Analyst's grim view of mining after lockdown: 'Pain' for most companies, some won't survive

Overall, mining companies will have to take a "fair amount of pain" as they battle the impact of a 21-day lockdown, while some may not survive at all, an industry expert has warned.

In a telephonic interview with Fin24 on Tuesday, Mergence Corporate Solutions mining director Peter Major weighed in on the impact of the national lockdown, instituted on 26 March 2020 to slow down the spread of the Covid-19 outbreak.

"On the whole, it is the smaller mining companies who will be hardest hit by the 21-day lockdown," said Major. 

The Minerals Council of South Africa, which represents the majority of the industry, has said it supports government's 21-day lockdown, but warned that its impact on the industry will be "significant".

The Council expects to provide information based on its modelling in the next few days. Harmony Gold has already warned of a significant drop in gold production, as a result of the lockdown.

In the meantime, companies may apply to the Department of Mineral Resources and Energy to continue limited operations during this time – mainly care and maintenance at underground operations to avoid potential damages caused by the cessation of operations. DRD Gold and Impala Platinum are among those companies which have applied to government.

The sector has taken a few hard knocks over the years, such as battling volatile commodity prices, strikes that have interrupted operations for months as well as load shedding.

This lockdown could result in a mixed-bag of responses from the sector, with some mines closing and others "barely" noticing it, according to Major.

Major is of the view that companies which have "weak or questionable foundations" or credibility may be wiped out. Listed, large cap companies which have "been through so much" over the past three decades will be better placed to withstand the impact of the lockdown, he argues.

"The last 20 years have been insane, they've taken extra measures," Major said of the latter, which typically have stronger balance sheets, and have ensured they have strengthened operations over the years.

Major believes platinum mines, coal mines and iron ore and manganese mines stand a fighting chance once the crisis is over. "They've been through the mill. They have strong balance sheets and can afford to go offline for three weeks," he told Fin24.

These mines are used to being shut down by communities, unions, or even government, Major said. "They will survive. They might not make as much money, but they have been through bootcamp over and over," he added.

Some small and medium companies, which might not have strong enough balance sheets and "decades of experience and diversification" will be harder hit by the virus, he said. They could continue to operate if they manage to find funding to keep operations going.

"Underground mines will suffer a lot too as leaving underground areas idle for more than a few weeks starts causing real problems.  And unfortunately – it's they that employ the most workers," he said.

'A beautiful funeral'

Coal miner Kuyasa Mining has had to shut down its operations for the duration of the lockdown. CEO Ayanda Bam spoke frankly about the situation, labelling it "bad".

Kuyasa employs about 600 workers, including contractors. Its biggest client is Sasol, which has since dropped demand for coal due to the lockdown. In a notice to shareholders on 31 March 2020, Sasol said some of its plants may have to reduce throughput due to lower offtake from customers due to the lockdown.

Kuyasa has felt the impact of lower fuel demand from consumers.

"Sasol is critical in the market for the supply of fuel, it's affected us," said Bam. The coal industry was not doing well prior to the lockdown either, Bam lamented.

"As we want into this lockdown, things were really not good for the coal industry. Sitting and not producing coal, not having any revenue, and having to put operations on care and maintenance – which costs money. You can't just walk away from an underground mine," he said.

When asked if Kuyasa had any contingency plans in the case that the lockdown be extended, Bam said that businesses and government may need to find unconventional solutions. "We are just passengers on a journey. I think there is no one who could plan for it," he said.

Bam proposed that mining companies be allowed to dip into their rehabilitation funds to tide them over this hurdle. Currently businesses are all applying to banks for help and relying on support from government. But mining companies have been setting aside money for rehabilitation to be used at the end of the mine's life – they should be able to use a certain percentage of those reserves in the interim.

"Those with enough life ahead of them to be able to rebuild, should have access to the rehabilitation funds," said Bam.

If some companies are going to die in two months, because of the crisis, they'll also die with those untapped funds. "Essentially you will have a beautiful funeral," said Bam.

Recovering from Covid-19

Commenting on the recovery prospects of the sector following the crisis, Major expects retrenchments following the crisis to only be implemented as a last resort, to keep a company alive.

"No company wants to retrench. You only retrench when you're losing money and going to go to zero. No one wants to go to zero," he said.

Some companies may have to retrench if there is limited demand for their commodities. But Major is optimistic that as other companies plough back into their economies, they should rely on commodities for required infrastructure development, as well as normal consumption requirements.

"Prospects are better for SA than for many other countries. We have a very established mining industry," he said.

The weaker rand also offers some protection, and with commodities being priced in dollars, SA stands to gain. The rand breached the R19/$ mark just days ago after Fitch downgraded the country's debt further into junk status and has currently buoyed at the R18.30/$ level.

"All mines can be profitable at this level and can even be profitable at R16-R17 [to the greenback]," said Major.

According to the Reserve Bank's latest Monetary Policy Review, published on Monday, the coronavirus crisis could see the production side of the economy, which includes the mining sector, contract by 2.6%. The Reserve Bank also projects job losses of 370 000 and as many as 1 600 businesses closing down.

Speaking more broadly on the economy, at a briefing on the review, deputy Reserve Bank governor Rashad Cassim said that the ability of firms to survive post the crisis depends on whether there is some relief provided to them.

"If that relief does not come on board, firms may close down," he said. 

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