Mining may be coming to end of 2016’s rich seam

Analysts don’t bank on a repeat of recent gains

THERE is no doubt that miners had a good year in 2016. In the face of rallying commodities worldwide, the share prices of Kumba Iron Ore, Anglo American and Harmony doubled and in some cases even quadrupled, placing them among the 10 best performers on the JSE.

But whether mining houses will continue to be lifted by commodity prices for a second consecutive year is questionable, according to analysts.

This is especially the case for South African mining companies, which, despite cutting costs, improving productivity and reducing investments in the past two years — and getting a lift from commodity prices in the second half of last year — still face specific challenges.

According to the Chamber of Mines, one area of focus in mining in 2017 will be safety.

Chamber of Mines spokeswoman Charmane Russell said that while the final safety statistics for 2016 had not yet been published, the number of deaths in the industry had increased for the first time in a decade, despite a drop in overall injury rates.

Last year the mining industry complained that the Department of Mineral Resources was enforcing inappropriate safety stoppages.

It said government inspectors were imposing unfair stoppages, which cost companies billions of rands in lost production.

Last year Anglo-Gold Ashanti challenged the department over safety stoppages known as section 54s at its Kopanang mine. The Labour Court in Johannesburg found in favour of Anglo-Gold.

Paul Miller, a mining and metals investment banker at Ned-will bank, said no one objected to safety stoppages when they served to improve safety, but the government had to apply the law rationally.

The long-awaited draft reviewed mining charter, which has been postponed a number of times and is still to be published, not add to the appeal of South African mining.

The Chamber of Mines, which has been in dispute with the department since 2015 about the “once empowered, always empowered” rule, again underlined the threat the charter would pose to a sustainable mining industry should the department publish it without making significant changes.

Miller said there would be a lot of legal battles over the mining charter this year.

Malan Scholes Attorneys, a Jo-Mines, hannesburg law firm specialising in mining law, launched a legal challenge against the government in 2015 over the interpretation of the charter.

Miller said: “Getting a new charter published does not in any way decrease uncertainty in our mining environment for as long as [the amendments] remain vague, open to interpretation and [include] political discretion for officials to apply their view.”

As it stands, the charter under review states that all mining companies should always have a 26% BEE shareholding.

The Chamber of Mines said that if little or no change was made to the soon-to-be-published charter, it “will consider all options in the event that all endeavours to reach an outcome that would sustain the industry have been proven to be futile”, Russell said.

The department had not responded to questions by the time of publication.

According to the Chamber of the mining industry — whose profitability has continued to dwindle in the past few years — lost R47-billion in 2015-16 due to the declining rand, while input costs, electricity costs, labour costs and material costs such as that of steel rose.

And when it comes to commodity prices, the good news might be behind us.

Makwe Masilela, a portfolio manager at BP Bernstein, said mining share prices had rallied so significantly because they came off a very low base and thanks to pockets of growth in the global economy that increased demand for metals.

“Something fundamental has to happen to stop commodity prices from going up,” said Masilela — although this year “we still expect an increase but not at the same level as last year’s”.

He said although there would be short-term volatility in the gold price due to elections in Germany, France and the Netherlands, the long-term price for gold would continue to be driven by the dollar and a US Federal Reserve decision to increase interest rates — which will have a negative impact on bullion.

For companies such as Anglo American, which are divesting from their bulk and base metals businesses, Masilela said the strategy would still be in place, with even better negotiating power, given the rise in share prices.

He expects the prices of coal and iron ore to start dropping this year.

❛ Something fundamental has to happen to stop commodity prices going up