SA Mining urgently needs Investor-Friendly Guarantees Framework

Cape Town, 11 February 2015: The positive message delivered by Mineral Resources Minister Ngoako Ramatlhodi to delegates at the Mining Indaba on Tuesday morning serves as a timeous reassurance to investors, but must urgently be followed by concrete interventions to provide guarantees that their investments will be safe and free from excessive interference into the future, says John Orford, Senior Portfolio Manager for Old Mutual Investment Group’s MacroSolutions boutique. In addition, investors will need to be given more certainty about the supply of key inputs such as electricity.

“Investors need to be assured that their assets are safe and that they can be run with minimal state interference. There also needs to be certainty that existing assets will not be nationalised, and that regulations will not be changed resulting in lower profitability for the sector.

“Although the Minister mooted decisive action in terms of future labour unrest, it is necessary to create proactive systems that improve labour relations, rather than only being reactive in times of crisis. This will foster an environment characterised by less conflict, fewer strikes and greater flexibility.”

Orford says that the Minister and Government’s commitment to finding a long-term, sustainable solution to the energy crisis must be welcomed.

“Investors must also be given more certainty about the supply of electricity,” he says.

“The electricity crisis has had two key impacts:  the price of electricity has increased considerably, reducing miners’ profitability, and secondly the uncertainty about the supply of electricity has curbed investment in the sector. This is not specific to the mining sector and the overall economic impact is that the potential growth rate of the economy is lower than it would have been without the electricity crisis. It’s imperative that the government and Eskom demonstrate a clear willingness and ability to tackle the crisis in the power utility and where necessary to engage the private sector in contributing to the solution of the power crisis.”

Although the generally positive position taken by the Minister in his keynote address may provide some peace of mind to potential investors, the reality is that the sector continues to reel from a series of such setbacks, says Orford. “While mining activity makes up only about 8% of the economy, it provides employment to an estimated 440 000 workers, and it still dominates exports, meaning it has a significant influence in the foreign exchange market,” he says.

“Unfortunately, platinum production remains 20% below December 2013 levels. In other words, normalisation of the sector to pre-Marikana levels of production remains slow. Looking forward, the sector also remains mired in difficulty. Some combination of higher Rand PGM prices, or more significant restructuring of the industry by closing unprofitable operations, could potentially restore profitability to the industry.”

Orford says clarification about the makeup, role and powers of the mooted “national mining champion”, needs to be provided as soon as possible.

He adds that the Mineral and Petroleum Resources Development Amendment Bill, which was recently referred back to Parliament, contained provisions which would be of some concern to potential investors, and that these issues needed addressing.

“The issue of potentially declaring certain minerals strategic and the provision that Government could control 20% of all new mining ventures are problematic,” he says.

“Declaring a mineral strategic is likely to raise concerns by industry that local producers will have to sell at below international market prices. This would probably reduce investment in the sector and could have the unintended impact of making the country less secure in the supply of these minerals.

“Similarly, the provision that the government would own 20% of all new mining ventures will also reduce the attractiveness of new investment and for some projects will mean that private companies are unlikely to go ahead with them. Overall, both measures will reduce profitability and hence investment and production in the sector.”