Powering through Covid-19 | Fin24
 
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Powering through Covid-19

Mar 30 2020 17:52
David McKay

It is tempting to fear the worst following President Cyril Ramaphosa’s dramatic 21-day lockdown announcement on24 March, aimed at stemming the spread of Covid-19, especially for the mining sector, which has long been at loggerheads with government over fiscal and economic policy.

The Minerals Council South Africa’s response was to call for creative measures, in association with government and business generally, to make sure all mines can reopen on 16 April when the lockdown is scheduled to end.

It fears some might not.

However, there’s ground for optimism in the face of the unprecedented events around Covid-19.

One is the most obvious: In terms of political capital, the Ramaphosa administration has never been more ‘on point’, moving with decisive pace in order to save the lives of South Africans.

Secondly, the interaction between government and business in tackling the Covid-19 crisis might be catalytic for public- private enterprise in the future. “The cooperation between government and the private sector has been excellent in the last few weeks,” says Charmane Russell, spokesperson for the Minerals Council. “There’s a great deal going on behind the scenes in terms of the private sector coming to the table.”

Thirdly, the last two weeks of stock market volatility, largely dominated by massive liquidations, represents an opportunity for investors, especially in the mining space, although caution is the by-word.

Thanks to the hardships of 2015, when the mining sector was found to have over-extended itself in search of market share, today’s diversified mining companies are well-stocked to survive the crisis. 

“Even under a very long government- imposed shutdown, SA diversified miners’ balance sheets should be able to cope, a testament to lessons learnt in 2015,” said analysts at RMB Morgan Stanley in a note to clients. 

Even assuming an extended shutdown of the mining sector of up to six months – which would be catastrophic to SA society in general – diversified SA mining companies will survive, with African Rainbow Minerals (ARM) burning 73% of its available cash, and Kumba Iron Ore, the Anglo American subsidiary, using only 36% of its cash.

All sectors of the investment market have probably been oversold but certain shares look especially attractive, such as Exxaro Resources, which has fixed-cost contracts with Eskom in a commodity that is likely to escape the lockdown owing to the essential role it plays in energy generation.

As for Kumba, it will benefit from rand hedge, and the fact that oil is at historic lows, lowering its cost of production. The firm is also exceedingly well-padded with cash reserves in a sector that is well-disposed to the slow but sure economic recovery analysts expect of China.

Where there is stress, however, is in the mining sector supply chain where even a 21-day lockdown might see equipment and supplies companies unable to prevail.

“Local suppliers of goods and services will struggle to last a 21-day shutdown, in our view,” said RMB Morgan Stanley. “In the event of failures within the mining sector supply chain, we’re concerned about a delayed ramp- up once the shutdown is lifted and elevated cost inflation as the supply chain will need to be rebuilt,” it said.

Even in this scenario, there’s upside to be had, according to the bank, which believes the mining sector ought to shoulder the cost of poverty alleviation in the regions where they operate. “It shouldn’t be a major drag on cash flows, but it would be precedent- setting,” the bank said.

These are precedent-setting times, however. The Oppenheimer and Rupert families have contributed R1bn each to alleviate stress on small businesses through the crisis – a response that perfectly brings the curtain down on the previous administration’s vilification of so-called ‘white monopoly capital’ and potentially raises another curtain on improved relations between the private and public spheres.

As for the short-term future of the mining sector post the lockdown, there’s the question still of how it intends to tackle potential outbreaks of the virus on the mines. Might this lead to a renewed bout of shutdowns?

Says James Wellsted, spokesperson for Sibanye-Stillwater: “There is no one answer to the question of what happens if an employee is infected: is it in the change room; is it somewhere else?”

The perception is that a mine is a relatively discrete entity; in fact, they are like “little cities”, he says. It takes about 60km worth of travel to move from Sibanye-Stillwater’s Libanon on the West Rand to the end of its other mine at Driefontein.

“The approach with infection is that wetry to limit where it may have occurred and, if necessary, we may have to shut a section or even a mine. But I don’t think it’s true that we would have to shut an entire business,” he says.

In other respects, the SA mining sector is positioned to tackle Covid-19 better than most in the SA economy owing to its expertise managing mining communities. The sector has been at the forefront of HIV/Aids treatment as well as tuberculosis (TB) and other occupational hazards such as silicosis.

Between 2008 and 2018, TB cases have fallen from just over 1 700 to about 500 while under the Mineral Council’s Masoyise Health Programme, counselling for HIV rose from 79.1% in 2015 to 84% in 2018. Over the same period, TB screening rose from 84% in 2015 to 90.3% in 2018, and TB incidence decreased from 1 068 cases per 100 000 population to 435 cases per 100 000 population.

“Mines are part of communities and we should expect employees to be infected,” a mining industry source said on condition of anonymity. “What we need to be able to do is very quickly isolate individuals and prevent further and rapid spread.

“It is only when it is evident that there is extensive and continuing transmission that consideration could be given to closing a part or all of a mine. Closing a mine doesn’t stop the problem. We need to take a holistic approach that recognises this.”

This article originally appeared in the 2 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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