Key opportunities and challenges facing the South African Mining Industry Presentation to the Portfolio Committee on Finance 20 February 2007 Cape Town
Outline of presentation Mining remains a key pillar of the South African economy. The synchronised global commodities boom and the booming international mining environment. The commodities boom and lost investment opportunities. Key constraints affecting investment in the SA mining sector. Volatility in the exchange rate. Infrastructure constraints. Regulatory constraints. Government, labour and Chamber addressing the challenges. Concluding remarks.
Mining remains a key foundation industry for South Africa. Mining accounts for: 15% to 20% of GDP (directly and indirectly) 50% of merchandise exports (primary and beneficiated mineral exports) 12% of fixed investment (directly and indirectly) 30% of the market value of the JSE 20% of formal sector employment (directly and indirectly) 50% of volume of Transnet s rail and ports 93% of electricity generation via coal power plants 16% of electricity demand. About 30% of liquid fuels via SASOL use of coal, etc.
The real contribution of mining 2005 data (estimates) Backward Linkages: GDP: R35-billion or 2.3% Jobs: 150 000 Mining s direct contribution: GDP: R94-billion or 6.2% Jobs: 450 000 The induced effect: GDP: R91-billion or 6% Jobs: 600 000 Forward linkages GDP: R25.8- billion or 1.7% Jobs: 55 000 Total contribution of mining: GDP: R246-billion or 16% Jobs: 1 260 000 (about 20% of total employment)
12 Mining as percentage of total GDP and of total fixed investment (GFCF) % of total GFC 10 8 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Mining as % of total GFCF Minings share of GDP
Total Labour in the South African mining industry 900,000 800,000 700,000 600,000 Number 500,000 400,000 300,000 200,000 100,000 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006*
200000 South African mineral sales R'million 180000 160000 140000 120000 100000 80000 60000 40000 20000 2004 2005 2006e 0 Platinum Gold Coal Iron ore Building Materials Other Total
The synchronised global commodities boom & the booming international mining environment. According to the PWC annual survey of the fortunes of the global mining industry entitled Let the good times roll 2005 was another spectacular year for the global mining industry: Gross revenue of the sector rose 25% to US$222 billion. Net profit rose 59% to US$45 billion, the profit margin rose to 20% versus 16% in 2004 & return on equity was 25% in 2005 versus 19% in 2004. Rising gross operating surpluses resulted in a 31% increase in capital expenditures of the industry to US$31 billion in 2005. At the exploration level since the trough of US$1.7 billion spent in 2002, expenditures have risen by 317% to US$7.1 billion in 2006. For a key mining country such as Australia profit before tax rose 95% in 2005 for mining companies and investment rose 34.5%.
400 Economist's All Metals Index, up 250% in US$ terms over the current commodity bull phase between October 2001 and August 2006 350 300 250 Up by 250% 200 150 100 2001/11/04 2002/01/04 2002/03/04 2002/05/04 2002/07/04 2002/09/04 2002/11/04 2003/01/04 2003/03/04 2003/05/04 2003/07/04 2003/09/04 2003/11/04 2004/01/04 2004/03/04 2004/05/04 2004/07/04 2004/09/04 2004/11/04 2005/01/04 2005/03/04 2005/05/04 2005/07/04 2005/09/04 2005/11/04 2006/01/04 2006/03/04 2006/05/04 2006/07/04
PWC Survey of top 40 mining companies "Let the good times roll", key indicators 45 40 35 % or ratio 30 25 20 15 2003 2004 2005 10 5 0 Gearing ratio Return on capital employed Net profit Return on Equity Effective tax rate EBITDA margin
Metals Economics Group - Global Exploration Expenditure Trends, 2003 to 2006 8000 7000 6000 5000 4000 3000 2000 Rest of World United States Pacific/SE Asia Latin America Canada Australia Rest of Africa South Africa 1000 0 2003 2004 2005 2006
Despite the almost unprecedented global commodities boom, South Africa has missed out on the benefits The strengthening exchange rate reduced benefits of rising US$ prices. Investment in SA mining fell by 20% in 2004, 13% in 2005 before a modest recovery of 5.9% (1 st 3 quarters) in 2006. Mining production is down fell by 2.2% in 2006 (non-gold fell 1%). SA s real export growth was only 1.3% in 1H06 and this fed through into pressures on the current account (6% deficit as %of GDP in 1H06) which undermined the rand, had inflationary and monetary policy implications. Exploration expenditures in South Africa grew by 139% between 2003 and 2006 versus the global growth rate of 225%.SA s exploration rank fell from 4 in 2003 to 7 by 2006.
160000 The rand gold price and rand production weighted PGM price per kilogram Gold price/ kg PGM price/ kg 300000 140000 120000 100000 250000 200000 80000 150000 60000 40000 20000 100000 50000 0 2003 2004 2005 2006 0 Gold per kg Production weighted PGM price per kg
South African mining real gross fixed capital formation, 1994 to 2006, (2006 is for the first 3 quarters annualised) 20000 16% decline p.a. R'billions in 2000 money terms 15000 10000 5000 Growth 7.8% p.a. 5.9% p.a. 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: SARB/ABS
Real mining fixed investment on a seasonally adjusted real term quarterly basis, and the year-on-year growth rate in real mining GFCF 20000 40 R' millions at constant 2000 prices 15000 10000 5000 0-5000 -10000 30 20 10 0-10 -20 YoY % growth rate Real mining GFCF YoY growth rate in mining GFCF -15000 2001 2002 2003 2004 2005 2006-30
Real gross fixed investment in mining, base indexed to 2000, Australia versus South Africa 250 Base index 1999=100 200 150 100 Australia South Africa 50 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Growth rates in South African mining production % YoY increase 30 25 20 15 10 5 0-5 -10-15 Total Non-gold 2004 2005 2006
South Africa: current and financial accounts of BOP as a % of GDP 8.0 6.0 4.0 % of GD 2.0 0.0-2.0-4.0-6.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Current account % GDP Financial account % GDP
7.0 South Africa's share of global exploration expenditures, 2003 to 2006 6.0 % of total exploration 5.0 4.0 3.0 2.0 1.0 0.0 2003 2004 2005 2006
Government and industry agree there are many reasons Strength & volatility in Rand exchange rate (2002-2006) Infrastructural constraints: Logistical constraints in rail and ports severely hampered export growth (iron ore, coal, ferro-alloys). Shortages of water affected development of mines. Regulatory constraints: New Act with large number of applications (so learning process and bottlenecks for industry and government). Challenges regarding interpretation of MPRDA and Charter. Challenges on environmental licensing, (dealing with 3 government departments, trust funds and water licences).
