Expectations are hotting up for bigger, upbeat Mining Indaba
Surge in commodity prices fuelled by politics, supply fears and renewed Chinese demand
THE allure of Cape Town’s Mining Indaba for most mining analysts, investors and geologists has always been the warmer weather that the city offers rather than the wintry climes of London or New York. For the past 23 years, it has been a perfect escape.
Over the past few years, however, there’s been a marked decline in excitement at the potential for any deal-making at the city’s convention centre following an end to the Chinadriven commodity super-cycle. Attendance fell and while pin-striped analysts and investors from abroad have continued to flood into the city, their main concern wasn’t PowerPoint presentations.
This year may mark a turning point. About 32% more companies will be attending the event and close to 71% more investors have registered than last year, according to conference organisers.
With the commodity price upsurge and companies slowly returning to profitability, commentators are expecting this year’s indaba to be more upbeat and a lot less gloomy.
Inspired by rising geopolitical tensions, gold has gained more than 8% over the past 12 months. And while still far off its peak, platinum is up almost 17% as deficit fears grow. Coal and iron ore prices have also rallied on Chinese demand.
The top 10 resource shares on the JSE, including the likes of Anglo American, have rallied over 50%, outperforming the All Share index’s 10% climb.
“There will be an emerging optimism that we are coming out of the low,” said Andrew Lane, Africa mining leader at Deloitte.
There would be less doom and gloom than there was at last year’s indaba, he said.
While agreeing with the more positive prognosis, Hanré Rossouw, head of resources at Investec, said it was still going to be a sober environment, with investors and companies aware of the volatile price movements. “In that sense, companies are still conservative with the balance sheet in terms of capital and are still in a costcutting mode. This is despite the strong recovery in margins.”
Although the gold price has held up well over the past year, AngloGold Ashanti, the third-biggest gold producer in the world, is preparing to cut its workforce because of cost pressures and declining grades.
Its smaller rivals, Harmony, Gold Fields and Sibanye, are expanding their footprint outside South Africa, prompting the question of where gold is in the commodities cycle.
Rossouw said the South African gold sector was in a period of buying assets outside the country, and this would be the way to survive over the next five years, given South Africa’s declining production. Local gold production peaked in 1971 at a million ounces.
While AngloGold is rightsizing, Harmony has benefited from its acquisition of the Hidden Valley mine in Papua New Guinea.
Sibanye’s Stillwater acquisition in the US for $2.2-billion (about R30billion) late last year wasn’t well received by the market.
Miners shouldn’t get a “rush of blood to the head” when making decisions, as they used to in the past, Rossouw said.
On Sibanye’s recent deal, “the market is probably yet to be convinced that there is a strategic fit and there are real synergies with that, rather than just a diversification”.
Investors will be looking for clarity on dividend policies and clear statements of when and how capital returns will be made.
Platinum miners are still some way off being dividend payers. Rossouw said platinum was probably still about two or three years behind gold in the cycle, in terms of growth.
Given the slow increase in the platinum price it is believed miners are waiting for a turnaround to bail them out. Anglo American Platinum, Impala Platinum and Lonmin are still in a delicate position regarding costs.
Rossouw said that although Northam Platinum, which had made a few acquisitions, and Royal Bafokeng Platinum had experienced some growth in terms of cash, there was still restructuring that needed to be done in the industry for more growth to be achieved.
“The general trend will be production starting to drop, and we have seen that with Lonmin,” he said.
For the coal industry in South Africa, it was clear that coal was going to remain the base load, with Medupi and Kusile power stations ramping up.
Thermal coal was going to remain stable at current levels.
A common question among investors at the indaba is bound to be about regulatory uncertainty, specifically around the review of the Mining Charter.
Critics have argued that policy uncertainty stopped the country from fully benefiting from the commodity super-cycle and will also probably affect the next uptick in resource prices.
South Africa has had four different resources ministers over the past decade.
But for Rossouw, regulatory uncertainty is not the main reason why South Africa’s mining industry is shrinking.
“People love blaming regulatory uncertainty for a lack of investment in the sector and it certainly has played a role in underinvestment,” Rossouw said.
“There are several outstanding questions that the updated MPRDA [Mineral and Petroleum Resources Development Act] and Mining Charter will need to clarify.”
Deloitte’s Lane agreed that although Africa as a whole was an attractive mining destination, South Africa was a different issue because of red tape.
“Out of all the risks mining companies face, the two biggest risks are the geological risk, and the regulatory risk.”
Lane said the regulatory regime was what South African investments were built on and in order to attract investment, that regime needed to remain consistent.
Rossouw said the Department of Mineral Resources needed to be clear in terms of where, what and when, and set targets and be ready instead of slipping up with the timing.
“There is an imperative that we have to fix the quality of the dialogue between stakeholders. If we get that right, it will enable all the other issues we have,” Lane said.
A question among investors is bound to be about regulatory uncertainty