Reforms key in post-Covid-19 mining sector recovery - report

Two workers in an underground mine.
Two workers in an underground mine.
Getty Images
  • Covid-19 hit when the local mining industry was already on the back foot, hobbled by power outages that interrupted production.
  • The industry lost approximately 4% of total planned output during 2019 due to power outages, according to the report.
  • Technology is the key to unlocking cost competitiveness for South African mining.

Improved legislative framework and investment in technology are some of the key reforms that should be considered by local mining as part of Covid-19 recovery plans, according to a latest report by the Boston Consulting Group.

Once the backbone of the economy, the industry has in recent years been eclipsed by other countries, as companies, particularly gold miners, battle the challenging conditions associated with deep-level mining and the country's unstable energy supply.

As a result, Covid-19 hit the industry when it was already on the back foot compared to its global counterparts, with 64% of South African mining output falling on the high half of the global cost curve.

Adding to the difficult landscape is uncertain regulatory framework and electricity supply constraints, which is said to have shaved off almost 30 days of production in 2019 due to power cuts.

"We estimate that the industry lost roughly 4% of total planned output during 2019 due to power outages," the report stated.

The report estimated that 15 to 25% of South Africa's 2020 output would be lost due to the lockdown. It also highlighted the taxing environment navigated by the sector which contributed R356 billion or 7.3% to GDP in 2018. 

"Our current scenario modelling estimates that 15 to 25% of South Africa's 2020 output has been lost due to lockdown and resultant ramp-up of production," says Tycho Moncks, the managing director at the Boston Consulting Group and co-author of the report.

Invest in technology

Mining companies were from 26 March instructed to put shafts and smelters under care and maintenance, as the government implemented sweeping lockdown regulations. Operations gradually resumed at a reduced capacity, with companies revising down their production guidance for the period.

To improve competitiveness, the report identified key reforms which might be taken to get the sector back on track, which include investing in technology, improved legislative framework, a steady power supply and investment promotion.

"Technology is the key to unlocking cost competitiveness for South African mining, and the industry should proactively look at opportunities for the appropriate investments," it said.

Bottlenecks in the rail and port infrastructure were said to inhibit the export of minerals such as iron ore and manganese. The expansion of the Saldanha Railway capacity to 87 metric tons could help improve capacity. The Sishen to Saldanha railway line, operated by Transnet, plays a key role in the ferrying of iron ore to the harbour for exports.

While production levels have taken a knock, companies have, however, benefited from higher commodity prices and the favourable rand-dollar exchange rate. Gold and platinum group metal (PGM) prices have surged, helping companies boost income and address pay debt.

This month, ratings agency S&P revised its outlook for AngloGold Ashanti and Gold Fields to stable from negative on account of improved gold price, which increased 28.4% in 12 months.

The agency predicted gold and PGM prices would likely remain above long-term averages through 2022, allowing producers to lower leverage on a more sustainable, through the cycle, basis.

It expected gold prices to revert to the long-term average of $1 300 an ounce from 2023.


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