CHECK AGAINST DELIVERY MINING INDABA KEYNOTE ADDRESS Norman Mbazima, Deputy Chairman of Anglo American SA 5 February 2018
REVIVING MINING S HOLY GRAIL How we can encourage investment back into South Africa s mining industry o Minister of Mineral Resources, Mosebenzi Zwane, representatives of African and other governments present here today, financiers of our industry, industry colleagues, ladies and gentlemen. Good morning to you all. o This year, the Mining Indaba happens in an ever-changing world, filled with continued uncertainty and opportunities. Today, I would like to focus on what is required to encourage investment back into South Africa s mining industry. This is a subject that needs an honest airing. o The numbers are telling: ü Last year, South Africa s GDP grew by a mere 0.7%, well below our population growth of 1.61% and below most of our neighbours. ü By the third quarter last year, unemployment came in at 27.7% the highest rate in 13 years. ü In his Medium Term Budget Speech, the Finance Minister indicated that there would be a revenue shortfall of some R50.8 billion, and that our budget deficit would be 4.3% of GDP. o These are alarming statistics. They indicate that South Africa desperately needs to grow its economy at a significantly faster rate. o Such growth would help increase government revenue, fund government expenditure, especially the social welfare that some 17 million of our citizens depend on, and provide employment opportunities especially for the youth whose unemployment rate is closer to 40%. 2 of 9
o The mining industry, and indeed every other industry, has to contribute as much as it possibly can to the required growth. But, the sector s current performance cannot be described as satisfactory. o In December last year, the South African Chamber of Mines published a report 1 on mining investment in South Africa, which shows that: ü Gross fixed investment in mining has been stagnant since 2009, and has declined by 5% over the course of the last three years; ü While net investment has declined by 57% since 2008; ü And despite commodity prices improving by about 11% on average since 2006, our output as an industry has been stagnant; o I want to argue and I hope I am preaching to the converted here that we urgently need to get investment back on the agenda for South Africa. o While we may have one of the world s most endowed mining jurisdictions, we have not been able to bring this endowment to account. We need to attract capital for South Africa s mining industry, whether foreign or domestic, and we must accept that such capital needs to get a competitive return. o I think it is very important for us all to remember that such money comes from the savings, pensions, and insurance policies of ordinary people like you and me. There may be intermediaries like fund managers, banks, and other financial institutions but these serve to aggregate the money and to channel it. 1 Report: Mining investment in SA in an improved policy and regulatory environment, December 2017. 3 of 9
o The question today is what do we have to do to attract these funds into our mining industry? Today, I d like to talk about the five main areas that can help bring investment back into our sector, and these are: 1. The political environment; 2. The regulatory environment; 3. Rail and port infrastructure; 4. Financial returns and fund flows; 5. And, investment promotion o Firstly, I would like to argue that although it may unsettle us at times, the changing dynamics in our politics is a shaping force that we must reckon with positively. o In this regard, it was encouraging to see how the internal rules and processes of the African National Congress, South Africa s governing party, were observed even during a hotly contested elective conference last December. This resulted in a credible outcome, which we think is a significant first step towards stabilising the political dynamics in our country. o As the country prepares for its 5 th democratic election, which will be held next year, we look forward to an exciting period of debate and democratic contestation. o Our view is that if the right choices are made, South Africa will regain its momentum and this will bring together all social partners government, business, labour, and civil society and provide a renewed sense of hope. o At Anglo American we are clear on our position: we are in the business of mining, not politics. The people of each country in which we operate choose their leaders according to their processes. We will work with those leaders and are interested in the policies that are adopted and how those policies are applied. o Secondly, we cannot underestimate the negative effects of poor and inconsistent regulation. 4 of 9
o Very large amounts of capital are needed to start a mine. Your capital is deployed over a very long period of time before it can be recouped. It is for this reason that investors require a clear, concise and consistent regulatory environment to justify investing. o At present, we have anything but a conducive regulatory environment. Consider the following: ü The industry is awaiting a court judgement on the once empowered, always empowered principle; ü The industry is in court with the government on disputes concerning the third mining charter; ü Every time that the charter is reviewed, targets are changed; ü The amendment of the principal legislation, the MPRDA, commenced in 2012 and has still not been completed, six years later. It is probably time to start the next amendment; ü The relationship between the Department of Mineral Resources and Industry is at an all-time low; o As in all matters brought before courts, the current legal disputes are well defined and narrow. o However, the issues that need to be resolved are comprehensive and can only be resolved by dialogue and engagement to arrive at a regulatory regime that works for everyone. One that is clear, concise, and consistent. o This is a pre-requisite to attracting the Rands, Dollars, Pounds, Euros, and Renminbi needed in our industry. 5 of 9
