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Craig Brewer, Head of Africa Natural Resources Advisory at Barclays Africa [JSE:BGA], joined Alec Hogg to unpack the tone for the mining industry in 2015, the pair look back at the Mining Indaba and the trends it unravelled for the year ahead.
It was an interesting week at the Mining Indaba last week, Craig. I know that you met a few clients and obviously, did quite a lot of networking. Did you do much business?
Yes, Alec. The way Barclays Africa approaches this is not a meet and greet. We set up a series of meetings with both domestic and offshore mining houses, and we really tried to set the 2015 agenda. Often, it’s a continuation of some of our discussions of last year, formulating the way forward. 2015 is a very different year to 2014.
It does look like Mergers and Acquisitions could be at the top of most miners’ agendas.
If you go back to last year, everyone was saying that this would be the time for M & A consolidation domestically, offshore, and gold in West Africa. We were talking about consolidation here in the thermal coal space in South Africa and all of the private equity money. We’re seeing some of these private equity groups from GKR to X2 etcetera, and there’s talk of almost $20m of committed capital out there but it didn’t come through. This year, there’s a far more pragmatic approach. People are looking at the disposal of non-cores. People are looking at spinning off. We’ve seen that in BHP and South 32. We’ve heard the commentary from Anglo American with regard to some of their platinum and potentially, coal assets but people are definitely looking at cleaning up their portfolio and focusing on their productivity, cash flow, and improving their balance sheets. Maybe we will have a bit of a run in M & A this year.
I had an interesting chat with Robin Sanders, a private equity heavyweight from London, who was saying they’d love to come into the South African market and generally, into the mining market. In South Africa, there’s a concern about BEE. Her view was that at 26%, if you have four BEE deals, you’d have no company left. Is this something that you saw as a concern?
Absolutely, Alec. A couple of key themes came out of this Indaba with regard to South Africa. Firstly, there was Eskom and I think everyone’s spoken about that. Another one was regulatory uncertainty and this applies throughout Africa. We’ve seen the history in Zimbabwe with their platinum and in Zambia with their royalty changes but in South Africa, we have a fair degree of uncertainty. It starts with this BEE audit and the results of the GR to March 2015. Many companies out there have done a significant level of BEE transactions, set up companies such as Exxaro or Kumba, and they were given credit for that in terms of their mining license so not everyone is at 26 percent. We’ve also seen many companies have had to issue equity to restore balance sheets and sometimes, BEE has been diluted and yet, they did the initial BEE transaction. As you quoted, “How many times can you circulate a 26 percent shareholding for any one company”, so this has been compounded at the same time in South Africa, by the MPRDA being sent back to Parliament. People are concerned that it will come back with maybe, those changes and beneficiations. In addition, you’d couple that with this concern about which minerals would be deemed strategic and the Minister would actually implement that demarcation. These types of uncertainties, starting with BEE, do create concern for investors. Having said that, we still see a lot of investor interest into the region.
We also had the South African Mining Minister at the Indaba. He seemed to send quite a supportive message but I suppose that you need to see the action.
Look, Minister Ramatlhodi has had a far more active approach recently. We know that in early February, he was meeting with the coal, PGM, and gold CEO’s. He’s trying to piece together a common vision. He’s really putting the effort in there but the difficulty is comments such as ‘national mining champion. How do you actually put that together? Who manages it? How is it created?’ He has to look at some of these issues. He has to look at the productivity in this country and the labour issues. Everyone is very concerned about the gold effect in the AMCU/NUM debacle, so he has a lot on his plate. He was giving a good message out there, but you need to see the follow-up action on this.
At the Mining Indaba, there wasn’t a whole lot of discussion around the topic of the new mining lab that’s being proposed by President Zuma. He went to Malaysia, learned about the labs that they have there, and brought it back here. The first one was the Ocean Economy, it’s called Operation Phakisa. Mining is the next one in line, to be addressed. Perhaps these issues will be thrashed out there.
We weren’t aware that any issues had been thrashed out and I think everyone’s waiting for the Minister to come through with his view. I think that you just have to be careful with things like China, etcetera. China, at seven percent growth from a GDP perspective, is a new realism, which we have to take into account here and we can’t rely on China to bail out commodities any longer, nor to be the catalyst for M & A into the region. If you look back at 2010, China’s GDP was in double digits. Coming down to seven percent within five years is really, setting the tone that you can’t just rely on China to bail out Africa with regard to resources.
Craig, it was interesting talking to the Glencore guys, off the record. They were quite forthright about commodity prices still having a way to go before they bottomed out. What is your reading of that internally, at Barclays Africa and indeed, the feedback that you got from others who were at the Indaba? This morning we had iron ore, now being projected at $35.00 per ton.
Iron ore in particular has been the lifeblood of the major diversifieds and heavily reliant on China, so it goes to my comments before in terms of China with the seven percent GDP growth rate. We don’t believe that iron ore’s going to improve over the next one to two years. We do know that some of the majors were able to be profitable at about $50.00 iron ore price. If it drops below that, then there will have to be some fallout but it’s all a question of supply. I don’t think iron ore producers have turned off the taps as this iron ore price has declined, so you’re still in a rather ‘surplus’ situation. I think that goes to copper and coal as well. None of them are showing short to medium term improvement.
Which suggests that the whole regulatory uncertainty is something that, if Africa wants to benefit (or at least, not lose potential future investment), it had better get its act together.
It does need to create a certain and fair environment, particularly when you look at iron ore, copper, and some of the other major industrial commodities. When they’re in Africa, those producers put up significant infrastructure such as railways, ports, and loading facilities, apart from bringing in employment around the community. That has really assisted Africa over the last five to ten years, so you still need to attract that investment Dollar into Africa because it’s not just the actual commodity or the resource space. It’s all spin-offs and logistics, etcetera so it needs to have a certain and fair environment. The more uncertainty there is the more inclined that investment Dollar is to go to other regions.
They often say that the level of optimism at the Mining Indaba (or how long it lasts), will tell you what’s going to happen in the mining industry, generally. You don’t sound terribly optimistic. Is this because you saw the engagements there as being a little bit pessimistic?
No, I don’t think we’re pessimistic. I think there’s a certain sense of pragmatic realism. Last year, people were way too optimistic and there was a bit of carnage out there, over the year. This year, I think people understand that they didn’t see the declines in iron ore, coal, or copper. They didn’t see oil halve in three months. What people are looking at now is more of the same in terms of commodity pricing, balance sheet restoration, focus on core operations, and the big issue is productivity leading to cash flow and then, returns to shareholders. It’s not that we’re pessimistic. I think we’re just very realistic.
Back to basics for the mining sector, generally. Craig Brewer is with Barclays Africa.
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