IT was tempting to fear the worst following President Cyril Ramaphosa’s dramatic 21-day lockdown announcement on March 24 aimed at stemming the COVID-19 virus, especially for the mining sector which has long been at loggerheads with the government over fiscal and economic policy.
The Minerals Council South Africa’s response was to call for creative measures, in association with Government and business generally, to make sure all mines can reopen on April 15 when the lockdown is currently scheduled to end. It fears some might not.
However, there’s grounds for optimism in the face of the unprecedented events around COVID-19. One is the most obvious: in terms of political capital, the Rampahosa Administration was never been more ‘on point, moving with decisive pace in order to save the lives of South Africans, and notwithstanding the heavy-handed approach to compliance and enforcement that has subsequently materialised now being modified.
Secondly, the interaction between Government and business in tackling the COVID-19 crisis might be catalytic for public-private enterprise in the future. “The cooperation between Government and the private sector has been excellent in the last few weeks,” said Charmane Russell, spokeswoman for the Minerals Council. “There’s a great deal going on behind the scenes in terms of the private sector stepping up to the table.”
Between making that statement and now, AngloGold Ashanti announced it had made two hospitals available for exclusive use by provincial governments in managing COVID-19 cases. The company’s response has been exemplary.
Thirdly, the last two weeks of stock market volatility, largely dominated by massive liquidations, represents an opportunity for investors, especially in the mining space – although caution is the by-word.
LESSONS OF 2015 DEBT CRUNCH
Thanks to the hardships of 2015 when the mining sector was found to have over-extended itself in search of market share, today’s diversified mining companies, in particular, are well prepared to survive the crisis.
“Even under a very long government imposed shut-down, South African diversified miners’ balance sheets should be able to cope, a testament to lessons learnt in 2015,” said analysts at RMB Morgan Stanley in a note to clients.
Even assuming an extended shut-down of the mining sector of up to six months – which would be catastrophic to South African society in general – diversified South African mining counters survive with African Rainbow Minerals (ARM) burning 73% of available cash, and Kumba Iron Ore, the Anglo American company, utilising only 36% of its cash.
All sectors of the investment market have probably been over-sold, but certain shares look especially attractive such as Exxaro Resources which has fixed cost contracts with Eskom in a commodity that is likely to escape the lockdown owing to the essential role in plays in energy generation.
As for Kumba, it will benefit from rand-hedge, and the fact that oil is at historic lows lowering its cost of production. The firm is also exceedingly well padded with cash reserves in a sector that is well disposed to the slow but sure economic recovery analysts expect of China.
Where there is stress, however is in the mining sector supply chain where even a 21-day lockdown might see equipment and supplies companies unable to prevail.
“Local suppliers of goods and services will struggle to last a 21 day shut-down, in our view,” said RMB Morgan Stanley. “In the event of failures within the mining sector supply-chain, we’re concerned about a delayed ramp-up once the shutdown is lifted and elevated cost inflation as the supply chain will need to be rebuilt,” it said.
Even in this scenario, there’s upside to be had, according to the bank which believes the mining sector ought to shoulder the cost of poverty alleviation in the regions where they operate. “It shouldn’t be a major drag on cash flows, but it would be precedent-setting,” the bank said.
These are precedent setting times, however. The Oppenheimer and Rupert families have contributed R1bn to alleviate stress on small business through the crisis – a response that perfectly brings the curtain down on the previous administration’s vilification of so-called ‘white minority capital’ and potentially raises another curtain on improved relations between the private and public spheres.
As for the short-term future of the mining sector post the lock-down, there’s the question still of how it intends to tackle potential outbreaks of the virus on the mines. Might this lead to a renewed bout of shut-downs?
Said James Wellsted, spokesman for Sibanye-Stillwater: “There’s no one answer to the question of what happens is an employee is infected: is it in the change room; is it somewhere else”.
The perception is that a mine is a relatively discrete entity which in fact they are like “little cities”, he says. It takes about 60km worth of travel to move from Sibanye-Stillwater’s Libanon mine on the West Rand to the end of its other mine at Driefontein.
“The approach with infection is that we try to limit where it may have occurred and if necessary we may have shut a section or even a mine. But I don’t think it’s true that we would have to shut an entire business,” he said.
In other respects, the mining sector is positioned to tackle COVID-19 better than most in the South African economy owing to its expertise managing mining communities. The sector has been at the forefront of HIV-AIDS treatment as well as tuberculosis and other occupational hazards such as silicosis.
Between 2008 and 2018, TB cases have fallen from just over over 1,700 to about 500 whilst under the Mineral Council’s Masoyise Health Programme, counselling for HIV rose from 79.1% in 2015 to 84% in 2018. Over the same time period, TB screening rose from 84% in 2015 to 90.3% in 2018, and TB incidence decreased from 1,068 cases per 100,000 population to 435 cases per 100,000 population.
“Mines are part of communities and we should expect employees to be infected,” said a mining industry source said on condition of anonymity. “What we need to be able to do is very quickly isolate individuals and prevent further and rapid spread.
“It is only when it is evident that there is extensive and continuing transmission that consideration could be given to closing a part or all of a mine. Closing a mine doesn’t stop the problem. We need to take a holistic approach that recognises this.”