A new dawn for mining? - Politicsweb

19 February 2018 - It may be stating the obvious, but viable business depends above all on a relatively simple mathematical calculation: the revenue that a firm is able to make must, over time, exceed the costs it incurs in the course of its activities. Where this calculation fails, business becomes – in a rational sense – impossible.

 

By Terence Corrigan 

The postponement of this week’s judicial hearing on the controversial Mining Charter – and the potential of a positive outcome from the new spirit of engagement between mining and Cyril Ramaphosa’s administration – sharpens attention on the ecosystem in which mining either just survives, or thrives.

It may be stating the obvious, but viable business depends above all on a relatively simple mathematical calculation: the revenue that a firm is able to make must, over time, exceed the costs it incurs in the course of its activities. Where this calculation fails, business becomes – in a rational sense – impossible.

This equation is balefully relevant to South Africa’s mining industry. As the most recent iteration of PWC’s authoritative annual survey of the country’s mining industry – Mine SA – shows, mining in South Africa is today increasingly operating on flat revenues and thin profit margins, nervously watching for changes in the environment that could push it out of viability. This is despite the fact that commodity prices have been on the increase since the lows of early 2016. A brutal reality here is that it is becoming ever more expensive to keep mines operating.

A case in point is electricity. South Africa’s mining industry has spent the last decade in the shadow of the country’s electricity crisis. Mines are voracious electricity consumers, and rapidly escalating prices are imposing strains that many will not be able to withstand.

According to Ted Blom of the Organisation Undoing Tax Abuse (Outa), since 2007 Eskom has hiked its tariffs by around 500% – well ahead of inflation. Eskom’s recent application to the National Energy Regulator (Nersa), for an increase in its tariffs of some 19.9%, has sent a further shockwave through the mining industry. The Chamber of Mines estimates that this would add some R3.21 billion to the overall industry costs, which would in turn render around two thirds of gold and platinum mines ‘unsustainable’ – and cost as many as 48 000 jobs.

These are serious consequences. And electricity is but one input cost, not necessarily the most important. Looking at the past decade, SA Mine comments: ‘The reality is that mining input costs increased significantly more than the Consumer Price Index.’

Indeed, the Chamber of Mines’ mid-year analysis of the state of the industry (reviewing Stats SA data) made the following observations: ‘Better prices should prompt more commodity exports from SA, but Stats SA reports that commodity exports actually declined during the first quarter of 2017. Estimates are that this drop was nearly 8% on the previous quarter. The net effect of lower volumes despite higher prices explains some of the profit pull back. The further reason for the latter must be cost increases.

The intermediary input cost index (excluding labour costs) for mining has been running at 13% per annum over the last 10 years, and although the rate of increase has declined slightly, input costs are continuously eroding viability. At current prices, more than 60% of our platinum sector is loss-making.’

Faced with this situation, little option remains but to shear costs where possible, itself a difficult exercise. Savings on such items as consumable mining supplies provide some relief, but ultimately savings on the scale that the prevailing climate requires imply something more fundamental. Hence the decline in jobs (individual wage packets being sensitive territory), and the threat to marginal mines.

But the good news is that this needn’t signal an inevitable and terminal decline. Yes, the mining calculus is changing. Mining firms, in South Africa and abroad, are needing to look beyond mere cost containment into innovation as a key to the future. From extractive technologies to management systems to data analysis to the structuring of stakeholder relationships, the mining industry is gradually revolutionising itself. Mining is drawing on a growing range of expertise, much of it from fields not traditionally associated with mining. It is in such innovation that previously unreachable deposits can be mined, and the legitimate interests of all involved can be heard and integrated.

This is a future that beckons, but it is one that must consciously be built. Innovation does not come cheap, and as the industry reorients itself, innovation will need to be extensive. This is a large commitment for an industry in the uncertain and stressed South African environment.

For mining to continue to make its contribution to South Africa’s economy, there must be a recognition that the prospects for long-term viability on the part of the mining industry are intimately connected with the entire economic and governance ecosystem. But, too often, this ecosystem is dysfunctional – the intrusive demands envisaged in the Mining Charter being a prime example, undermining the predictability needed to make long-term commitments. It is vital that all with an interest in mining – mining firms, civil society and government, as well as businesses with linkages to the mining sector – reorient themselves to an ethic of cooperation in the common interest.

South Africans can only hope that the announcement by the Presidency that it “has been in discussion with the Chamber of Mines to resolve the impasse over the mining charter and to facilitate a process of developing a New Mining Charter that all stakeholders can support and defend” will prove to be the first step towards such an orientation.

A 2016 study on mining innovation (by Monitor Deloitte, Doblin and the Mining Indaba) phrased it succinctly: ‘What’s needed is a more systematic environment in which all innovation can thrive. To minimize or remove the perceived barriers to innovation, mining companies and the broader ecosystem of industry participants would significantly benefit from coming together in a structured manner to discuss, promote and foster innovation.

Some collaboration is taking place organically but on a very small scale. More structure, organisation and support is required to help develop major mining innovation hubs – the likes of which would include companies, educational institutions, incubators and the various levels of government.’

Doing so will ensure the groundwork for a new-look dynamic industry for the future and for future generations.

*Terence Corrigan is a Policy Fellow at the SA Institute of Race Relations, a liberal think tank that promotes economic and political freedom. 

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