Roger Baxter, the lanky CEO of the Minerals Council, is an optimistic kind of guy. He stoutly believes, for instance, that South Africa’s economic recovery can be found in the revitalisation of its mining sector. But even he is finding it hard to keep the faith sometimes.
“This is now a matter of urgency,” he said in a Minerals Council statement in November, a reference to the impending downgrade of the South African economy by ratings agency Moody’s. A “substantial turnaround” was needed in six months, preferably through a series of economic reforms, if South Africa was to avoid moving a peg down the world’s economic ladder.
It’s true, South African mining is on the edge. New investments – of the fresh capital, greenfields type – can be counted on the fingers of one hand.
And yet, in terms of the performance of companies operating here, the sector had a bit of a banner year. According to a survey by auditing firm, PwC, South African mining companies returned R27bn in dividends between July 2018 and June 2019. For most of this year, the JSE’s Mining Index matched the HSBC Mining Index – a performance based on solid, indisputable metrics such as the fact that industry revenue exceeded R500bn, twice the level of 2009.
The higher revenue was largely down to the performance of dollar metal and mineral prices globally, but not entirely. Certain metals languished: platinum, for instance. It traded up $130/oz from its January start – about 16% at the time of writing – but was nonetheless at a $1,000/oz discount to its sister metal palladium.
The export coal price dwindled to around $65/t, roughly 34% down in 12 months. Average diamond prices fell an estimated 35% below 2014-17 levels. It clearly wasn’t a uniformly good year. The denominator in JSE performance, however, was the rand. At the time of writing, the rand was 1.5% weaker against the dollar against its January start. In August, however, it was 6.9% weaker. This elevated yet further buoyant dollar metal prices, and provided a degree of insulation for metals and minerals that weren’t faring as well.
Baxter is right, though. There’s a storm coming. Rand benefits are likely to be matched on the downside by mining inflation. “The impact of the current rand against the dollar will have a massive impact on revenues,” PwC’s Africa energy utilities and resources leader, Andriew Rossouw. “But it’s probably a short-term cash boost.”
MINING STILL SEEKING TRUST
Outside South Africa’s immediate environs is a global commodities market in foment, but deceptively so. On the one hand, metal and mineral prices are strong – dollar gold for instance is currently around $1,450/oz, nearly $300/oz better than its January start – but fundamental questions about the nature of commodity markets are being asked.
According to Goldman Sachs economist, Jeffrey Currie, mining companies have continued to lost about 34 cents for every dollar invested despite recent efforts to rehabilitate their balance sheets, pay dividends, and take a conservative approach to volume growth. This is not as bad a performance as the oil and gas sector; nevertheless, a new conservatism among holders of capital, including the Chinese who have generally stopped financing loss-making enterprises, has made it harder for mining firms to raise capital.
The sand is shifting beneath our feet
In addition, questions about the role of mining in society has made production expansion and greenfields investment more difficult to achieve. Sovereign wealth funds have become less accommodating, even unwelcoming, of ‘the old world economy’ in the context of a carbon neutral future.
That’s why the transformation of China from a commodity-hungry ‘investment’ economy to a consumer-driven economy, hasn’t hit commodities prices too hard. Demand may have softened but the ability of the commodity market to respond to supply deficits when they occur is much diminished.
This has been evident in statements made, for instance, by iron ore producers BHP, Rio Tinto and Fortescue Metals whose chairman, Andrew Forrest, said this month it was not possible to “turn up the dial” on iron ore production. This was despite the supply deficit caused by Brazilian firm, Vale, following an iron ore dam burst in January which killed hundreds of people and led to a halt in production.
“While it is tempting to blame the trade war and other political uncertainties on this sharp decline in capex, we believe such uncertainties only reinforced a trend that was already in place,” said Goldman Sachs’ Currie.
Mining and society is a double-edged sword, however. On the one hand, the world’s mining sector is in need of an image makeover, backed by actual substantial improvement in how it tackles the environment, society and governance (ESG) matter. Many asset managers now employ an ESG officer whose job it is to keep close tabs on how mining firms treat communities, employees and ecology.
“I would rather report back to my investors on a bad operating quarter than a big ESG issue,” said a chief investment officer of one of the UK’s large mutual funds in a Miningmx interview in June. “That’s a career ender.”
“The sand is shifting beneath our feet,” said Mark Cutifani, CEO of Anglo American in October. “If we cannot make a demonstrable positive contribution to society and do so without it being seen and understood, our businesses will not be sustainable.”
According to a recent report by the United Nations Environment Programme, delaying action on climate control by a year will mean emissions need to be cut even faster and at greater cost, with a dwindling chance of success, according to Sky News. The forces against new mining projects couldn’t be greater with 2019 surely going down as the year in which decarbonisation became embedded in popular consciousness, aided by the visceral speeches of Greta Thunberg.
Herein lies the opportunity for the mining sector. Copper has properties not found in other major elements providing thermal and electrical conductivity, greater safety, than other conductive metals and recyclability. According to the European Copper Institute, adding one ton of copper can reduce up to 7,500 tons of CO² emissions annually.
Our conclusion is that to meet the government 2030 emission targets, copper needs to be priced at $8,800 per ton, or a 40% uplift from today’s prices
According to Paul Gait, an analyst for New York bank, Bernstein, the expected tripling in wind far capacity from the current 600GW in output in the next decade equates to 330,000 tons of new copper demand a year, assuming a 9% compound average growth rate over the next 10 years. “In other words, we should be expecting almost one million tons per annum of incremental copper demand coming from wind power alone in 2029,” said Gait in a report published in October.
Set against this is whether the world has developed enough copper reserves to meet this potential demand? Given the increased reticence of lenders to finance new projects, it seems likely that deeper, lower grade copper reserves will have to be developed on a brownfields basis – a development that will only call for improved incentive pricing.
“Our conclusion is that to meet the government 2030 emission targets, copper needs to be priced at $8,800 per ton, or a 40% uplift from today’s prices,” said Gait. “For rapid decarbonisation, the price implications are extreme,” he said. The ‘Greta Scenario’ – describing net zero carbon emissions by 2025 – requires copper prices to rise to $20,000/t or even higher, he said.
It’s easy to see, in this context, why the likes of Sydney- and Johannesburg-listed copper/zinc exploration and development firm, Orion Minerals, is so bullish about its R3.8bn Prieska Copper Project in South Africa’s Northern Cape province. Instructively, however, it’s a brownfields project highlighting how little incentive there is in the country for new greenfields mining developments, regardless of the societal and macroeconomic forces encouraging it.
Even new projects, such as Vedanta Resources’ Gamsberg project may not reach full fruition. A concentrate mine has been built, also in the Northern Cape, at a capital cost of $400m. But further investment to build processing facilities are hanging by a thread owing to the failure of Government to guarantee the regulatory framework for the electricity the project requires.
“If we can’t make it work here, we will have to look at other geographies,” said Deshnee Naidoo, CEO of Vedanta Zinc International in a recent interview with Reuters. “My concern is about Government’s ability to deliver power.”