Mixed signals perpetuate uncertainty

Things simply will not settle down in South Africa’s mining sector. Conflicting policies, agendas and interests continue competing for dominance, leaving the sector shaky and uncertain. While this state of affairs clearly seems to be impacting negatively on foreign investor confidence, South African mining houses continue to invest in the sector despite the uncertainty.

South Africa’s failure to fully exploit the commodities boom between 2003 and 2008, cost 51,000 new job opportunities – more than one-third of government’s target of 140,000 new mining jobs by 2020, judged by by an employment scenario model contained in this year’s Budget Review. The model also shows that for every 1% increase in value-add, employment rose by 2.7%.

In the latest development in the nationalisation debate the leadership of the National Union of Metalworkers of South Africa (Numsa) has again put the demand for the outright nationalisation – first demanded by the ANC Youth League - back on the agenda. It wants the mines nationalised and cooperatives established topdeal with poverty.

This comes shortly after President Jacob Zuma, in his state-of-the-nation address, brought some clarification and certainty to this troubled sector for the near and medium term. It also seemed to render less likely any form of nationalisation in the longer term.

The ANC Youth League (ANCYL) and its leader, Julius Malema, mischievously misinterpreted Zuma’s remarks – among others, about the state mining company –as a victory for the pro-nationalisation lobby. Something denied by  Zuma’s mineral resources minister Susan Shabangu.

Even though much more is needed to bring certainty and confidence back into the mining sector, Zuma’s remarks would, upon closer analysis, undoubtedly have been welcomed by the industry.

Numsa, the second largest trade union in South Africa, also  called on its parent federation, the Congress of SA Trade Unions (Cosatu) and the SA Communist Party (SACP) – both allies of the ANC – to speedily iron out their differences on tactics and strategy.

In a subsequent development the ANCYL welcomed the launch of the state-owned mining company’s first operations at Ogies, Mpumalanga.

The ongoing talk and debate about nationalisation has already spooked the markets and investors in respect of South Africa’s mining sector.

However, factors other than nationalisation have also contributed to a negative outlook, including uncertainty over controversial regulatory issues, the controversial awarding of licences and contracts to politically connected players and companies, escalating power costs, the threat of more electricity blackouts, a very restrictive labour law regime and high-cost strikes.

But, it has been the call for nationalisation that has made the headlines more than anything else.

As a result of these pressures on the sector, countries such as Mexico, Chile, Brazil, Indonesia and Malaysia last year benefitted strongly from foreign direct investment, while South Africa remained out in the cold with long-term investors steering clear of these shores. Furthermore, South African mining shares are trading at ever bigger discounts, while the mining shares of other African countries are trading at a premium.

At the recent Mining Indaba in Cape Town industry chiefs, mining lawyers, bankers, investment analysts, consultants and other delegates were upbeat about the outlook for commodities and another boom cycle. But, it seemed they feared South Africa will again be given a miss in favour of other African countries with more regulatory and political certainty, as well as Australia, Brazil, Mexico, Indonesia and Canada among others.

Their fears were that the South African government would not do enough to address the uncertainty being caused by talk of nationalisation, corruption, regulatory uncertainties and infrastructure problems, specifically the threat of more power supply interruptions.

Cynthia Carroll, CEO of Anglo American, told delegates that nationalisation of the South African mining industry would be the country's path to ruin and would drive away billions of dollars in investment. It was made quite clear that mining requires massive long-term and high-risk investment and that no mining company would invest if their long-term security were not guaranteed.

On top of all of this it has also come to light that the state’s mining company, African Exploration Mining & Finance Corporation (AEMFC) is busy obtaining 128 prospecting and mining licences in terms of preferential treatment not afforded to other mining companies.

However, the irony seems to be that while foreign investors may be jittery, local mining companies are still investing. Anglo American’s Carroll was widely quoted in the media as saying her company is planning a $4.8-billion (R34.37-billion) capital investment in iron-ore, platinum and coal in South Africa, with a further possible new capital investment in diamonds.

On another level Anglo American is working closely with the state rail entity Transnet and electricity provider Eskom on preventing coal shortages at Eskom’s power stations which also supply the mines. This comes amidst expectation that there will again be an electricity shortage in South Africa this year and next.

Meanwhile another major South African mining company, Gold Fields, which generated R1.2-billion reserve cash flow in the final quarter of 2010, is developing five new gold mines.

And, this month JSE-listed Impala Platinum announced that it had budgeted R29-billion of capital expenditure for its South African and Zimbabwean operations over the next four years. Impala’s flagship Rustenburg operation would benefit significantly from this investment. The company has already increased its platinum production by 6% to 952,000 oz in the half-year ended December as a result of higher throughput at Impala Rustenburg among other developments.