JOHANNESBURG (Business Day) -- South Africa’s rich endowment of mineral resources continues to lure investors and the decline of the gold industry in the past few decades is hardly symptomatic of the rest of the mining industry, analysts and researchers said last week.
But the business environment is tough enough to deter the world’s biggest mining groups, who can afford to pick and choose their locations. Most of the investment activity in South Africa’s mining sector is by local companies and foreign juniors, who traditionally tackle the risks that the major groups shun.
Statistics from the minerals and energy department do not paint a picture of an industry in decline, other than gold mining.
According to the directorate’s latest mineral economics booklet, South Africa’s Mineral Industry 2005-2006, R54.9 billion ($7.55 billion) of investments were committed to mineral-related projects in South Africa last year, of which 96% was for primary minerals.
Another R64.57 billion ($8.88 billion) of investments in other mining and mining-related projects were being considered. Mining, excluding exploration, contributed R94.3 billion ($12.9 billion), or 7%, to South Africa’s gross value added in 2005, which was R6bn higher than in 2004.
Over 10 years, the contribution rose to 8.7% in 2002 from 6.8% in 1998 but fell to 7% in 2005.
The minerals and energy department says this probably reflects growth in South Africa’s secondary and tertiary industries and contraction in gold mining. Adding processing of minerals would increase the wider industry’s contribution to total gross value added.
Bruce Alway, a senior analyst at London-based independent metals consultancy GFMS says the key reason for declining gold production in South Africa for the past two to three decades was falling grades.
U.K.-based researchers Virtual Metals CE Jessica Cross says the problem with the gold industry has nothing to do with government. The mines are old and miners have to dig deeper for lower-grade ore - “a geological problem, not a political one”.
In the platinum group metals sector, reserves are being put into new hands outside the traditional three mining companies and the timing appeared to be excellent because the world was moving into a long-term robust market for platinum, she says, although Virtual Metals has some reservations about the outlook for palladium.
Standard Bank economist Goolam Ballim says in real rand value, except for gold mining, the industry is expanding. The gold sector is performing quite differently from platinum or coal.
But while statistics and commentary bear out that nongold mining is flourishing , the responses on whether South Africa might have grown faster are more equivocal. South Africa’s mining companies have had to cope with a raft of new laws and regulations in the past few years: the mining charter, the Minerals and Petroleum Resources Development Act (MPRDA), the Diamond Amendment Act, a threatened beneficia-tion act and a long-drawn-out draft Mining Royalties Bill. The implementation of the MPRDA in particular, which governs the re-issue of mining rights, has come under fire for slowness and complexity.
Risk has become a foul word in South African business since both Sasol [NYSE:SSL] and Anglo American [Nasdaq:AAUK] referred to risk in South Africa at different times and deeply offended government.
But major strain is being put on CEs by the incompetence of government departments and the gratuitous rudeness accompanying that incompetence, says a senior mining executive. “There is no possibility of public complaint about it because complaints fall on deaf ears and the person being complained about will launch a vendetta.”
But GFMS’ Alway says that in issues such as security of tenure and political risk, South Africa ranks well below countries of the Commonwealth of Independent States (including Uzbekistan), Indonesia and Papua New Guinea.
“South Africa has a great history of mining gold, a good workforce and that makes it one of the better places to mine. It is plausible to consider mining a very attractive industry in income generation and labour absorption, which is why government policy should not retard its growth but rather reduce the frictions that plague the investment decision process,” Ballim says. “Arguably South Africa, and mining specifically, should have grown even quicker recently, especially as China’s share of world trade has surged from less than 2% in 1990 to about 7%. It could be that many of the developments peculiar to local policy have introduced hesitation among mining firms,” Ballim says.
Virtual Metals’ Cross says government has played a positive role in bringing new entrants into the market. Her only reservation is that junior mining companies appeared to be obsessed with “ticking boxes” for compliance at the expense of an international perspective.
But an analyst, who spoke off the record for fear of reprisal, expressed concern about the fact that Barrick Gold [NYSE:ABX; TSX:ABX], which is desperate to acquire gold reserves, had sold its stake in the South Deep mine to Gold Fields [NYSE:GFI], effectively walking away from South Africa.
The major resources groups such as BHP Billiton [NYSE:BHP] and Rio Tinto [NYSE:RTP] were also not investing in big mining projects in South Africa, which was seen as a complex environment.
“It could be that South Africa’s mining environment is particularly difficult now, while the new legislative framework is being rolled out, and in 10 years will be an easier place in which to operate,” the analyst said.
