SA Mine 11th edition

In Transition

This is the 11th edition of our annual publication highlighting trends in the South African mining industry, as represented by the top 26 mining companies by market capitalisation.

Overview

It may be the foundation upon which the economic and industrial revolution carried South Africa onto the world stage, but the South African mining industry requires a revitalisation to regain its lustre.

This is the 11th edition of our annual publication highlighting trends in the South African mining industry, as represented by the top 26 mining companies by market capitalisation.

Mining companies have begun to enjoy some welcome relief in 2019, as gains in commodity prices, aided by a weaker rand, began to bring the industry back into profitability, despite increased costs and weak production. Free cash flows doubled and EBITDA and dividends are at five-year highs. Shareholders can be cautiously optimistic with the mining sector outperforming the JSE All Share Index over the last two years, as it recovers from an extreme low base.

Despite the impressive financial recovery, the R22 billion in impairment provision, down half from the 2018 level, highlights the high cost base of our deep level mines. Not even the significant rand gold price increase could save gold’s terminal production decline, which was compounded by shaft closures and industrial action. In the absence of new technology, halting this decline seems unlikely.

The SA mining industry is in transition from a deep level, labour intensive, conventional mining environment to a mechanised shallower, technologically advanced industry. Over the last 15 years, overall mining production has declined marginally, as declining deep level gold production is offset by increased bulk and base metal commodity production.

Ten-year historical financial information (R ‘billions)

Ten-year historical financial information (R ‘billions)

 

Download the latest publication ofSA Mine 2019

Global economy, local impact

Global economy

The global economy experienced a challenging growth environment over the past two years. The World Bank estimates that global economic growth slowed marginally from 3.1% in 2017 to 3.0% in 2018. Activity in the manufacturing and trade sectors lost steam in 2018 and continued to do so in 2019, with trade-related political tensions between some of the world’s largest economies remaining elevated. Slower growth invariably results in pressure on mining commodity prices. 

Aerial view of mining tractor

South African economy

The South African economy has recently experienced its most challenging period of growth since the dawn of democracy. Real economic growth averaged just 0.8% during 2018, which was again below the population growth rate. The first quarter of 2019 experienced a 3.2% quarter-on-quarter contraction in economic activity, with the return of Eskom load shedding playing a big role in this. The second quarter came with some better news: a 3.1% quarter-on-quarter improvement in economic activity saved the country from falling into a technical recession. The mining sector was a key contributor to this recovery.


Not just all hot air

In addition to strategies regarding the impact of mining companies’ operations on the environment, climate changes are forcing mining companies to consider a range of climate factors that impact on their operations:

  • Increased frequency of extreme weather events, such as flash floods, see increased operating costs in repairing damage to infrastructure, shutdowns and insurance costs;
  • Long-term changes to the local climate impacting the availability and predictability of day-to-day inputs required for mining (water, transport routes);
  • Changing consumer demand impacting a mine’s social licence to operate; 
  • Limitations on funding for new carbon-intense projects;
  • Direct regulations requiring expenditure to control and monitor emissions and penalties where these are exceeded;
  • Input cost on the likes of electricity as carbon tax and other emission costs are passed on to consumers; and
  • Socio-economic impact on communities around mines.

Extracting the impact

Legislation

The Carbon Tax Act, which became effective on 1 June 2019 levies a carbon tax rate of R120 per tonne of carbon dioxide equivalent (tCO2e). Tax-free allowances are available to reduce the carbon tax liability to a maximum of 95% of taxable emissions. Taking into account the allowances, the effective tax rate ranges between R6 and R48/tCO2e.

Carbon tax will be levied in respect of the sum of the direct GHG (also known as Scope1 GHG) emissions ofa taxpayer in respect of a tax period expressed as the CO2e of those GHG emissions resulting from fuel combustion, industrial processes and fugitive emissions.

The Regulations provide that companies, that conduct so-called ‘listed activities’ above the specified threshold, are required to report Scope 1 GHG emissions to the Department of Environment, Fisheries and Forestry (DEFF), which will form the tax base for carbon tax purposes.

Further impeding legislation that may cause some uncertainty for taxpayers is:

  • The Draft Carbon Offset Regulations – claiming the carbon offset tax-free allowance, limited to 10%; and
  • Sections 10 and 11 of Carbon Tax Act – regulations underlying the trade exposure and performance benchmark tax-free allowances.

The mining industry we see today is at an existential crossroads. Funding is significantly complicated by the need to maintain a social licence to operate and by safety, health and environment requirements. At the same time, the rate of technological change and changing consumer behaviour have emerged as major concerns for the industry.

This publication cover the following topics:

  • The rate of technological change
  • Changing consumer behaviour
  • Leadership in the digital world

Contact us

Andries Rossouw

Africa Energy, Utilities and Resources Leader, PwC South Africa

Tel: +27 (0) 11 797 4060

Luyanda Mngadi

Partner, PwC South Africa

Tel: +27 (0) 11 287 0661

Mining Enquiries

EU&R Centre of Excellence, PwC South Africa

Tel: +27 (0)11 797 5332

Follow us