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Low expenditure on exploration is a major concern for the SA mining industry, Allan Reid, head of mining at law firm Cliffe Dekker Hofmeyr, has told Fin24.
In his view, this does not bode well for the future of mining in the country.
Reid believes both the Mining Charter guidelines and requirements for operating licences will result in increased barriers to funding, especially for new projects.
In 2018, it emerged that after a four-year slump, mining companies were beginning to spend on exploration again, as interest in base metals began to rebound and clean technologies boosted demand for niche battery ingredients.
'Pretty good year'- but not for SA
A report by S&P Global Market Intelligence found that miners spent $8.4bn searching for new metal deposits - some 15% more than in 2016, and that exploration spending, excluding iron ore, could increase again by 20% in the next year.
The mining industry in SA is in a different position to the industry worldwide. Reid described 2018 as a pretty good year for the mining industry globally.
But SA is no longer one of the leading mining destinations of the world. According to the PwC ranking of the top 40 mining companies in the world, only one is based in SA, namely Anglo American.
"Globally we have seen an increase in commodity prices and how cost-cutting measures became effective. Generally, there was an increase of returns to shareholders globally and an increase of profits," Reid said.
Bulk commodity mining companies - mining coal, manganese, chrome and iron ore - did well last year and, in Reid's view, will continue to do so this year and even beyond.
At the other end of the spectrum, commodity prices did not favour gold and platinum mining companies, and the dismal performance of recent years was not reversed.
Furthermore, various gold and platinum shafts in SA are reaching the end of their productive lives and becoming very expensive to mine, Reid said.
The position of SA platinum miners was somewhat ameliorated in that the basket price for platinum group metals (PGMs) was buoyed by an increase in prices for palladium and chrome.
Nevertheless, on an aggregated basis and after impairments by the gold and platinum producers, the mining industry in SA recorded a substantial loss for 2018.
"The gold and platinum companies are likely to continue to face headwinds going forward in SA," said Reid.
Challenges
According to Reid, obtaining and maintaining a social licence to operate has become a major challenge for many SA miners.
"There have been numerous court decisions in last few months, which are going to place a burden on mining companies applying for mining licences," he explained.
In one case, the judge ruled that, if there are informal settlements on land a company wishes to mine, the company requires consent from the community.
"This would, therefore, not involve only a consultative process, but actual consent," said Reid. In his view, associated costs, or benefits ultimately claimed by the community, could make the mining project unviable for the company.
Rising costs
"The other major risk is the cost pressures facing SA mining. Employee costs are rising above inflation and rising costs coupled with lower production leads to SA becoming a less favoured destination for mining," Reid said. He believes the consolidation trend is set to continue, both in terms of company mergers and asset consolidation.
As for the 2018 Mining Charter, he argues it is an improvement on the June 2017 version, but that it still "raises considerable fears among foreign investors, especially in relation to the carried interest of communities and employees, as well the distribution black economic empowerment in specific percentages".
The latest version of the Charter allows mining companies who complied with the 26% empowerment stipulation in the previous version to enjoy empowered status even if their empowerment partner has exited their investment in the company. New applicants must comply with the 30% stipulation.
Regulatory certainty
However, Reid said there was a move towards greater regulatory certainty in SA's mining industry during 2018.
"I don't think the new Mining Charter goes far enough to encourage new investments, but at least investors know where they stand and companies embarking on new mining projects know where they stand as well," he said.
"SA's mining industry faces a lot of competition from other African countries, but these countries also have amended their mining legislation, increased taxation and indigenisation laws. This is particularly so in Zambia, Tanzania and the DRC. I think those aspects will balance out whatever difficulties we have with our Mining Charter and will even the playing field."
For Reid the annual Mining Indaba - taking place in Cape Town from 4 to 7 February – is an important hub for the mining industry, and this year is likely to see "industry optimism".
"I think at this year's indaba we will see evidence of a continuation of companies restructuring. This will be a very good platform for those companies looking for finance and for different funding models," Reid said.
"I will be an interesting indaba and I think we will see a bit more industry optimism than has been the case in last two years."
