Complex challenges affecting African mining industry - expert

The challenges affecting the African mining industry are complex - but with challenges come opportunity, as the industry looks into 2019 and beyond, says Dennis Gibson, chief technical officer of Black & Veatch Mining.

Gibson is responsible for integrating the company's wide range of technical skills in infrastructure development into the mining sector.

"The region continues to struggle with water shortages and energy constraints, and the fact is that water remains a critical resource for the industry. Often water scarcity is a major issue, although excess and flooding can also impact mining production," Gibson told Fin24.

"In Africa, scarcity requires that miners need to drive up efficiency of use and use less of this precious commodity. The same goes for power, where intermittency and accessibility can act as major barriers."

These challenges are forcing mining operations to innovate, diversify their portfolios and plan for contingencies as they work towards reliability and resilience.

"Reducing mines' use of water and energy has the dual benefit of improving the bottom line while also improving relationships with the local community, which will help safeguard mines' social license to operate," explained Gibson.

"Today more than ever, we're seeing advances in technology that can deliver on the promise of increased efficiency while improving mine health and safety."

New monitoring and the use of data analytics are helping mines gain higher levels of real-time situational awareness. Increased automation can improve safety and productivity.

Advances in water treatment technologies are broadening the conversation around recycling and reusing water, strengthening how mines take sustainable management approaches to water to the next level.

"Even as miners across the continent continue to rely on fossil fuels for power, clean energy technologies such as solar and wind, paired with advances in battery technology, are becoming increasingly price-competitive," said Gibson.

"This holds additional benefit when it comes to powering operations in remote areas or locations with unreliable power sources."

Since the global financial crisis and especially since the protracted downturn from 2013 mining companies have developed a focused and strategic approach to capital allocation, according to Gibson.

This is at both the project and operational level and in the recently active mergers and acquisitions market, he said.

An example he provided is Newmont Mining's recent merger with Goldcorp, which may put pressure on others in the gold sector to explore mergers or other plays aimed at synergies to drive down the cost of operation and improve project return on investment.

This includes opportunities to focus on more productive sites, or value-asset plays created through divestments.

"On the project side, we expect miners to continue to be even more rigorous in their analysis of projects, even as the market improves," said Gibson.

"Even as commodity prices strengthen, we're seeing leadership being extra diligent and cautious in their approach to capital allocation, which was not necessarily the case in the boom times in the early 2000s."
 
Sean Munsie, analyst at Allan Gray, commented that, historically investors have outperformed meaningfully by investing in resources companies when commodity prices are unsustainably low. This isn't the case at the moment, he said.

"However, currently valuations aren't stretched and debt levels are generally manageable. Diversified miners are trading at attractive valuations based on spot commodity prices but less so once normal price assumptions are factored in," according to Munsie.
 
He adds that investors need to "look through the cycle" when valuing a company. This is why Allan Gray is currently seeing pockets of opportunity in select diversified miners, despite being underweight mining stocks.

"We weigh up each share against each other based on return over a multiyear period, and compare it with the accompanying risk. We prefer to invest in companies that offer a decent margin of safety based on 'normal' commodity price assumptions, accounting for all costs and capital expenditure. Given the cyclical nature of the industry, management’s capital allocation track record is also an important consideration," says Munsie.

Follow Fin's 24 Mining Indaba Special Report here

ZAR/USD
16.83
(-0.43)
ZAR/GBP
21.37
(-0.00)
ZAR/EUR
19.68
(-0.20)
ZAR/AUD
12.00
(+0.27)
ZAR/JPY
0.16
(-0.27)
Gold
1879.44
(-1.30)
Silver
23.31
(-4.51)
Platinum
856.00
(-1.89)
Brent Crude
42.24
(+0.55)
Palladium
2203.01
(+0.07)
All Share
53265.33
(-0.10)
Top 40
49126.16
(-0.05)
Financial 15
9570.37
(+0.53)
Industrial 25
71886.85
(+1.23)
Resource 10
52935.40
(-1.85)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 1342 votes
It depends on how the funds are used.
73% - 8755 votes
No. We should have gotten the loan elsewhere.
16% - 1930 votes
Vote