Risk raises hurdles to mining inflows
Increased country risk and regulatory uncertainty have changed the way some mining investors look at SA, holding back spending on projects that do not deliver returns under higher investment hurdle rates.
Increased country risk and regulatory uncertainty have changed the way some mining investors look at SA, holding back spending on projects that don’t deliver returns under higher investment hurdle rates.
The hurdle rate, or return on capital invested, increases as a risk premium is factored in. Essentially, investors want a big return on their money if projects are considered risky.
SA has become increasingly risky for investors, with Eskom in desperate trouble with R450bn of debt it cannot service; continued demand for bailouts running into billions of rand by other government entities; and failing service provision, resulting in more community unrest, with mining companies flagging it as one of their major risks.
More specific to mining is the regulatory uncertainty they see stemming from the third iteration of the Mining Charter, which faces a court challenge about certain clauses.
The world’s largest platinum miner, Sibanye-Stillwater, has lifted its targeted return for potential new projects in SA by two-thirds to 25%, forcing it to either look at alternative ways to bring projects into production or slowing them down until circumstances improve.
One such deal was to vend its gold tailings west of Johannesburg into dump retreatment specialist DRDGold in exchange for a 38% stake in the company, unable to convince the Sibanye board to invest in the project that would deliver relatively cheap and safe production.
In the past a project with a post-tax return of 10%-15% was considered “great”, Sibanye CFO Charl Keyter told delegates at the Joburg Mining Indaba. “You are now looking at a 25% return. It’s a fact of life we have regulatory uncertainty. It will bed down but who knows when. That is how you factor it in,” Keyter said.
Sibanye CEO Neal Froneman has spoken in the past of stalling a number of gold projects such as Burnstone in SA because of the higher cost of doing business in the country, mainly because of uncertainty about how much more electricity tariffs would increase as Eskom tries to fix its balance sheet through charging its clients more.
Impala Platinum (Implats), which owns Zimplats in Zimbabwe and shares in the Mimosa mine there with Sibanye, considers risks outside regulatory uncertainty. Zimbabwe is essentially a failing state, but the government is protecting productive platinum mines as far as possible as one of its last major sources of revenue.
“When we evaluate projects in Zimbabwe, that is quite important given the economic and legislative environment. When we compare a project in Zimbabwe vs SA you have to risk-weight the project,” Implats CFO Meroonisha Kerber said.
Implats CEO Nico Muller has said the company will no longer invest in deep-level mines in SA, with the risks associated to costs and the time to build these operations making them unpopular with investors.
A growing consideration in assessing risk and investment hurdles is a new approach to environmental, social and governance (ESG) issues, said Abigail Mukhuba, finance director at African Rainbow Minerals.
“ESG forms a bigger part of that investment decision.
“Sometimes you find projects with wonderful internal rates of returns, but all these ESG matters and the uncertainty, particularly when you consider mining is such a long-term game ... are now forming a bigger part of that decision-making process than the financial part at some point,” Mukhuba said.