SA’s mining industry returned to profitability in 2019 despite a challenging operating environment marred by regulatory uncertainty, energy constraints, labour disputes, illegal mining activities and a shortage of skills. These are some of the key highlights from PwC’s 11th edition of SA Mine, a series of publications that highlights trends in the South African mining industry released by PwC today.
Andries Rossouw, PwC Africa Energy Utilities & Resources Leader, says:
“In spite of an improvement in operating performance, investor sentiment and the global attractiveness of the industry continues to erode with investors and consumers questioning whether the industry can create sustainable value for all stakeholders. More than ever, the speed of technological advancement, climate change, sustainable operations and changing consumer behavior, should be top of mind for mining companies. They need to find a balance between stakeholder needs and long-term sustainable operations in their capital allocation decisions.”
To restore faith in a challenged industry, mining leaders will need to show that they are at the forefront of responsibility creating sustainable value for all stakeholders. “By aligning financial and sustainable strategies to prioritise green, customer and community-focused strategies, further enabled by technology, will help build a long-term vision of growth, access, equality, innovation and trust,” Rossouw adds.
In 2019 total market capitalisation increased to R884 billion. This is well above the market capitalisation of the prior year which was R482 billion (2017: R420 billion) and is mainly due to the increase in market capitalisation of companies within the platinum group metals (PGMs) and gold sectors.
Gold and PGMs benefited from the improved rand price environment and continued to dominate the market capitalisation of the companies analysed. Their total market capitalisation increased by 133% and 129%, respectively. Despite a R65 billion increase in iron ore and a R29 billion increase for diversified miners, these increases were not enough to retain their proportionate share of market capitalisation.
The total revenue generated by the South African mining industry for the year ended 30 June 2019 was R529 billion. This was largely driven by increased PGM, iron ore and manganese revenue. Gold revenue decreased as the higher rand gold price, could not offset the declining production.
Coal remains the biggest revenue generator despite changing global consumer sentiment and contributed 28% of mining revenue for the year.
Capital expenditure increased from the prior year by 10% mainly as a result of a weaker rand exchange rate. The gold sector was the largest contributor to this with R34 million in capital expenditure in the current year, compared to R20 million in the platinum sector.
There was an 8% increase in the operating costs in comparison to the previous year. The increased costs were driven by marginal increased production in the current year, higher electricity and labour costs and inflationary increase in consumables and mining supplies. Labour remains the largest cost driver in the sector and continue to grow as labour costs increases remain above inflation.
The average EBITDA margin of the 26 companies included in this publication is 25%, which is marginally higher than the previous year’s 23%. Only six of the 26 companies have an EBITDA margin in excess of the average margin.
The current year impairment was half that of the previous year. The total impairment amounted to about R22 billion mainly as a result of ongoing platinum and gold impairments. Despite improved prices, the increased cost base of deep level mines is still putting pressure on mines.
Manganese, iron ore and chrome are the only commodities that have seen real production growth over the last 15 years. Iron ore showed a decline during the year. Gold production is on an ongoing decline despite the higher rand gold prices – this shows the challenges of productivity in deep-level mining. Coal production saw a marginal increase on the prior year.
Value to mining investors
During the 2018-2019 financial period, mining companies have continued to create value on many fronts for their stakeholders – through distributions to shareholders, payments to suppliers of goods and services, royalties and taxes. Value creation to shareholders grew to 12% in the current period. This increase is mainly as a result of the increased iron ore prices and resultant dividends from iron ore producers. Direct corporate taxes to governments reduced due to the timing of specific payments in the prior year.
Luyanda Mngadi, PwC Partner and SA Mine 2019 project leader says:
“Overall, mining companies are more exposed to the scrutiny of their stakeholders due to the significant impact their operations have on the communities in which they operate and society in general. Mining companies need to keep creating the value they are known for and consider how their brand is communicated – especially considering their pervasive and key socio-economic impact in rural communities.”
Climate change is fundamentally changing the way businesses of the future will operate. It is also driving a change in consumer behaviours. Climate changes are forcing companies to consider a range of climate factors that affect their operations. These include, amongst others: increased frequency of extreme weather events, long-term changes to the local climate impacting the availability of day-to-day inputs, changing consumer demand, limitations on funding for new carbon-intense projects, input costs that may be passed on to consumers, and direct regulations requiring expenditure to control and monitor emissions. It is positive to note that some mining companies have taken steps to prepare for and adapt to these issues.
Opportunities in technology
There are several opportunities for companies that embrace and harness new technologies. Although investment in new technologies is costly, renewable energy to power mining operations is increasingly being recognised a viable technology. Consequently, this reduces emissions and could even lead to financial benefit as the cost of renewables is rapidly decreasing.
Reputation is key to mining’s social license to operate
Mining companies often operate in some of the most politically and socially challenging parts of the world, where the industry remains an important driver of economic growth. In many cases it results in mining companies and the local communities competing for the same resources such as water and energy.
Mining companies need to work closely with their communities and stakeholders to clearly demonstrate the direct, indirect and induced value they create from their operations as this is not always understood by communities.
Mining companies of the future will need to consider the viability of the minerals they mine, their mining and processing technologies, as well as energy sources for their operations. They should also consider a two-pronged approach to climate change to ensure their businesses remain resilient and relevant:
The first is the need to reduce the current carbon-intense areas of their businesses. The second is the need for climate change adaption to the impacts of climate change that are already manifesting.
Senior Manager, Media Relations, PwC South Africa
Tel: +27 (0) 11 797 4470