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GLOBAL mine maintenance spending is idling and expansion spending is taking a nosedive. In 2013 South Africa is going to buck both these trends - but for all the wrong reasons.
The year ahead is going to be the one where two major forces dominate boardroom airtime and determine South Africa’s future mining landscape.
The decidedly unsexy terms cost inflation and political risk are this year’s major players in the national arena. With 2012 not dissipating into Mayan doom, market players will have to resort to the good old broom.
The current situation has created two types of market participants, short-term and long-term.
Some players are focused on the short term as a survival strategy; quite simply, they need to sacrifice long-term objectives to remain solvent.
Others are focused on the short term, based on earnings pressures from shareholders - for these players, every decision in 2013 will be about free cash flows.
Long-term players have the benefit of deeper pockets, and as such are following either a hibernation or a realignment strategy.
The hibernators are firm believers in commodity super cycles and the eventual return of demand side growth; they plan on weathering the downturn by nurturing existing operations and readying for the day after.
The realigners - while also subscribing to the inevitability of the next commodities boom, distant as it may appear - believe the mining sector has undergone a fundamental paradigm shift which requires a wholesale attitude change in the light of the game-changing reality.
They face the challenges of skills scarcity, cost inflation, price and currency volatility, resource nationalism and maintaining a social licence to operate.
These new dawn advocates are developing diversification strategies to reshape their empires, in accordance with the new rules of engagement.
Political risk
While mining majors have a steady eye on the global macroeconomy, South Africa has proven to be a special needs child deserving special attention.
In an effort to mitigate risks, the industry as a whole over the next few years will keep maintenance at current levels but gradually reduce expansion spending (see Figure 1).
The MaX Ratio (maintenance capital expenditure as a percentage of expansion capital expenditure) is a rough guide to measuring capital allocation decisions.
As indicated in the diagrams, the global MaX ratio between 2008-2011 (see Figure 2) was trending downward, indicating market confidence - most likely as a response to the Chinese juggernaut - and the belief that double-digit growth could continue for another 30 years.
However, the forecasts from 2012-2015 (see Figure 1) showcase a sharp rise in the MaX ratio, indicating that miners are circling the wagons in an attempt to ride out this long bearish storm without much concern for future supply shortages.
South Africa will track this trend - but not in 2013.
As a special needs economy, South Africa will be treated with different medicine.
While global maintenance spending will idle, 2013 will bring an increase in maintenance spending in SA.
This will be the result of two factors. Firstly, since new projects are off the cards for most majors, they will focus on extracting the full benefits of low hanging fruits. This would include:
• utilising excess processing capacity to maximise outputs; and
• increasing mining of open pit and other easy access ore sources.
The flip side of maintenance spending increases will materialise from the second factor, sacrificing higher grade ore bodies in favour of lower cost alternatives and downsizing of uneconomic operations. This involves:
• maximising the mining of easy access ore sources;
• ramp-downs at marginal shafts and beneficiation plants; and
• mothballing underwater operations.
Expansion capex will also be drastically reduced, but not in 2013.
While long-term projects will be delayed, reduced or canned, those with short-term cash generating potential will be given both thumbs up, the mining equivalent of a sugar high.
Among the movers and shakers, some unusual market moves can be expected in 2013.
Mergers, acquisitions and divestitures
Local players will be following one of two strategies: diversify metals and/or diversify regions.
What this means for industry participants is that aside from spending pots of money on consultants, there will a smorgasbord of what to buy.
Juniors and mid-tiers will be preening themselves as acquisition targets as cash constraints tighten.
The majors will be spinning off dislocated business units previously viewed as adding diversity, but currently seen as adding adversity.
Incumbents with broad portfolios will look to balance exposure.
Those bullish on South Africa will look to grab high quality assets on the cheap.
Delisting and private equity
The year 2013 will be a good one for departing the public arena.
Delinking mining share prices from their underlying commodities prices will motivate private equity houses as well as sovereign wealth funds and their ilk to acquire and delist mines, in an effort to serve their longer-term investment horizons and secure vital commodities.
Cost inflation
Globally labour costs have been spiralling upwards, fuelled by skill shortages and the mining of remote, less desirable locations.
South Africa by and large doesn’t suffer from the latter issue, with most mining regions fit for family rearing. However, skilled miners are easy pickings for companies in Canada and Australia, creating a diminishing pool of scarce skills at any price.
Low-skilled labour suffers from the reverse scarcity condition, ie a heavy oversupply of low-skilled labour which historically has been a boon to miners since they could exploit this supply side surplus.
However, due to the increasing power and demands of (dis)organised labour this market equilibrium has received a kick in the stasis.
The sole advantage of cheap labour, ie being cheap, is no longer the case and with it the raison d'être has expired, begging a better solution to getting rocks out of the ground.
This brings us to the better solution for 2013 - technology.
Technology
Most mining majors operating in developed countries are well versed in mechanised mining. Expect an abundance of cross pollination based on already applicable technologies, as well as a mini gold rush to develop tools to tackle the not yet feasible unique requirements of SA mining.
While mining CEOs embark on the expedition for the holy grail of public-private partnerships, their minions are scouring the Earth in a less ambitious quest - that of acquiring assegai-less extractive technologies.
The New Year will see those miners who rapidly substitute labour intensive mining with the mechanised kind reap massive productivity gains; let’s hope they get to keep them.
