Mining sector suffers R60bn knock on low commodity prices

Johannesburg – The continuing trend of low commodity prices has resulted in R60bn worth of impairments in the mining sector, the PwC SA Mine report released on Thursday showed.

This is the eighth edition of the report. It indicated that the level of impairments over the past five years came to R157bn. The industry reported an aggregated net loss of R46bn, since 2009.

“Companies had no choice but to cut back on new developments, re-focus on profitable production rather than maximum production and to save costs,” stated Michal Kotzé, mining industry leader for PwC Africa. Given the risks associated with the current economic environment, management has had to make tough decisions to ensure sustainability.

In the current year, most companies’ top risk exposures include liquidity and capital management, renewed focus on the cost of mining, water scarcity and climate change.

“The long-term nature of mining investments translates into a significant lag in the supply response to price changes. This lag contributes to the cyclical nature of the mining industry,” stated Kotzé. “Although there is no consensus, we have probably reached the bottom of the cycle, but may stay here for some time.”

Commodity contributions

Coal remained the highest earning commodity in South Africa. The share of revenue decreased marginally to 29% from 2015 to 2016, total coal mining revenue increased by R1.3bn from a high base of R104.4bn in 2015.

Platinum group metals' (PGMs) share of mining revenue grew from 25% to 27%. This is an R8.6bn increase from R87bn in 2015.

Gold’s share of revenue increased significantly from 15% in 2015 to 20% in 2016, primarily on the back of stronger gold prices and the weakening rand, according to PwC.

Iron ore’s share of mining revenue continued its downward trend from 14% in 2015 to 10% in 2016.

Mines improved their cash flow position. “Last year reflected the worst free cash flow position since the financial crisis in 2008. This year shows an improvement largely due to cash management practices,” said Andries Rossouw, partner at PwC Assurance.

Revenue increased by 2% to R7bn. The platinum companies’ revenue increased by 11% to R12bn, as a result of higher production following the impact of the strike in 2014. Gold also showed an increase on the back of higher gold rand prices while other commodities reflect a decrease mainly as a result of lower iron ore prices.

Operating expenses increased by R12bn, up 5% from the previous year. “The low increase in operating cost is testimony to the various savings initiatives implemented by management, including reduction in marginal production, renegotiation of supply agreements and a reduction in overhead structures,” said Rossouw.

Labour costs remain the biggest cost component in the local mining industry. The share of labour costs increased by 5.2%.