Mining sector to ‘anchor down’ in tough times
Companies now making decisions based on the commercial viability of projects
LAST week Mark Cutifani, CEO of Anglo American, described the crises in the mining industry in a nutshell, when he said “necessary actions [have to be taken] to survive in these tough times”. And tough times they are.
Merger and acquisition activity in this sector has been hardest hit. According to merger and acquisition information sourced from DealMakers Online 60 transactions were announced in the first half of 2008 valued at R82bn. As at the end of June this year this number had fallen to 22 deals valued at R14bn — and if one takes into consideration the effect of a weakening exchange rate the value of transactions is further eroded.
Sandra du Toit, head of mining & metals, Africa Corporate Finance at Standard Bank, says companies in the sector are looking carefully at capital allocations, specifically at existing and new projects, and acquisitions. Companies are taking a long hard look at their portfolios and making decisions on the commercial viability of each project. The view that disposal of noncore assets may see better efficiencies when run by others is now a consideration.
This trend is not peculiar to South African mining groups; international firms too are feeling the pressure brought on by weak commodity prices. What these tough conditions have done is create, for those companies with strong balance sheets, opportunities to pick up assets at good valuations. Recent examples include the sale in June by AngloGold Ashanti of its Cripple Creek mine to Newmount Mining for $820m. Rio Tinto also announced the sale of its diamond and coal mining assets in Zimbabwe, marking the withdrawal of the firm from the country after a 60-year presence, and in May BHP spun off a collection of noncore assets into a separate company, South32.
Du Toit concedes that conditions are more difficult for companies in the local commodity environment with a number of additional factors impacting on an already tough landscape. Investors, she says, are concerned about SA’s infrastructure, such as uncertainly in electricity supply which will constrain operations and challenge efficiencies. In addition labour issues are tricky with current wage negotiations in the gold mining industry under way. The uncertainty surrounding local ownership requirements has caused further problems for investors. While the principle of a 26% shareholding is understood, the current confusion around the interpretation of the principle “once empowered, always empowered” adds to further indecision, she says.
The Chamber of Mines has lodged papers in court seeking a declaratory order. Fierce opposition by the Department of Minerals and Energy has led to severe financial and legal consequences for companies falling foul of its interpretation. Eskom has recently announced that it requires suppliers to have a BEE ownership level of more than 50% begging the question as to what is in it for investors as minority shareholders in ageing assets.
Having said all this, there are deals being concluded but these tend to be the smaller “bolt on” transactions. Du Toit gives examples — African Rainbow Minerals, she says, has been taking advantage of market conditions by buying mining rights on contiguous properties so extending the life of its mines. Chinese companies continue to show interest in the smaller asset class; the acquisition by private equity and venture capital company Heaven-Sent Capital Management of Village Main Reef earlier this year is an example.
Looking ahead on what to expect, Du Toit sees activity in the sector remaining low key. Unlike the previous downturn in 2008 which was relatively short, driven by sentiment and bounced back strongly this current downturn is driven by supply and demand.
She expects prices to remain depressed for longer with an improvement only in 2017-18. Companies will use this time, she says, to anchor down, focus on core businesses and strengthen balance sheets.