[miningmx.com] – EMPLOYEES of mining companies have pocketed more in wages than in any of the previous five years, according to the annual PwC survey “Mine’ which analyses the financial data of 37 JSE-listed mining companies with a market capitalisation of R200m or higher.
Based on “value distributed’, which best approximates to gross income (revenue minus direct purchases), employees on average received in salaries and benefits 38% of the gross income – the same as in 2013.
None of the other beneficiaries of gross income did as well, however.
Some 34% of gross income was reinvested in the businesses versus 41% in 2013 while shareholder dividends accounted for only 11% of gross income, down from 19% in 2013.
Stripping out the bumper dividend provided by Kumba Iron Ore, the Anglo American subsidiary, the remaining 36 mining companies covered in the survey only paid 2% of gross income to shareholders in terms of dividends.
Given that payouts had been between 12% and 19% over the previous five years, which includes the period of the economic and financial crisis of 2010/11, you can see why investors have grown impatient of mining companies.
“The high percentage of value received by employees is not sustainable and is expected to move back to a longer-term average of 30% through either a return to profitability or, if that is not possible, through a decrease in the number of employees,’ said PwC energy and mining assurance partner, Andries Rossouw.
According to Statistics SA, the number of employees in the mining sector in June 2014 was 4.1% less than in June the prior year, which is similar to the decrease of 4.3% experienced from June 2012.
“This suggests a trend of increased pressure on companies to manage resources and costs through downsizing,’ said Rossouw. It remains to be seen if the increasingly radical nature of wage negotiations will modify this.
“The sad thing about labour negotiations is that “the P word’ [productivity] has been avoided,’ said Rossouw. “We need to align productivity with remuneration.
“Our research indicates that focusing on team leader underground can make a difference on productivity. If those people are empowered then productivity does tend to pick up,’ he said.
EXECUTIVE PAY
No discussion about remuneration would be complete, however, without seeing what the executive class banks on an annual basis.
Rossouw’s view is that executive pay in South Africa’s mining sector is actually somewhat behind international standards especially as South Africa’s mininig bosses are “globally markertable’.
The median of total CEO pay within South Africa’s mining sector is R18m of which between R7m and R8m consists of salary and benefits with a cash bonus of R3m awarded on average, and the R7m balance comprising shares awards.
“This quantum, while many times that of junior workers, is in line with large listed companies in other industries in South Africa,’ said Rossouw. “Global mining companies pay their CEOs two to three times this amount,’ he says.
On a granular basis, and supposing CEOs received all of their R18m on average (so they met their performance criteria for share awards and cash bonus), that would be equal to R50,000 a day.
Quite whether CEOs and fellow executives are actually receiving cash bonuses or share awards is another question, however, especially against a background of higher asset impairments registered by South Africa’s mining sector this year.
According to PwC, total impairments were R49bn in 2014 of which R42.5bn were in the gold sector alone, followed by platinum (R11.7bn). In fact, of the 37 companies reviewed in the survey, 18 of them had net book values in excess of market values.
What this means is that the net asset values of many mining companies was more than the market was prepared to attribute to the company. Said another way, the market has been telling mining companies in 2014 that their businesses are over-valued. Executive pay is often judged against share price performance.
Shareholders tend to suffer again in such circumstances as capital growth [of the share] is absent in addition to a lack of yield [dividends].
Ultimately, it may lead to restructuring although Rossouw believes retrenchments is probably the last thing company CEOs want to consider. They may have to in order to keep businesses sustainable.
The Editda margin, which is the profit before tax, interest, depreciation and amortisation is was 28% for SA’s gold companies in 2014 and a paltry 17% for platinum companies.
According to Rossouw, companies need a margin of 30% to 35% in order to pay the cost of debt which, in a long-term business such as mining where capital outlay can precede payback by a number of years. “Margin pressure is threatening the sustainability of the sector,’ he says.
“I believe it’s never been harder to manage a mining company at the moment,’ Rossouw says.
This article first appeared in Finweek.