o We are very encouraged by Deputy s President Cyril Ramaphosa s comments at the recent World Economic Forum in Davos that urgent action is needed to resolve the current Mining Charter impasse. o I am very hopeful that with the improvement in the political environment that we have seen since December, we can now find the reset button and get back around the table. I cannot wait to participate in this. o Thirdly, bringing back investment into our sector is also dependent on our ability to revitalise crucial infrastructure, especially rail and port networks. o A large portion of our production by value is bulk commodities like iron ore, coal, and manganese. o These are produced in inland mines and need to be transported to the coast, loaded onto ships, and taken to overseas markets like China, India, and Europe where they are required. o In the 15 years that I have been associated with this industry, I have not seen any significant expansion of the rail capacity for transporting these products to our ports. For the mining industry to grow, we need to urgently expand our rail and port networks. o Most of the large infrastructure projects around the world have happened when government has taken the risk to invest in infrastructure to encourage investment, or when government has put in regulations allowing the private sector to do so. Increasingly, there is a move towards Public Private Partnerships as an enabler for infrastructure development. o Many of our competitors, in countries like Australia and elsewhere in the world, have mines that are closer to the sea and are geographically located closer to the customers. This makes them more competitive than us. 6 of 9
o I would, therefore, urge immediate dialogue to work out how best to ensure that we adequately invest in our rail and port infrastructure, so as to facilitate the growth and competitiveness of our mining industry. o In order to get approval for funds to build new mines or expand existing ones, management teams have to go to their investment committees and boards to justify why such an investment is appropriate, including compared to alternative investment options elsewhere. o This, of course, means being able to demonstrate that the project will be able to meet all the costs that are legitimately required to be borne before a profit can be returned including taxes, labour, procurement, community and regulatory costs. o Given the large dollar amounts involved and the lengthy investment periods, we also have to consider the likelihood of the various costs forecasted being very different when they are actually incurred. This is most difficult to predict in the regulatory space where rules can be changed by promulgation by government. o Equally important is the certainty of a consistent and clear mining policy, stable and functioning government institutions and efficient processes o The motivation also needs to put forward how commodity prices are likely to be over the life of the mine and what effect changes from that forecast will have on the investment. Commodity prices have been particularly volatile in recent times and thus it became difficult to justify major new investments. o Thankfully, these have picked up recently, but we re not quite there yet. The global economic outlook is improving. One can feel the sentiment improving just by walking the corridors of this conference and talking to the various stakeholders represented here. So, there is hope on this front. o Put yourself in the shoes of the boards taking these multi-decade investment decisions. It s tough and we have to compete for limited capital. Unless investors can see that all of us have confidence in our economy, our democracy, and our institutions, they will take their money elsewhere. 7 of 9
o We have to go out there and talk about our investment climate how and why it is a welcoming one for investors. An important part of this is hearing one aligned voice from government, business and labour, just as was the case a few weeks ago in Davos. o I am frequently asked about Anglo American s commitment to investing in South Africa. There is no better place than South Africa to see the contribution we have made, both past and present. o Take our USD 2 billion investment in the Venetia Underground extension through De Beers, which represents the single largest investment in diamond mining in many years in South Africa. o If you look at the mining space, our transformation story is remarkable. I can quote, Seriti Resources, Exxaro, JCI, African Rainbow Minerals, Royal Bafokeng Platinum, Shanduka, Harmony, AngloGold, and a whole host of others who have come out of the Anglo American stable. o In closing, I would like to reiterate that: o a stabilising political environment; o coupled with a regulatory environment that encourages investment; o along with ramping up investment in rail and port infrastructure; o and understanding the importance of financial returns, fund flows and investment promotion....are the five fundamentals that can encourage investment back into South Africa s mining industry. o We are constantly reminded of the triple scourge of poverty, unemployment, and inequality in South Africa. The performance of our economy in 2017 does nothing to alleviate this, instead, it exacerbates it. 8 of 9
o We desperately need the economy to grow much faster than the 0.7% we recorded so that we can generate employment and increase government revenue. o The mining industry can be a significant contributor to this growth, but only if we make conditions right for investment. o This is a pivotal moment for South Africa, one of the world s great and naturally blessed mining nations. Let s seize that moment. Together. Now. I thank you. o-o-o 9 of 9