Exchange rate challenges Between first quarter 2002 and first quarter 2005, the rand appreciated by 48% (from R11.53/US$ to R6/US$) against the US$ and this eroded most of the US$ commodity price gains. From first quarter 2005 to now the rand has weakened by 16% and US$ prices rose strongly, providing a good boost to rand commodity prices. The volatility in the exchange rate has also made planning more difficult (compare first quarter 2005 when the rand was R6 to US$ with today at R7.15 per US$). In the past 18 months the rand has weakened and US$ commodity prices have risen further resulting in much higher rand prices.
Exchange rates ZAR & AUD vs USD 12.50 0.40 11.50 0.45 10.50 0.50 ZAR/USD 9.50 8.50 7.50 6.50 ZAR/USD USD/AUD 0.55 0.60 0.65 0.70 0.75 USD/AUD 5.50 1999 2000 2001 2002 2003 2004 2005 2006 0.80
Infrastructure constraints For bulk commodity exporters in particular, specific rail and port constraints in 2004/2005 undermined the ability of the sector to grow the volume of exports (coal exports fell in 2004 before a slight recovery in 2005, while iron ore exports showed no growth in 2004 before a modest rise in 2005). Agreements on capacity expansions for coal and iron ore were concluded in 2005/06. EIA constraints have delayed the Richard s Bay Coal Terminal expansion upgrade by one year. Water constraints delayed PGM projects in Steelpoort area. The lack of sufficient pipeline capacity between Durban and Gauteng is a concern regarding the security of supply of fuel to the inland market.
Regulatory constraints New law effective from 1 May 2004, large number of applications big learning curve for all parties. Capacity constraints in government and industry to deal with the applications. Interpretational challenges. Incomplete applications by mining companies. Environmental permitting big challenge (water licences, EIAs, triplication of paperwork, EMPs, funding of environmental trust funds), which in turn can delay mining rights. The lack of sufficient capacity in DWAF to process water licenses is another problem area delaying mining projects. 1.5 hectare mining licence inappropriate for the alluvial diamond sector.
Programme of action to address problems Mining Industry Task Team on Investment established in November 2006. (Several meetings held). Purpose of the Task Team is to: Research and document constraints to investment in mining. Provide recommended solutions to challenges. Tripartite Monitor Gold Study looking at extending the life of the gold sector, including task teams on productivity enhancement and cost containment, regulatory and investment and non-mining investment. National Treasury are investigating the concept of FLOW THROUGH SHARES as a means of encouraging exploration and venture capital raising in the sector.
Good news: industry appears to have turned the corner Investment & mining production started recovering in second half 2006 (investment was up 5.9% in first nine months of 2006) High level industry leadership engagement on the challenges facing the sector Agreements signed with Transnet for the upgrades of Coalink line to Richard s Bay, rail line from Sishen to Saldanah, and port of Saldanah. Expansion of the RBCT approved. Development of De Hoop dam started.
Good news (continued) Positive developments in recent months: 2495 new prospecting licences granted (94% finalised within time frame, i.e. either granted or refused) 341 mining rights granted (65% finalised) 1025 permit applications granted (84% finalised) Transparency on progress with applications DME targets: 6 months for prospecting rights; 12 months for new mining rights Chamber and DME engaging on environmental licensing
New prospecting rights, progress in processing rights (May 2004 to December 2006-data source: DME Mineral Bulletin) % 100 90 80 70 60 50 40 30 20 10 0 100.0 82.1 Received Accepted Refused or rejected 42.8 40.2 3.2 13.8 Granted Withdrawn In process
% 100 90 80 70 60 50 40 30 20 10 0 New mining rights, progress in processing rights (May 2004 to December 2006-data source: DME Mineral Bulletin) 100 87.1 Received Accepted Rejected and refused 26.8 24.4 5.9 42.9 Granted Withdrawn In process
Royalty concerns Significant improvements in second draft of Royalties Bill are welcomed Chamber remains convinced a net based system is in the economic interests of the country. The proposed two-tier system of royalty rates is a concern: Higher penalty rate for primary exports could significantly undermine the competitiveness of certain commodities (iron ore, coal, manganese, with very little downstream benefit). Rather than penalising mining, the focus should be on creating a competitive environment that attracts the manufacturing companies.
An invitation Chamber and mining industry would like more interaction with Parliamentary structures Visits to mines to obtain hands-on information should take place regularly Chamber is willing to carry a portion of the cost of such visits
Conclusion Stakeholders need to continue to deliberate on how to encourage a more stable exchange rate (planning over the past few years has been a real challenge!) The social partners are working together at a high level to address infrastructure constraints. The social partners are working together at a high level to address the regulatory challenges affecting investment, job creation and growth in the mining sector. The Chamber of Mines remains committed to addressing the challenges the industry faces through open and constructive dialogue with government, organised labour, Parliament and State Owned Enterprises.