SA’s mining companies have an unpleasant balancing act to consider regarding extricating themselves from Eskom or investing in their assets.
The necessity is not one other mining companies worldwide may be considering, as they launch renewable projects and take themselves off grid power to enhance their green credentials and reduce their carbon footprints.
In SA, there’s an element of that consideration coupled with a carbon tax that comes with buying electricity from Eskom and its fleet of old coal-fired power plants.
But one of the primary motivations is to secure cheap and relatively reliable power as opposed to that from the state-owned monopoly.
Pan African Resources has a R140m project to install a 10MW solar array at its Evander mine, with the management considering the installation of another two similarly sized arrays, one for its Barberton mine and another at Evander. Both gold operations are in Mpumalanga.
Gold Fields has just secured permission to build a 40MW array at its South Deep mine near Carletonville. While Gold Fields has not released a capital expenditure number for the project, using the Pan African figures of R14m per installed MW of solar and adding a little more for the size of the array, the cost should be R560m-R600m.
Using a very simplistic calculation on just the installation of solar arrays to get a best-guess estimate of the cost of the intentions of SA’s mining industry to build up to 2GW of renewable energy projects, this would work out to R28bn-R30bn the sector could spend on renewable energy.
This cost does not factor in alternative renewable energy sources such as wind, or the giant batteries these electricity supplies need to store power at night or when it’s cloudy, or when the wind isn’t blowing. Nor does it include the cost of using Eskom’s infrastructure to send or sell electricity — the technical term is “wheeling” — to companies’ other mines, into the neighbouring communities or into the general grid.
To understand the scale of investment needed to install the 2GW, it’s helpful to compare it to the gross fixed capital formation or spending on projects and equipment the industry incurred during 2020.
It amounted to R96bn.
Simplistic calculations would indicate that a third or slightly less of mining companies’ annual spend on buying new equipment and gear for their operations would be spent on installing just the basics of electricity supply.
It’s likely to be higher than that with all the extra charges of wheeling and battery technology that must be added for many of these proposed projects.
Where does that money come from? Would it be diverted from investments in operations, or out of cash resources, debt or curtailed dividends to investors?
More difficult
Any which way, there’s a real opportunity cost of these projects.
In an interview with Business Day this week, Minerals Council SA’s chief economist, Henk Langenhoven, said this factor and the more than sevenfold increase in Eskom’s tariffs for large industrial users since 2008 and erratic supply made it that much more difficult for management to secure board approval for new projects in SA.
All the fine talk from mineral resources & energy minister Gwede Mantashe that SA is doing so well in attracting investment overlooks this point.
Ignoring all the other noise and uncertainty about mining investments in SA, this is one of the most fundamental factors a board will consider for long-term project spending in SA: is there electricity and can we calculate how much it will cost over the life of a mine? These two factors will play a major role in the profit calculations and ultimately investment decision.
There is no way to forecast what Eskom’s tariffs will be a few years from now. It has debt of more than R450bn, rolling blackouts, an almighty battle behind the scenes for control of the entity, and an ageing, unreliable power generation fleet that was neglected for a decade.
Having big industrial users running for the door and putting in their own power generation means future revenue for Eskom will fall. Either that or mines will close as one of their biggest fixed costs makes operations unprofitable.
Either way, Eskom is the loser. But the biggest loser is SA Inc. It will lose jobs, mineral growth and wealth creation.
It’s hard not to laugh at the ANC’s much-cherished desire to beneficiate minerals or add wealth to them by turning raw materials into end products, creating skilled jobs and higher fiscal revenues.
With the state of SA’s electricity, that’s a pipe dream — something even Mantashe acknowledges.
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