- Fin24
*Fin24 user Jarred Myers doubles as a columnist. Views expressed are his own.
The year ahead is going to be the one where two major forces dominate boardroom airtime and determine South Africa’s future mining landscape.
The decidedly unsexy terms cost inflation and political risk are this year’s major players in the national arena. With 2012 not dissipating into Mayan doom, market players will have to resort to the good old broom.
The current situation has created two types of market participants, short-term and long-term.
Some players are focused on the short term as a survival strategy; quite simply, they need to sacrifice long-term objectives to remain solvent.
Others are focused on the short term, based on earnings pressures from shareholders - for these players, every decision in 2013 will be about free cash flows.
Long-term players have the benefit of deeper pockets, and as such are following either a hibernation or a realignment strategy.
The hibernators are firm believers in commodity super cycles and the eventual return of demand side growth; they plan on weathering the downturn by nurturing existing operations and readying for the day after.
The realigners - while also subscribing to the inevitability of the next commodities boom, distant as it may appear - believe the mining sector has undergone a fundamental paradigm shift which requires a wholesale attitude change in the light of the game-changing reality.
They face the challenges of skills scarcity, cost inflation, price and currency volatility, resource nationalism and maintaining a social licence to operate.
These new dawn advocates are developing diversification strategies to reshape their empires, in accordance with the new rules of engagement.
Political risk
While mining majors have a steady eye on the global macroeconomy, South Africa has proven to be a special needs child deserving special attention.
In an effort to mitigate risks, the industry as a whole over the next few years will keep maintenance at current levels but gradually reduce expansion spending (see Figure 1).
The MaX Ratio (maintenance capital expenditure as a percentage of expansion capital expenditure) is a rough guide to measuring capital allocation decisions.
As indicated in the diagrams, the global MaX ratio between 2008-2011 (see Figure 2) was trending downward, indicating market confidence - most likely as a response to the Chinese juggernaut - and the belief that double-digit growth could continue for another 30 years.
However, the forecasts from 2012-2015 (see Figure 1) showcase a sharp rise in the MaX ratio, indicating that miners are circling the wagons in an attempt to ride out this long bearish storm without much concern for future supply shortages.
South Africa will track this trend - but not in 2013.
As a special needs economy, South Africa will be treated with different medicine.
While global maintenance spending will idle, 2013 will bring an increase in maintenance spending in SA.
This will be the result of two factors. Firstly, since new projects are off the cards for most majors, they will focus on extracting the full benefits of low hanging fruits. This would include:
• utilising excess processing capacity to maximise outputs; and
• increasing mining of open pit and other easy access ore sources.
The flip side of maintenance spending increases will materialise from the second factor, sacrificing higher grade ore bodies in favour of lower cost alternatives and downsizing of uneconomic operations. This involves:
• maximising the mining of easy access ore sources;
• ramp-downs at marginal shafts and beneficiation plants; and
• mothballing underwater operations.
Expansion capex will also be drastically reduced, but not in 2013.
While long-term projects will be delayed, reduced or canned, those with short-term cash generating potential will be given both thumbs up, the mining equivalent of a sugar high.
Among the movers and shakers, some unusual market moves can be expected in 2013.
Mergers, acquisitions and divestitures
Local players will be following one of two strategies: diversify metals and/or diversify regions.
What this means for industry participants is that aside from spending pots of money on consultants, there will a smorgasbord of what to buy.
Juniors and mid-tiers will be preening themselves as acquisition targets as cash constraints tighten.
The majors will be spinning off dislocated business units previously viewed as adding diversity, but currently seen as adding adversity.
Incumbents with broad portfolios will look to balance exposure.
Those bullish on South Africa will look to grab high quality assets on the cheap.
Delisting and private equity
The year 2013 will be a good one for departing the public arena.
Delinking mining share prices from their underlying commodities prices will motivate private equity houses as well as sovereign wealth funds and their ilk to acquire and delist mines, in an effort to serve their longer-term investment horizons and secure vital commodities.
Cost inflation
Globally labour costs have been spiralling upwards, fuelled by skill shortages and the mining of remote, less desirable locations.
South Africa by and large doesn’t suffer from the latter issue, with most mining regions fit for family rearing. However, skilled miners are easy pickings for companies in Canada and Australia, creating a diminishing pool of scarce skills at any price.
Low-skilled labour suffers from the reverse scarcity condition, ie a heavy oversupply of low-skilled labour which historically has been a boon to miners since they could exploit this supply side surplus.
However, due to the increasing power and demands of (dis)organised labour this market equilibrium has received a kick in the stasis.
The sole advantage of cheap labour, ie being cheap, is no longer the case and with it the raison d'être has expired, begging a better solution to getting rocks out of the ground.
This brings us to the better solution for 2013 - technology.
Technology
Most mining majors operating in developed countries are well versed in mechanised mining. Expect an abundance of cross pollination based on already applicable technologies, as well as a mini gold rush to develop tools to tackle the not yet feasible unique requirements of SA mining.
While mining CEOs embark on the expedition for the holy grail of public-private partnerships, their minions are scouring the Earth in a less ambitious quest - that of acquiring assegai-less extractive technologies.
The New Year will see those miners who rapidly substitute labour intensive mining with the mechanised kind reap massive productivity gains; let’s hope they get to keep them.
- Fin24
*Fin24 user Jarred Myers doubles as a columnist. Views expressed are his own.
