SA Mine 2023 report: Adapt to thrive
By PwC
Despite a drop in profits, mining companies are progressing positively by investing in their future operations.
Since the post-COVID-19 economic rebound, South African mining companies have enjoyed record levels of performance and shareholder returns. However, in the past year, there has been a regression experienced in these metrics due to several changes across the industry. In PwC South Africa’s 2023 SA Mine: Adapt to thrive report, we take a closer look at some of these factors that include productivity and infrastructure constraints, decreases in the prices of certain minerals, and increases in input costs.
“The amalgamation of these factors has resulted in a decrease in profits and operating cash flows experienced by South African mining companies. However, strong balance sheets have enabled miners to increase investment into operations and pay dividends,” says Andries Rossouw, PwC’s Africa Energy, Utilities and Resources Leader.
He adds that the weakening South African rand may have provided some relief to the lower dollar-mineral prices, but this has been offset against more expensive imports and the input costs of key chemicals, materials and equipment required for operations.
Vuyiswa Khutlang, PwC South Africa Energy, Utilities and Resources Partner, says that as the reserves of certain minerals shrink, it will be critical for mining companies and governments to adapt to this by developing strategies that can safeguard communities that are dependent on these operations.
“In most small towns where mining takes place, miners play a significant role in providing social services such as education, clean water and sanitation, and infrastructure,” she says. “Therefore, the need to transition communities from being dependent on mines, reskilling employees, and rehabilitating mines becomes a critical conversation for all stakeholders. This is especially important as some provinces have as little as six years of mining left based on currently declared reserves,” says Vuyiswa Khutlang, PwC South Africa Energy, Utilities and Resources Partner.
The mining sector’s crucial economic role
The South African economy has historically, to a large extent, been dependent on the mining sector. For the first six months of 2023, South African Revenue Service export data shows that the value of mined material exports amounted to R575 billion. This equates to around 58% of total exports made by South Africa to its trading partners. Rossouw says the sale of mined materials is essential for South Africa’s economy, as inflows from these sales is a significant contributor to the country’s foreign currency reserves.
“The socio-economic environment in which mining companies operate in South Africa is often characterised by high levels of unemployment, low skills and poverty. The consequences of any challenges to mining could result in a dire situation for the nation’s economy and security including the social well-being of society,” says Andries Rossouw, PwC’s Africa Energy, Utilities and Resources Leader.
On the employment front, the mining industry provides around 478,000 people with formal employment, according to data from Statistics South Africa. The sector also provides the country’s fiscus with critical income in the form of corporate taxes, mineral royalties, and individual tax from employees within the sector.
Challenges across the landscape
Recently, mining companies have experienced several challenges, with the following being noted as risks to mining businesses and the wider industry:
– Electricity constraints;
– Logistical constraints for bulk commodity exports;
– Above-inflationary cost pressures;
– Fluctuations in commodity prices and exchange rates;
– Challenges with illegal mining jeopardising the safety and viability of some mining operations; and
– A shortage of critical skills within the sector.
Considering these challenges, and the fact that investors have investment options other than South Africa, Khutlang says an important question to consider is ‘how many years of mining can South Africa expect to have for certain key commodities such as gold, coal, iron ore and platinum group metals?’ When it comes to this, a lack of exploration and the lag between investment decisions and new production could hamper long term sustainability of the industry.
Securing minerals for a cleaner future
As plans and executions towards net zero take place, there is greater emphasis to secure critical minerals for global decarbonisation efforts.
“Southern Africa has some of the critical metals needed, and it is important for the region to look at opportunities and take advantage of them. To take advantage of these opportunities will require significant cooperation between public and private stakeholders,” says Vuyiswa Khutlang, PwC South Africa Energy, Utilities and Resources Partner.
In our report, we provide an overview of the 2022-2023 financial period which suggests that miners are continuing to look forward.
“Investment in the future of operations has increased, while continuing to return value to shareholders through dividends, even though profits have decreased. Miners have continued to invest in projects in South Africa, with the largest increase identified in capital spending on assets year on year, from 18% in 2022 to 37% in 2023,” says Andries Rossouw, PwC’s Africa Energy, Utilities and Resources Leader.
Miners clearly continue to see value in the future, and are investing in this. They have opted to dig deep into their pockets and have retained less of their funds in order to fund new capital investments. There are, however, early signs that the significant drop off in prices of platinum group metals and coal from record prices could limit future investments. Miners’ tax returns have also continued to be a key driver balancing the national trading account. As a result, their value creation inevitably drives values for a wider range of stakeholders, and strives towards achieving sustained outcomes for the industry as a whole.
Explore the full report here