved free cash flows and higher dividends, which was welcome news for shareholders.
Free cash flow more than doubled to R87bn from R37bn the year before. This is by far the highest in a decade of PwC data.
This means returns to shareholders ballooned to R49bn from R21bn the year before. Kumba Iron Ore paid shareholders R19bn, while DRDGold paid a record dividend of R564m.
Anglo American Platinum paid R14bn and diversified miner Exxaro Resources rewarded shareholders with R7.5bn.
“The R28bn year-on-year increase in distributions to shareholders indicates that even during the difficult Covid-19 trading conditions and disruptions noted in production, mining companies were able to provide shareholders with increasing returns,” PwC said.
Balance sheets were generally strong at the end of June. “The liquidity position of the SA mining industry continues to improve and remain stronger than the global mining sector,” the report said.
SA mining companies were involved in 40% more merger and acquisition (M&A) transactions, striking 32 deals compared to 23 the year before. The total value of the deals was $3.2bn.
“Following a period of strategic repositioning since 2015, and an increased emphasis on value preservation and capital discipline, mining companies may find themselves better placed to ride out the storm from an operational perspective,” PwC said.
“The outcome of such dramatic production declines, coupled with a number of operations being placed on care and maintenance, has resulted in a number of companies facing extraordinary headwinds and liquidity challenges, both locally and abroad,” it said.
“This creates the potential for more opportunistic transactions in the short term, as companies with robust balance sheets look to acquire attractive assets with strong fundamentals at discounted valuations. We expect that these speculative transactions will likely be the primary driver for M&A activity in the coming months.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.