Global rankings turn sour for SA and Australia

The latest controversies surrounding the South African mining industry are putting the reputation of the country as a mining investment destination in serious danger. That which is happening locally with the exploration of mineral resources, however, is not unique to South Africa as governments worldwide are battling to find acceptable ways of extracting more value from these resources for domestic populations in a highly integrated global economy in which competition for mining investment has become keener over the last two years.

In a recently published annual global survey of the mining industry, South Africa has slipped to position 61 out of 72 countries for the period 2009/2010 compared to being ranked in position 49 our of 71 countries during the previous year. This is a continuation of a trend since South Africa was still ranked 27 out of 47 jurisdictions in the survey’s policy potential index in 2002/2003.

The Canadian-based Fraser Institute (FI) annual survey of mining companies aims to establish how mineral endowment and public policy factors such as taxation and regulation affect exploration investment.

South Africa has not been the only investment destination to take a plunge in its rankings. Australia, Nevada in the United States and Quebec, Canada also find themselves in this boat in the latest mid-year update of the FI survey. In those jurisdictions, it was particularly new proposed mining tax hikes that played a major role, according to Mineweb.

For South Africa, the fall in ranking coincided with reforms in legislation regulating mineral rights and the way in which the Mineral and Petroleum Resources Development Act (MPRDA) of 2004 has been implemented. Neither has the ongoing debate about possible mine nationalisation been helpful to South Africa’s cause.

When the FI survey was released in April this year, one manager of an exploration company was quoted as saying: “The black empowerment regime in South Africa is confusing and restrictive.” The high profile of politically well-connected individuals in recent controversies concerning exploration rights can only serve to entrench such perceptions.

South Africa is now considered the third least attractive investment destination in Africa after Zimbabwe and the Democratic Republic of the Congo.

The announcement by Minister of Mining Susan Shabangu on 17 August – that a six-month moratorium is being placed on new prospecting licences after the unseemly situation surrounding ArcelorMittal South Africa, Kumba Iron Ore and Imperial Crown Trading – could go a long way toward arresting the slide.

Referring to growing concerns of international investors, she said that she wanted to “reassure all stakeholders that South Africa is a mining jurisdiction worthy of future investment.” While earlier in the year at a Mining Summit Shabangu called for the country’s mining laws to be amended by early 2011, she said the moratorium on new licences was required to enable her department to audit all licences that had been granted since the introduction of the MPRDA.

While the Chamber of Mines welcomed the moratorium, some analysts pointed out there were down sides to it as well, and could have a negative impact on job creation. The Chamber’s chief executive Zoli Diliza said plans to remove regulatory uncertainties from the MPRDA would assist the mining industry to attract direct foreign investment – critical to the competitiveness of the country and the industry.

Uncertainty is among the worst possible conditions for mining investment which, by the nature of the huge upfront outlays and relative long run-ups to returns, has to take a long-term look. According to Fred McMahon, the FI’s vice president of international policy, this is why Quebec came out top of the heap “because its stable government policies offer them the certainty that reduce risk for long-term projects.”

Quebec, however, was pushed out of the top spot in the mid-year update after an announcement of a review of its mining law, denting its reputation for stable government policies.

Australian state jurisdictions took much greater knocks after the federal government’s announcement in May this year of its intention to introduce a heavy Resources Super Profits Tax on the mining industry. Although the super tax was later cancelled, Australia’s mining companies still face large tax increases.

Five Australian jurisdictions dropped between five and 18 positions in the rankings, with New South Wales, now in 38th position, the hardest hit.

In Australia, the mining tax has even become an issue in the general election that is now only days away. The Association of Mining and Exploration Companies has been running political advertisements to lift the profile of the issue, fuelling fears that the lack of developmental investment in the industry will lead to the loss of job opportunities.

The Australian industry has already taken a knock after, in an attempt to improve the local benefits from mining on the back of rising global spot prices, Brazil’s Vale SA, Australia’s Rio Tinto and BHP Billiton switched from an annual benchmark pricing system to a quarterly pricing scheme for iron ore.

China, which buys about 25% of Australia’s industrial mining output, responded by lifting its own domestic output.

How keen competition for investment capital has become, is illustrated by the fact that companies participating in the FI survey reported that exploration spending came down from $3.6 billion in 2008 to 2.9bn in 2009.

The FI survey’s update can be found at www.fraserinstitute.org/