The Chamber of Mines recently conducted a survey among its members in an attempt to understand the investment and employment potential of the mining sector in the event of a return to best practice in policy, legislation and regulation formulation.
We asked: "What if the South African mining sector could get back into the top 25% of investment attractiveness rankings, which is where our potential suggests we should be?"
Altogether 16 companies responded to the survey, representing a cross-section of the various commodities and making up the overwhelming bulk of mining production in SA.
The South African mining industry’s real GDP in 2016 was 2.6% smaller than that recorded in 1994. The financial services industry, on the other hand, has grown by 168% in the same period. The question is whether this contrast is due to lack of potential or the negative effects of the regulatory environment. And the responses to the survey offer an indication of the effect of the regulatory environment, of which the chamber has been highly critical.
SA has consistently fallen down the Fraser Institute investment attractiveness index (relative to best-practice policy, legislation, regulation and operating environment). In contrast, the same institute ranks SA in the top quartile for its mineral potential. Clearly, there is a fundamental mismatch between the potential and the current outcomes.
Mine development has long lead times, so certainty and a conducive policy environment are important determinants of hurdle rates for return on investment.
In an adverse environment, hurdle rates have to be constantly reviewed and repriced upwards as the risk premium associated with the operating environment increases. In an unstable environment, the probability of potential investment not taking place significantly increases, rendering projects unviable.
Some companies stressed that investment was generally dependent on a wider variety of determinants than the political and policy stability of the operating environment. For example, the commodity price cycle and forecast price assumptions are important in making investment decisions. The survey was an attempt to isolate the effect on investment of the policy environment from the operating environment.
To understand the potential positive effect of policy certainty, the chamber quantified the amount of current capital expenditure already in the system. This was possible by using company reports as well as the 2017 Nedbank report on Capital Expenditure Project Listings.
The estimated currently planned capital spending in the mining sector (stretching over the next four years) amounts to more than R145bn. The potential capital expenditure in a more certain and conducive environment (covering at least another three years) could amount to an additional outlay of more than R122bn.
This means capital expenditure on mining projects could be 84% higher than R145bn. The positive effect on employment creation, according to the survey results, would be nearly 48,000 people.
Much of the planned investment is "stay in business" investment. Investment in new mines halved from 2012 to 2016 and that was before the 2017 publication of the reviewed Mining Charter of the Department of Mineral Resources, which this survey shows will worsen this trend.
Investment in new mines halved from 2012 to 2016 and that was before the 2017 publication of the reviewed Mining Charter
Five companies responded that they were not considering any potential new investment. One firm is contemplating divesting from SA. They either could not see worthwhile investment opportunities or the adverse environment had resulted in these firms focusing their efforts on other geographies.
An interesting finding is that the relative contribution to investment of the R122bn potential spend does not correlate with the relative employment effect. For example, the coal sector has the highest investment potential, representing 42% of the total potential investment, but only 31% of the employment potential.
The converse is true of the gold sector, which has the highest employment potential (62% of the total potential jobs) but only 31% of the capital spend. Of the current capital expenditure, the platinum group metals are spending the most, or nearly 46% of the total.
Based on these findings, the mining industry certainly has significant investment and employment potential, but unlocking this potential will require a nurturing environment to stimulate long-term investment.
It will also require the support of a currently antibusiness regulator in creating partnerships for growth in order to foster investor confidence.
• Langenhoven is chief economist at the Chamber of Mines.
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