Mining: 2010's up and downside
Excluding December, for which statistics aren’t yet available, coal sales in 2009 were worth only 1% less than platinum sales from SA’s mines at around R51,7bn – almost 25% of total mineral sales, reports Statistics SA.
Though coal production fell by a relatively marginal 1.3% last year the value of sales dropped 22,4%. Despite that drop it was still the least affected mining sector after gold and iron ore, which both actually improved sales last year.
Unlike platinum, for which SA enjoys something close to a global monopoly, and gold, for which it long ago had the same stature, coal is uniquely inward-facing.
Around 50% of local production goes to Eskom and 20% to Sasol.
One of Eskom's two new coal stations – Kusile – is yet to sign a coal supply contract and Anglo Coal is logistically best placed to supply the new giant. Going forward, the Medupi and Kusile stations represent probably the most significant factors in local demand.
However, Kusile still hangs in the balance as Eskom, industry and Government ponder the imponderable construction costs.
But the vexed export sector will be in the spotlight this year after the Richards Bay Coal Terminal (RBCT) reclaims its position as the world’s largest coal exporting facility.
The RBCT’s Phase V expansion is due for commissioning at end- March, giving the terminal the theoretical capacity to export 9m t/year, a leap of 15m t.
Unfortunately, there’s no guarantee Transnet Freight Rail will be able to bring that much to port after only delivering 61.1m t last year.
Promises have been made and technical assistance promised, but ultimately the proof is in the pudding.
Exported coal contributes disproportionately to South African coal companies’ revenue.
While exports, due in large part to Transnet, account for less than a third of sale volumes they bring in almost 60% of revenue.
That’s why access to the RBCT is so essential.
Coal is in many ways the leader of empowerment in SA’s mining, a function of its rapid expansion through countless new juniors that need mining rights and its inextricable link to the State-owned power supplier.
In last year’s DMR Budget speech Minister Susan Shabangu made special mention of the coal industry’s “market challenge”: the monopolisation of export facilities by a few giant producers.
However, this year the RBCT is set to make headway with black economic empowerment by allotting 9m of the 15m t in new capacity to new black-owned clients, drawing those groups into the industry’s money-spinner.
One company with both an RBCT-allocation and a – reportedly unusually favourable – Eskom-contract is Optimum Coal Holdings, a black-owned group aiming at a JSE listing this year.
Optimum has made strides in consolidating two large mines earlier unbundled from BHP Billiton for empowerment purposes to a number of shareholders.
At writing, Optimum was waiting on regulatory approvals to push up its share in the Koornfontein mine to 91%, while it already controls the huge Optimum colliery after which it’s named.
This fast rising company has little debt and seemingly on track to become a major player in this dynamic sector.
Platinum group metals
The platinum market is an entirely different kettle of fish. It remains SA’s most important mining sector and most valuable exporter – even after a catastrophic drop in sales value last year of 40% (or R35bn) in the first 11 months.
Despite well publicised job losses and production suspensions, the big spillover effect of the recession has been the stalling of expansions and new projects, of which many are set to resume this year – credit markets willing.
That sets the scene for corporate activity while simultaneously feeding optimistic forecasts for the platinum price, due to the improbability of supply as opposed to demand for autocatalysts and physical PGM-investments, improving much over the short term.
Projects that have been postponed due to the crisis include Impala Platinum’s Leeuwkop and Wesizwe’s Frischgewaad-Ledig, which was put on hold awaiting financing of more than R5bn.
Large producers, such as Anglo Platinum and Impala, could very possibly target producing juniors like Eastplats and the more established Aquarius as a quicker route to increased production while the platinum price, according to most estimates, will at very least maintain its strength.
An average platinum price of $1 500/oz is forecast by leading analysts surveyed early this year by the London Bullion Market Association, although highs of $1 900/oz are expected over the course of the year.
As with gold, the increasing role of investors makes for an ever larger price spread and increased volatility.
Among the big fish there’s more than a slight possibility Xstrata will renew its failed bid for Anglo American.
The “merger of equals”: takeover proposal lapsed in October 2009, but April marks the end of the mandatory six-month waiting period before Xstrata can have another go at it.
Phillip Klapwijk, of GFMS – who last year forecast the average gold price of $972/oz to within $2 – now prophesises greater volatility due to the gold market finally tipping into a mostly investment-driven business for the first time since 1980.
It essentially means more upside while money markets are shaky, with the obvious downside of more potent corrections and general volatility.
Klapwijk now predicts an average spot price of $1 172 throughout the year, with a high of $ 1340/oz – not far off the average forecast of analysts’ surveyed by the London Bullion Market Association early this year: $1 199/oz.
George Soros reportedly called the investment drive the “ultimate asset bubble” but shortly thereafter doubled his Soros Fund Management’s gold investment in February.
As last year, much of SA’s gold industry’s fortunes depend on the US dollar/rand exchange rate, which in 2009 eroded much of the yellow metal’s dollar gains.
Eskom’s tariff hikes present a particular profit-eroding threat to the deep power-intensive mines of the gold sector.
At least one new player is heading for the JSE this year: Aurora Empowerment Systems, the fast-moving saviour of troubled gold mines headed by scions of the Mandela and Zuma families.
After spending more than R1bn on a portfolio of arguably the worst gold mines in SA – and promising further capital expenditure of hundreds of millions of rand to turn them around – all eyes are on this new, unproven group. Aurora is in the process of acquiring Labat Africa’s listing to house its mines.
However, only time will tell if it ends up being the new Harmony or the new Pamodzi Gold.