One of the major questions on the lips of most, if not all, mining industry investors, is whether the captains of the global industry are going to lose it again. The fear is that a new wave of heightened demand encourages a fresh wave of project optimism and zealous capital spend.
A report by financial services firm PwC shows just how rehabilitated the mining sector is following the commodity price meltdown of 2012 – a horror show of note.
It’s worth recalling just how bad things in the sector became. Take the aggregate market capitalisation of the world’s 40 largest mining companies, for instance: they fell from $1.2tr to $494bn in three years.
All the metrics point to a loss of financial discipline that has since been recovered. For 2014, the market capitalisation of the Top 40 – which includes the likes of BHP, Anglo American, Glencore and South32 – rose to $926bn from $714bn a year earlier.
And having exorcised the debt-fest of 2013, in which impairment charges increased to a 10-year high of $57bn – dividends paid increased 125% year-on-year to $36bn in 2017 from $16bn.
Although less than the $41bn paid in 2013, it’s fair to say the mining sector’s big players are back on an even keel. Impairments totalled $4bn last year.
“We call it tempting times,” said Andries Rossouw, a partner at PwC, referring to whether mining companies will take the plunge and start splashing out on new productive capacity; after all, there are demand deficits to feed.
According to Aleksander Popovic, an analyst for CRU Group, a world-renowned commodity markets research house, the demand outlook is rosy.
“While lithium, cobalt and some of the other hot metals have stolen the headlines, the overall outlook for demand is quite positive over the next five years,” he said at the Junior Indaba, a mining conference, earlier this month.
Rossouw doesn’t think, however, miners will be seduced by improved market conditions.
That’s because the metal price correction from 2012 to 2015 saw approaches to investor returns upended. Gone was the progressive dividend – an unsustainable pledge to shareholders that returns would just keep improving – to be replaced with a thriftier approach in which companies paid dividends as a percentage of annual net profit.
“Of the Top 40, 23 have a formalised dividend policy that on average aims to pay dividends at 30% to 40% of annual net profit,” said Rossouw. “Based on current performance and expectations, dividends paid are likely to remain high in 2018,” he said.
But there’s a flipside to this: under-investment in new productive capacity can be just as hazardous as over-investment. PwC remarks in its report that junior mining has to find investment support. It said that “the current lack of investment in exploration and capital projects will eventually catch up”.
“Following a clear growth strategy through the cycle will help companies avoid the mad rush for resources at the top of the cycle.”
As frequently pointed out in these pages, South Africa is not known for its exploration or venture capital market for mining. Exploration was, historically, the preserve of the major mining companies which had the resources, balance sheet and income to support the high-risk activity that is junior mining.
That, however, needs to change, according to Bernard Swanepoel, a founder of the Last Mile Fund, which has been set up to invest in small-scale mining and mining services.
It recently bought a stake in Mooiplaats, a thermal coal mine in Mpumalanga.
“North America gets a disproportionate amount of exploration money because they incentivise for it,” he said at the Junior Indaba. “I get the sense we don’t think we’re in competition with the rest of the world.
And I think as a result, we’ll lose out to places like Zimbabwe, which will get more money for mining this year.”
One of Swanepoel’s gripes is the poor regulatory environment for junior, exploration and small-scale mining. The Mining Charter, for instance, makes the same demands on the few exploration companies operating in SA as it does for the majors.
Black ownership targets, for instance, are the same even though equity is a highly important financing tool for junior miners. “You can’t fund a piece of paper on predetermined ownership structures,” said Swanepoel.
There’s also not enough turnover in exploration and mining permits in terms of the ‘use it or lose it’ principle adopted in the Minerals and Petroleum Resources Development Act of 2004. “Why don’t we know how many permits have lapsed and why they haven’t changed hands?” asked Swanepoel.
According to Peter Major, analyst with Cadiz Corporate Solutions, the department of mineral resources is heavily under-resourced. Working through its affiliated Council for Geoscience, geological information about South African minerals is poorly understood. Permits are issued too slowly and, he suspects, to friends instead of entrepreneurs with a hunger to make them work.
“SA Inc. spent zero on exploration last year,” said Swanepoel. “The system is designed to put gatekeepers between yourself and success, while the Mining Charter makes it almost impossible for junior miners.
Unique opportunity for Botswanan coal
Junior miners are finding business across SA’s border easier to conduct than inside the country, especially in the coal sector, which is not where you’d expect a start-up business to thrive considering the opposition of civil society to the fuel.
Jacques Badenhorst, the recently appointed CEO of Maatla Energy, a company building the Mmamabula Colliery in Botswana, is an example.
“The uncompetitive investment environment in SA and regulatory issues are not helping the industry. Junior miners are looking elsewhere, such as Botswana, which is an option in terms of supplying coal into SA,” he said.
There’s also a unique opportunity for Botswanan coal: whereas previously the country struggled to supply export markets given its landlocked status, it now has a ready domestic market given Eskom’s call for more coal, some 33m tonnes in the short-term – a procurement drive described by Phumaphi Mashale, CEO of the UK’s Shumba Energy, as “an insane amount”.
Eskom is facing additional pressures given the increase in the export price of coal, which has seen local players prefer that market over Eskom, which is trying to trim its primary energy cost.
“By working with the South Africans, Botswana has got the ability to complement the supply to Eskom, which can liberate a lot of companies here (in SA) to export coal,” explained Mashale.
Said Badenhorst: “It has certainly created an opportunity for Maatla in terms of a distance perspective to places like the Northern Cape and Western Cape markets, and there is definitely a big coal shortage.
If you speak to any coal trader currently, nobody can get consistency of supply and good-quality coal,” he added.
And there’s also the point that Botswana is just an easier place to do business in the mining sector than in SA, according to Mashale. “There are a number of tax incentives when you operate in Botswana.
First of all, there are no exchange controls. But apart from that, there is unlimited care for tax losses and you get a tax reduction on the yellow equipment that you bring into the country,” he said.