[miningmx.com] — JOB preservation surely stands behind Finance Minister Trevor Manuel’s deferral of the Mineral and Petroleum Resources Royalty Act last week. This is a levy in compensation for depletion of South Africa’s mineral resources and was due for implementation from May.
But this is also an election year, and while the 2009 national budget didn’t exactly buckle to leftist pressure, it wouldn’t be prudent to encourage more of it either.
Not with so much of the sector failing. News from auditing firm Ernst & Young is that at least 20% of London’s junior mining market is on the bones of its backside, and the picture isn’t much better in South Africa.
Said Manuel: “When a global motor company cuts back on making cars, it cancels its orders for catalytic converters…[T]his firm making catalytic converters is not in Detroit or in Shanghai, it is here in the Eastern Cape.
“The mine producing the platinum that goes into that converter is near Rustenburg. The worker in Uitenhage and the mineworker in Rustenburg is now without work. And the woman who runs the little stall selling vegetables outside the mine is making less money each passing week. And their families, all of them, face a future made more precarious by the vagaries of global finance.”
The Chamber of Mines of South Africa reckons for every mineworker, there are 10 dependents. Based on union Solidarity’s calculation that about 14,000 jobs have been lost in the platinum sector alone, that’s about 140,000 people already affected in South Africa by the slump in commodity prices.
So it makes sense to temporarily ditch the royalty legislation which, incidentally, levies companies at the earnings before interest and tax (Ebit) line regardless of whether they make a profit or not.
Unhappy with empowerment progress
One wonders, however, whether another government scion, the minerals and energy department (DME), will have a similar understanding of the zeitgeist. I refer to an announcement last week by the DME that it would have the mining charter reviewed.
Sandile Nogxina, director-general of the minerals and energy department, says the charter needs to be reassessed before October in terms of the legislation which provided for a so-called “half-way house” discussion with companies and unions after five years.
Nogxina has also made plain his dissatisfaction with empowerment’s progress in the sector. The problem is whether the half-way house discussions are going to improve or worsen confidence in mining.
The uncomfortable question for Nogxina and his industry peers is that if empowerment can’t be made to work in a bull market, how’s it going to prosper now? Absa Capital has said empowerment is hard to support while vendor finance is a non-starter assuming the improbability that mining firms would agree to sell shares at such low levels.
It’s a sign of the times that the pioneer of South Africa’s mining empowerment, Mvelaphanda Resources (Mvela), is hell-bent on being sold even though Nedbank assures me Mvela’s shareholders, Tokyo Sexwale and Lazarus Zim, are not in any financial distress, nor the bank which arranged a slug of Mvela’s debt.
Gold storms back
The metals market might be on its knees but not the gold price, which has regained a familiar swagger. The equities, meanwhile, have seized on the opportunity after spending three years in the shadows. The talk now is of free cash flow and rewards to shareholders.
Take African Rainbow Minerals (ARM) for instance. Its chairperson, Patrice Motsepe, was roundly criticised for hanging on to the group’s 18% stake in Harmony Gold, considered a poor investment. Now, however, the stake is worth 30% of Arm’s net asset value compared to 15% a year ago.
Sensing their time had come, gold companies were the most ebullient at the Indaba Mining Conference, an event held each year in Cape Town. (Last year the conference was buzzing; this year, about 1 000 less people turned up).
Undeterred by the smaller audiences, the gold miners said the metal was likely to benefit from any dollar weakness. Martin Murenbeeld, a north American economist at Dundee Wealth Economics and a most prescient of gold market-watchers, forecast the possibility of a $2,300/oz gold price, although he also says it will reach a much lower $995/oz by the end of 2009.
Assuming Murenbeeld’s $995/oz is possible, South African gold mining firms stand to take a massive margin leap.
Let’s take the case of Harmony. It already had a R30,000 per kilogram margin after growth capex in its December quarter, which is quite unusual for a South African gold producer.
But based on the same quarterly costs, and a $995/oz gold price, the margin shoots up to R120,000/kg. For the four-fold increase in margin to happen, Harmony is required to sustain all-in costs of around R220,000/kg, and for the gold price to gain $55/oz.
In a similar vein, Nick Holland, Gold Fields’ CEO, is able to declare that the days of after-capex losses, at least for his company, are over. That would be great news for Mvela Resources, incidentally, as it’s due to cash in its Gold Fields shares this year in order to kill that debt.
