Mining in South Africa: Cautious Optimism

The commodity cycle and political/regulatory uncertainly have hit South African mining hard. The way forward is technology.

By Eduardo Arcos

IMAGE: Courtesy of Vermeer

The last three years have proved a bumpy ride for the mining industry in South Africa. As Chinese previously insatiable appetite for commodities waned amid a decelerating economy, prices of metals plunged to recession-era lows, major exploration projects were brought to a halt and mine closures took place across the board. Nevertheless, the recent stabilization in the price of commodities has gradually restored confidence from investors, who are once again looking to this region of vast mineral wealth. The overall consensus is that the boom years are gone for good but there are still plenty of opportunities under the new normal, and investors are slowly getting back on board.

As the region’s largest and most dynamic economy, South Africa hosts the leading mining clusters in Sub-Saharan Africa. Its long-lasting mining tradition, dating back from colonial times, has for decades brought foreign investment to the country. To date, South Africa remains the world’s leading producer of platinum and manganese and is Africa’s largest gold exporter. Moreover, the country sits on the world’s largest platinum reserves and the second largest reserves of gold.

During the last two decades, South Africa has escalated on the mining value chain, from mere extractive activities to manufacturing and development of high-tech products. Despite this diversification, the mining industry was badly hit by the global commodity slump. Therefore, South African companies had to re-think their operations and reinvent themselves into more efficient and productive entities.

Companies drastically reduced costs through layoffs and a halt in investments on new projects. Data from the South African Chamber of Mines shows that roughly 35,000 jobs in the mining sector were lost between 2012 and 2014 alone, mainly in the gold, platinum and iron ore sectors. Moreover, the number of people employed by the mining sector has shrunk considerably over the last two decades, from 800,000 to roughly 440,000. This has partly contributed to the high unemployment rate in South Africa, currently hovering at around 25 per cent. “When gold fell sharply, we took really hard steps. We retrenched 50 per cent of our people at the head office and we closed our explorations division,” declared Sven Lunsche, vice president of Goldfields.

Companies have, however, begun to regard this adverse environment as an opportunity to look inwards, become more efficient and “mine smarter”. By investing in high tech solutions, enhancing the skills of their labour force, and making their processes more efficient, companies have adapted to the new normal in commodities prices, bringing down operational costs, and increasing their resilience in the event of future commodity price shocks.

As a result, software solutions have been in high demand, as companies seek to automate processes and make the right on-site decisions based on real-time data, all of this with fewer workers. In this regard, South African software developers have readily taken on the challenge. “In a way, we benefitted from the mining slump- the industry lost skills and software can fill the gap,” affirmed Charles Muller, managing director of Minesoft, a Johannesburg-based mining software company.

Other high-tech providers have expressed optimism over mining companies’ appetite for technological solutions to improve their efficiency and bring down costs. 3D Laser Mapping, a UK-based company, introduced this year the first mobile, wearable, multi-platform LiDAR, which offers remarkable achievements in geotechnical applications for underground mining.  “Particularly in the mining industry, I see a big movement toward low-cost, low manpower, technology-driven solutions,” expressed Matthew Bester, regional general manager for 3D Laser.

These investments are gradually bringing down costs and making operations profitable again. “Our costs are now below or close to $1,000 an ounce [for gold], and seven of our eight operations are profitable currently,” affirmed Lunsche.

Cost-reduction is not the only incentive to invest in technology solutions, as these also enhance safety at mining sites and facilitate operational decisions based on real-time data provision.

The mining sector has also benefitted from increased demand for gold during 2016, as investors look for safe havens amid global political uncertainty. Moreover, demand for commodities such as coal has experienced an upturn. As a sense of normality returns to the mining industry, new projects are starting to line up again. Taung Gold, a Hong Kong-listed company, is in the process of finalising the permitting and licensing to start operations at its Evander site, containing 7.5 million ounces of gold. Moreover, the company expects to start operations at its Jeanette mine in three years time. Additionally, White Rivers Exploration and Harmony Gold have embarked in a ZAR$ 15 million joint venture to explore further resources adjacent to the Target gold mine in the Witwatersrand basin, believed to have substantial gold and uranium deposits.

Despite increased optimism, clouds still loom on the horizon for the mining industry in South Africa. Corruption scandals have severely debilitated President Zuma, resulting in political uncertainty. Meanwhile, the overall economy remains sluggish and renewed tensions with labour unions should not be discarded. Additionally, uncertainty over the dispositions of the new mining charter, to be unveiled before the end of the year, remains a pressing concern as these could include new regulations on Black Economic Empowerment (BEE) quotas, new requirements for South African-manufactured goods, and the percentage of revenues that have to be destined to R&D in the country.

When asked about the current political turmoil in South Africa, Rudolph de Bruin, executive director at Taung Gold, declared: “Concerns about South Africa are currently centred on corruption perceptions, but I think that corruption does not impede the ability to do business. There is a lot of mineral wealth in South Africa to be exploited profitably”.

Political uncertainty has resulted in the depreciation of the South African Rand versus the US dollar, which has ironically increased competitiveness in the sector by reducing operational costs for companies and therefore has incentivised private investment. This, together with increased investor appetite for gold as a safe haven amid geopolitical developments in the United States and Europe, has restored confidence in South Africa’s gold sector, which is poised for growth in 2017.

Optimism also lies in the emergence of new small-to-medium sized players in the industry. According to Kevin Peacocke, CEO at APT Processing, a mineral processing equipment provider, growth over the last years has not come from majors but from entrepreneurs entering the sector with specific needs and demands. In this regard, South African companies have much to benefit from, as they are well positioned throughout the continent and will certainly gain from the small and medium sized projects taking hold throughout Africa.

Sentiment in South Africa’s mining sector has changed for the better. From services providers to juniors and majors, the overall consensus is that the industry has already hit rock bottom and the path forward is starting to look promising.

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