SA Mine 2022

South African mining companies post sterling performance

South Africa’s mining sector delivered a sterling performance in the past year, despite several local and global challenges, and all stakeholders received much-welcomed value.

An analysis of these results and other factors including the economic context, infrastructure-related challenges in the sector, and industry and market analysis are explored in more detail in PwC’s newly launched SA Mine 2022 report.

The industry’s financial performance exceeded expectations on most fronts. Distributions to shareholders more than doubled to R190bn, Capital expenditure grew by 36% and taxes paid increased by 14% as South African mining companies in aggregate maintained profitability at last year’s high levels. Growing demand for commodities in the sector saw record rand prices for the platinum group metals basket, iron ore, and coal, while most other South African commodity prices remained at relatively high rand levels. 

A global low-carbon energy agenda remains a key focus, and this is anticipated to result in increased demand for a number of commodities in the medium to long term. Global constraints in supply of these commodities will mean increased prices and a need for investment in supply. When looking at a ‘just transition’ away from fossil fuels, the pace of this is likely to be limited by the availability of resources needed for the transition. Here, understanding the supply constraints will be key to mapping a realistic transition for the future. 

Andries Rossouw, PwC’s Africa Energy, Utilities and Resources Leader, says: “In South Africa, we stand to benefit from the demand growth, but whether South Africa and other resource-rich countries will benefit to the full extent will depend on their ability to address bottlenecks in supply and mine-to-market infrastructure.
There is an obvious need to invest in the right skills, infrastructure, energy and water, and in general, creating an enabling environment for exploration, mine development, production and sales. Realising the full potential benefit of our resources and creating long-term sustainable outcomes will depend on our ability to mine cost competitively and to integrate various value chains profitably.”

A cleaner, greener mining sector

When considering the volume of CO₂ emitted in South Africa annually, the mining sector is a major contributor to these emissions albeit almost negligible in the global context. In 2021, up to 81.4% of South Africa’s electricity was generated from coal, and considering that up to 60% of the energy used in the mining sector comes from electricity, issues of decarbonising as well as sustainable and reliable power supply are directly connected. Rossouw says that addressing these dual challenges will require the mining sector to make major investments into alternative and renewable energy sources and energy planning.

The global energy transition won’t be smooth, as was reflected in the record coal prices experienced for the year. As a coal export producer, it is essential that South Africa maximise the value obtained from its coal, through supporting global energy supply stability in these times of energy volatility.

Our report details the significant opportunity that exists for the mining sector to contribute to stable electricity supply, while meeting the growing pressures of ESG (Environmental, Social and Governance) and a low-carbon economy. Such investments are not only best practice, but are also considered viable and commercially attractive. 

Economic context and the recovery from COVID-19

The South African economy was only 1.4% y-o-y larger in the first half of 2022 as a combination of local and international factors held back the pace of economic growth. These included the international economic and geopolitical fallout of the Ukraine conflict, COVID-19 lockdowns in China, floods in KwaZulu-Natal, and electricity load-shedding. 

Sizwe Masondo, PwC South Africa Energy, Utilities and Resources Assurance Leader, says: “After dropping by 11% in 2020 due to the adverse impacts of the global COVID-19 pandemic and associated lockdowns, local mining production increased by 12% in 2021. By mid-2021, mine output volumes were back to pre-pandemic levels. However, mining activity experienced several challenges in the first half of 2022, resulting in mining output falling by 7% y-o-y in the first six months of the year.
These challenges included labour strikes, higher-than-usual rainfall, and disruption to global supply chains. In June 2022, mining production was at around 11% below the comparative monthly average during 2016-2019.”

Financial performance

Mining companies find themselves in a very strong financial position. Debt has largely been repaid and returns to shareholders at many companies have reached record rand levels. The fiscus also benefited from increased direct and indirect taxes and mining royalties to the extent that it could support ongoing socio-economic grants during the pandemic.

Commodity-driven input costs, including energy, global inflation and the weaker rand, although positive for rand commodity prices, are increasing input costs. These higher costs are further impacted by lower production levels which increase unit costs. We therefore expect a significant erosion of margins for the near term which will impact the performance in 2023. 

Vuyiswa Khutlang, PwC South Africa Energy, Utilities and Resources Assurance Partner, says: “The remaining available cash resources leave mining companies with interesting capital allocation decisions. Strategies will include expansions and new development, acquisitions, strengthening of local infrastructure and host communities, as well as market development and investments up and down the value chain. Execution on these strategies will require disciplined long-term sustainable mind sets.”

The trend noted across the South African mining industry over the past 12 months has been an increase in commitment to capital expenditure. This does not only bode well for both the overall economy, but communities surrounding these mining operations, suppliers, labourers and government. This in turn is expected to contribute to increased tax contributions to the state and job opportunities for local communities, making future investment key to the industry and country as a whole.