SA miners pay R27bn in dividends in 2019, but sector not yet investing in growth capital

SOUTH African mining companies returned R27bn in dividends to shareholders in the 12 months ended June, but the industry wasn’t yet investing in growth capital, said auditing firm, PwC, in its SA Mine 2019 survey published today.

Roughly half of the distributions were made by miners of bulk materials РExxaro Resources (R5.5bn) and Kumba Iron Ore (R12.5bn) Рas revenue from these products flourished. Iron Ore comprised 12% (2018: 10%) of total revenue generated whilst manganese production lifted its market share. Coal production remained the largest revenue driver for the South African mining industry at 28% of total revenue, down marginally from 29%.

But energy constraints related to Eskom’s operational troubles, and a degree of regulatory uncertainty notwithstanding broad agreement on a new Mining Charter, continued to hold back the sector which now constitutes 7.7% of GDP as of June down from 9% in 2011. It’s fair to say the sector was in a holding pattern.

“Capex actually remained flat as there is a backlog in stay in business capital which is being caught up at the moment,” said Andries¬†Rossouw, PwC Africa Energy Utilities & Resources Leader. “It will pick up,” he said.

For the purposes of the survey, 28 mining companies listed on the Johannesburg Stock Exchange (JSE) are examined which excludes dual listed entities such as BHP and Anglo American but includes listed subsidiaries such as Anglo American Platinum and Kumba.

The South African mining sector was transitioning from deep-level, labour intensive mining to open-cast mining. A deterioration in the country’s gold mining sector was highly likely in the absence of technological breakthroughs that would open up deep-lying gold. Platinum Group Metal (PGM) production was also becoming increasingly mechanised, he said.

There are some promising improvements though. As per the global mining trend, the number and scale of impairments declined – down to R22bn from R45bn in 2018 – whilst general profitability was also better. The industry was net profitable to the tune of R32bn compared to a net industry loss of R8bn in the previous year.

This was on the back of better commodity pricing, especially for precious metals, but the rand deterioration against the dollar also helped average prices received. PwC calculated an average rand to dollar exchange rate of R13.6, and there was more to come.

“The impact of the current rand against the dollar will have a massive impact on revenues especially for the remainde of the year,” said Rossouw. “But it’s probably a short-term cash boost and inflation will catch up,” he said. The rand is currently at R15.058 to the dollar.

Of total value generated, shareholder dividends increased to 12% of total funds compared to 8% in the 12 months of 2018. The majority of value created is paid in salaries and taxes via employee income tax, direct taxation and royalties.

In terms of yield, dividends were 6% of revenue and about 3% of market capitalisation as mining shares enjoyed a re-rate following years of compression from 2012 when indebtness and poor commodity prices hit performance. An increase in capital expenditure, however, was mostly stay-in-business capital rather than growth capital.

Said PwC in its report: “Mining companies are taking a disciplined approach when considering their capital allocation. As large-scale investments require long-term payback periods, long-term stability is required.

“While more certainty was brought about by the finalisation of the Mining Charter in 2018, more needs to be done in terms of dialogue.

“The implementation of the Carbon Tax Act and additional environmental regulations adds significantly to the cost base and implementation uncertainty in the industry,” it said.