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South Africa: throwing it away?

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World Coal,

Barry Baxter, Africa Correspondent, World Coal.

With its ratings at the second-lowest investment grade, inflation forecasts set to breach the top of the central bank’s target range, reduced national growth forecasts, a new coal policy from the government, ships waiting seven days to load because of power blackouts (while national power utility Eskom seeks to sell off assets), producers, analysts and potential investors in the South African mining industry are asking: is it not time for a reality check?

The mining industry is fearful that rapidly changing legislation will once again move the goalposts when it comes to black economic empowerment requirements, putting existing rights and licences at risk. Meanwhile, a senior executive from the coal sector has spoken of a lost decade and fears that the next 10 yr could easily result in little more than a virtual replay of that time.

“We have the single largest measured minerals inventory in the world,” said Mark Cutifani, CEO of Anglo American. “But in the course of the last 10 yr, real values in terms of the prices of mining companies’ shares listed on the Johannesburg Stock Exchange have declined by 30%. At the same time, the rest of the exchange performed exceptionally well.”

“For an industry that is the most important driving force of the local economy, directly and indirectly contributing 18% to GDP, it is not good enough,” he continued. “No one can afford to stand by and let the next 10 yr be another lost decade for this country.”

A dismal economy

Much of the confusion, dissent and ambiguity that surrounds the South African mining industry is that it remains politically driven, not allowed to develop on the innovation, initiative and industry of its own highly-skilled and world-respected leaders. Many say this is to distract from the government’s record in other areas.

South Africa’s economic performance had been dismal in recent years and might only reach 3% growth in 2017, according to Moody’s Investors Service. It has cut its 2015 growth forecast for Africa’s second-largest economy to 2% from 2.5%. Inflation, which accelerated to 4% in March, also seems likely to breach the Reserve Bank’s 3 – 6% target band by the end of the year, according to Kristin Lindow, Senior Vice President at Moody's Investors Service. She said: “Any major slippage from the government’s current position would put the public finances on a worse footing.”

Moody’s last year downgraded South Africa to Baa2. Fitch has awarded a similar rating, while Standard & Poor’s rated South Africa a notch lower. New ratings are due at the end of this month.

Productivity a problem

Highlighting problems faced by the South African industry, Seamus French, CEO of Coal at Anglo American, said productivity at Anglo American mines in South Africa was only 50% that of its mines in Australia.

“We have gone through a process of benchmarking and identified where opportunities for improvements are," he said. Although neither he nor Cutifani blamed the low productivity on the workers – they attributed it to the use of continuous miners rather than longwall mining equipment – French said that the company’s Australian metallurgical coal mines had seen a 30% reduction of its workforce after a similar work audit and subsequent changes.

The audit has now clearly been repeated in South Africa. This is unlikely to go down well with the country's government, which dislikes talk of labour reforms as upsetting to the delicate balance between itself, the labour unions and the Communist Party with which it forms a governing alliance.

Anglo American South Africa (AASA) has also made significant changes to its leadership structure with Mark Cutifani, the Group CEO of Anglo America, assuming the role of Chairman of AASA. Norman Mbazima, CEO of Kumba Iron Ore, will take on the role of Deputy Chairman of AASA, while Andile Sangqu joins the company in the newly established role of Executive Head of AASA. “These are important changes and demonstrate Anglo American’s commitment to playing an active and leading role in the ongoing development of a responsible, sustainable and competitive business and mining sector in South Africa,” Cutifani said.

Investor concern

Speaking in Cape Town at the 2015 Investing in Africa Mining Indaba, Director of Equity Research at Credit Suisse, Justin Froneman, said international investors were worried over a number of serious issues in South Africa’s mining industry. They were prepared to take their capital elsewhere if the situation persisted. “The thing people want most is active leadership at both corporate and country level,” he said.

“There is perception that not enough is being done. Things are quite unstable at the moment and investors want to see mechanisms put in place to address that. Unfortunately, we are not yet seeing anything. The legacy issues that surround South African mining cut deep. The starting point is that the sins of the past are there and we have to rectify [them].” The ability for industry to fall back on support from government was lacking and that caused frustration.

He also expressed concern about what he described as the “seemingly continuous adjustment” to legislation. “There needs to be a fundamental understanding that the government cannot take out everything it wants to from the mining industry regardless of the environment in which it is working,” he said. “Unfortunately mining is cyclical. Mines will pay lots of tax when times are good but not so much when times are bad. It is a mature industry, but the government wants to tax it to death or keep changing legislation to its own benefit.”

Written by Barry Baxter. Edited by .

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