South Africa’s mining industry continues to face tough times in the wake of continuing labour unrest and mounting cost pressure, says PwC‘s SA Mine.This, together with lower production and international demand weakness have resulted in shrinking margins and wide ranging impairment provisions for the industry. The significant decrease in profitability of the industry has also resulted in a substantial contraction in market capitalisation of South African mining stocks. This decrease is in line with international mining counterparts who are also struggling with higher costs and lower prices. A weakening rand over the period shielded the local mining industry to a certain degree from the decline, with rand prices remaining relatively flat. These are some of the highlights from PwC’s fifth edition of ‘SA Mine’, a series of publications that highlights trends in the South African mining industry. The study’s findings are based on the financial results of the top mining companies with a primary listing on the JSE, as well as those with a secondary listing whose main operations are in Africa for financial year ends to June 2013. Only companies with a market capitalisation of more than R200 million are included in this report. The selection criteria excluded global mining companies Anglo American and BHP Billiton as these organisations do not necessarily reflect trends in the South African mining environment. Hein Boegman PwC African Mining Leader, says: “The mining industry still adds significant value to the South African economy with regards to GDP contribution, employment, tax revenues and export revenue. The importance of this contribution was recognised by the willingness of the Government, labour and business to sign a framework agreement to support the sustainability of the industry. “Despite the challenging year, balance sheets remained strong, with stable liquidity. However, increased gearing was required as companies had to fund sustaining capital expenditure and in some cases operating losses. The R25 billion impairment provisions raised highlights the difficulty to make long term decisions in volatile markets.” Market capitalisation The 2013 financial year saw a continued decrease in the market capitalisation of mining companies. The market capitalisation for the top 37 companies declined by 28% from R833 billion to R597 billion at 30 June 2013. Gold mining companies were the hardest hit, losing R109.6 billion (48%) of their market capitalisation following the decline in the gold price. Following gold, platinum mining companies lost R75.8 billion (29%) of their market capitalisation. Market capitalisation of the top 10 declined by R228.9 billion (30%) to R544.6 billion. The bulk of the top 10 companies saw their market capitalisation decline with the exception of Lonmin and Assore, which have grown in value since 2012. Although the composition of the top 10 remained consistent, the gold producers moved down the order. The market capitalisation of the 37 companies improved after 30 June 2013 and as at 30 September 2013, had increased by 19% to reach R708.7 billion. Contribution by commodity Despite a decrease in price, coal remains the highest earning commodity in South Africa. The increase in the rand basket price of platinum was offset by lower sales volumes resulting in revenue consistent with the previous year. The decrease in gold production more than offset the increase in average gold price achieved for the year. Iron ore recorded its first decrease in revenue in the last 10 years. This was mainly the result of an average 5% lower iron ore price and lower sales despite good production. Financial performance of the industry “As expected given the turmoil in the industry, financial performance in the industry was disappointing,” says Boegman. Revenue was largely flat on last year as the rand price-driven increase in gold revenue was offset by lower sales volumes among almost all commodities. Production was severely affected by the labour strikes that started in the platinum sector before spilling over to other mines.
Operating expenses increased by 16%, which is in line with the 13% (16% if adjusted for the 2012 Impala strike) of the prior year. This increase occurred despite the no-work-no-pay strike and a significant decrease in production at most entities. If the strike-affected platinum companies are excluded from the operating expenses analysis, then the real increase is 23%, indicating the significant cost pressure being experienced by the industry, states the report.Labour remains the biggest cost component in the mining industry. Labour cost percentages vary from above 50% for the deep-level conventional mines to below 30% for those companies that mine predominantly opencast. Given the above-inflation increases seen in recent years and lower productivity, this cost component is likely to remain the biggest for some time. As expected and in line with global counterparts, there were substantial impairments in the current year. The R25 billion impairment provision equates to 34% of the current year capital expenditure and 6% of total mining assets. The 64% decrease in net profit is a result of the R25 billion impairment, the decrease in the EBITDA margin from 37.0% to 28.5% and the effective tax rate of 43% which is well above the previous year’s rate of 31%. Integrating risk into business strategy Overall, mining companies have been good at disclosing the risks they face. However, Boegman says the challenge remains to adequately link performance and risk management to put the necessary measures into practice. Volatile commodity prices, labour unrest and rising costs were amongst the most common risks disclosed by the companies included in the analysis. Large impairments due to underperforming assets and capital projects have featured prominently in financial results. These have led companies to implement cost management and cash preservation strategies, which have resulted in retrenchments and difficult wage negotiations. There is resultant uncertainty as to the sustainability of some mines. Boegman says: “Gone are the days when risks for companies were focused only on health and safety issues. Nowadays, it is imperative that mining companies rethink risk and the risk landscape in which they operate. “Companies now need to integrate risk and performance management and they need to evolve risk management to be more predictive in order to anticipate and plan for negative potential events. The changed environment requires mining leaders to steer their companies through the near term low margin challenges while recognising the impact on all stakeholders involved.” Safety in mines Safety statistics indicate that there is a higher level of focus in place and this becomes particularly clear when one compares current statistics to historic rates, which show a substantial decrease in fatalities and lost time injuries over the last 10 years. Improving value to stakeholders The mining industry adds significant value to South Africa and its people. Stakeholders in the industry include employees and their families, unions representing them, the Government as regulators and custodians of income tax for the country, investors, suppliers and customers. The monetary benefit received by each stakeholder in the industry is usually summarised in mining companies’ value added statements. It is a lot more difficult to quantify benefits resulting from costs that assist in uplifting communities or protecting the environment for future generations. Employees received 37% (compared to 27%) of value created. If one were to exclude the impressive performance of Kumba Iron Ore from this breakdown, then employees received 46% (2012:36%). The state received 21% (compared to 19% in 2012) consisting of direct tax, mining royalties and tax on employee income deducted from employees’ salaries. The actual contribution received by the state is significantly higher, with indirect taxes, such as VAT, import and export taxes also being collected. Funds reinvested in the form of acquisitions and capital additions made up 37% (compared to 27% in 2012) of the total value created. Distributions to shareholders remained consistent at 20% of value created and therefore decreased significantly in rand terms, highlighting the volatility of returns to shareholders. Excluding Kumba Iron Ore, this percentage drops to 7% (2012: 10%). It goes without saying that to increase value for stakeholders, total value needs to increase. The risk of all stakeholders pursuing maximisation of short-term benefits at the expense of longer term sustainability is real. To create value sustainably, stakeholders need to accept that suppliers of labour, capital and resources need to be compensated fairly and equitably, particularly since these stakeholders cannot operate in isolation.