Miners head to SA, but leave cheque books at home

Delegates talk in front of a display of a mine at Africa's biggest annual mining conference, last year's Investing in African Mining Indaba. (Rodger Bosch, AFP File)
Delegates talk in front of a display of a mine at Africa's biggest annual mining conference, last year's Investing in African Mining Indaba. (Rodger Bosch, AFP File)

Cape Town - With its iconic mountain, beaches and vineyards, it’s easy to attract global mining bosses and fund managers to Cape Town. Yet as thousands of executives, shareholders and officials flock to South Africa for the annual Mining Indaba, the industry’s investments are flowing the opposite way.

A mix of shrinking reserves, rising labour costs, frequent stoppages and regulatory uncertainty has prompted major miners to rethink their presence in the country, home to the world’s largest platinum, chrome and manganese reserves and the source of one-third of all gold ever mined.

Anglo American [JSE:AGL], once a keystone of the economy, is selling half its assets in the country, while BHP Billiton [JSE:BIL] and Gold Fields [JSE:GFI] both spun off their local operations in the past four years. AngloGold Ashanti [JSE:ANG] tried to do the same. South Africa, which was the world’s largest gold producer for a century until 2007, has now dropped to sixth place.

“They’re difficult mines in a tough operating environment with wage inflation constantly eating away at margins,” said Neil Gregson, who manages about $2.5bn of natural-resources stocks at JPMorgan Asset Management in London. “Increasingly, you need specialised management teams to run those assets. We don’t see any growth there.”

About 6 000 attendees are expected at the Mining Indaba, which starts on February 6. Executives from companies including Anglo American, Rio Tinto Group, AngloGold Ashanti and South32 [JSE:S32] are scheduled to speak at the event, Africa’s biggest resource industry conference.

READ: Investor interest in mining in Africa surges

As the largest miners shift their priorities elsewhere, investors are valuing South Africa-focused stocks more cheaply than global peers. The FTSE/JSE Africa Mining Index trades at 1.3 times book value, compared with 1.9 times for the Bloomberg World Mining Index. The measure for South African stocks has been at a discount to the figure for the global index for the past five years, except for during one month in 2013.

Even Sibanye Gold [JSE:SGL], the locally focused spin off from Gold Fields, chose to go to the US for its largest acquisition to date. The company had previously stated its intention to buy in its home country or elsewhere in Africa and took investors by surprise in December with a plan to buy Montana-based Stillwater Mining for $2.2bn.

“They’ve chosen to go overseas for the acquisition rather than something closer to home, it shows you how politically difficult it is to close things in South Africa,” said Michael Rawlinson, co-head of metals and mining investment banking at Barclays, which lends money to Sibanye.

Many of the South African mining industry’s problems stem from its turbulent and oppressive past. Mines, particularly gold, were largely built on the basis of cheap labour, minimal safety standards and plentiful electricity, with profits flowing to their white owners to the exclusion of the black majority. White minority rule under apartheid ended in 1994.

Above-inflation wage increases

To redress the inequity of apartheid, the government wants mining companies to be 26% owned by black investors, even if those investors later sell their stakes. Companies argue this will lead to continual dilution.

“Security over tenure is a concern for us,” JPMorgan’s Gregson said.

After more than a century of intensive mining, resources have been depleted, unions have commanded above-inflation wage increases, safety breaches are drawing increased scrutiny from government and power is increasingly expensive. The industry made its first net loss since at least 2009 in the year through June, as commodity prices plunged, according to PricewaterhouseCoopers.

Gold production in the country declined by almost half to 144.5 metric tons and output of platinum-group metals dropped 11% in the decade to 2015, according to the Chamber of Mines. Labour costs, which make up a third of the industry’s overall expenses, almost tripled to R117bn ($8.8bn) a year. Still, mining makes up about half of the country’s export earnings.

Safety stoppages

The government has also irked companies by imposing what they say are unnecessary safety stoppages that cost production. At up to 4km below ground, the country’s gold mines are the deepest and among the most dangerous in the world, typically employing thousands of workers mainly using hand-held drills.

READ: INFOGRAPHIC: Descend into the world’s deepest gold mine - in SA

If international investors and mining companies are deterred by South Africa’s challenges, locals may be willing to step in. Patrice Motsepe, executive chairperson of African Rainbow Minerals [JSE:ARC] and who had success buying unwanted gold mines in the late 1990s, said last month he’s once again looking to snap up unloved South African assets.

“South Africa has good infrastructure, it’s got great technical skills, it’s got a long history of mining,” Barclays’s Rawlinson said.

“But that long history means the best deposits have already been developed. To compensate for that it needs to be easy. That easiness is gone.”

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