South African Mining
in a Global Future
Mining Lekgotla
August 27, 2013
Peter Schwartz
SVP, Global Government
Affairs & St...
The true question:
How does South Africa remain an active &
relevant participant in a dynamic global mining
industry?
Ecological
Sustainability of ecosystems
Scenarios a balance at three levels
Economic
Realities of global competition
Human...
Outline
• Context / Drivers
• Global & SA economy
• Global mining industry environment & structure
• SA mining environment...
Global growth
(4.0)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
% GDP Growth
Emer...
SA Economy
(4.0)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
% GDP Growth
Emergin...
SA Economy
• Unemployment rate of 25%+ (~2x for youth); Low labor
participation rate 42% vs 61% peers
• high inequality Gi...
• Recently downgraded by all 3 major ratings agencies to
2nd lowest investment grade
• cited deteriorating political, soci...
SA Economy – Pressure on the Rand
• Current account deficit is expected to increase further:
• Exports lagging on slow glo...
Mining Industry Environment - Global
• Value maximization via solely increasing production has
shifted to managing product...
Mining Industry Environment - Global
• Gravity continuing to shift to emerging countries:
• 50%+ of largest mining compani...
Mining Industry Environment – China
• Estimated to consume ~40% of all mineral and metal
products
• Function of astronomic...
Global Industry Structure
• Past few years significant M&A activity driven by
opportunity of increased production volumes ...
• All levels looking to de-risk projects:
• Likely via joint venture partnerships
• Chinese investors interested partners ...
Mining Industry - SA
• Represents 60% of export revenues
• Contributes nearly 20% of corporate tax receipts,
• 6-9% direct...
Mining Industry - SA
• From 2008-2012, costs have risen at twice the pace of
inflation and productivity has decreased
• wa...
Exploitation by “Micro-financing”
• Interest & fees on a short-term loan of more than
25% a month, or 300% if annualised!
...
Strikes / Industrial Action
• The strikes/industrial action of 2012 cost South Africa up to an estimated R15 billion in
lo...
Unions – Learn from experience abroad
• ―Unrealistic Unions Die‖ – Andrew Levy, SA Labour Analyst
• SA mining union demand...
Vital to all Stakeholders
―[I am] worried for South Africa, I’m worried for the industry and I’m worried
for the people. W...
SA Sustainability
• Water – increasingly scare resource in a growing world
• Globally water demand may outstrip supply by ...
Global economy:
• Will emerging economies, especially China, continue their significant
growth/demand? What are the next e...
Political landscape:
• Can a sustainable policy be developed with a long-term lens, not just for the
next election?
• What...
Uncertainties
Market Size
• Will growth in global market demand and cost efficient production enable
profitable SA industr...
Scenario Matrix
Industry Innovation
GlobalEconomicGrowth
Low
High
High
Paralyzed
Propped
Up
Sustainable
Scenario: Paralyzed
• Slow adoption of mining technological and
methodological innovation keeps costs relatively high &
pr...
Scenario: Paralyzed
• 000,000s of workers are displaced with insufficient skills
to obtain meaningful employment elsewhere...
Scenario: Paralyzed
• Funding for government programs dries up with lost tax
receipts from lost production
• Difficult eco...
Scenario:
• Significant rise in global demand, namely from China &
other economies such as India, Brazil, Russia, &
Indone...
Scenario:
• Due to the decades long life-cycle of mining, companies
look to diversify
• invest more in deposits outside of...
Scenario: Sustainable
• Shift towards mechanization/automation to increase
productivity & safety is required to remain via...
Scenario: Sustainable - Beneficiation
• In-country processing captures more of the value
chain—creating jobs, developing s...
Scenario: Sustainable - Innovation
• Reef boring & ultra high strength
backfill…transition away from significant
inefficie...
Scenario: Sustainable - Innovation
• Many technologies and innovations that reduce the
mining effort require:
• A detailed...
Scenario: Sustainable - Industry Structure
• Trend of consolidation to take advantage of economies of scale as,
despite te...
Conclusion
1. Paralyzed: A failure to change creates substantial risk
of losses for the entire country
Favorable market co...
Thank You
South African Mining Industry
South African Mining Industry
South African Mining Industry
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South African Mining Industry

  1. 1. South African Mining in a Global Future Mining Lekgotla August 27, 2013 Peter Schwartz SVP, Global Government Affairs & Strategic Planning Salesforce.com
  2. 2. The true question: How does South Africa remain an active & relevant participant in a dynamic global mining industry?
  3. 3. Ecological Sustainability of ecosystems Scenarios a balance at three levels Economic Realities of global competition Human Pursuit of prosperous & secure livelihood
  4. 4. Outline • Context / Drivers • Global & SA economy • Global mining industry environment & structure • SA mining environment • Structural fundamentals • Investor sentiment • Sustainability • Uncertainties • Scenarios • Paralyzed • Sustainable
  5. 5. Global growth (4.0) (2.0) - 2.0 4.0 6.0 8.0 10.0 2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 % GDP Growth Emerging World Advanced 2011 Fcst 2013 Fcst Source: IMF
  6. 6. SA Economy (4.0) (2.0) - 2.0 4.0 6.0 8.0 10.0 2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 % GDP Growth Emerging World South Africa 2013 Fcst Source: IMF, SA Embassy
  7. 7. SA Economy • Unemployment rate of 25%+ (~2x for youth); Low labor participation rate 42% vs 61% peers • high inequality Gini coefficient of 0.6+; 30+% below poverty line 0% 2% 4% 6% 8% 10% 12% 14% 16% Nigeria India Japan USA Saudia Arabia Germany China SA Imports by Source (ZAR) 2012 2011 2010 0% 2% 4% 6% 8% 10% 12% 14% Netherlands UK India Germany Japan USA China SA Exports by Destination (ZAR) 2012 2011 2010 Source: SA DTI
  8. 8. • Recently downgraded by all 3 major ratings agencies to 2nd lowest investment grade • cited deteriorating political, social and economic conditions and uncertainty surrounding critical policy decisions • first time that the country has been downgraded since the rating process started in 1994 • Following initial downgrades foreign portfolio investment flows shrank from R12.5B Q4-2012 to R1.4B in Q1- 2013; well below 4 yr quarterly avg of ~R20B SA Economy Source: SA Reserve Bank
  9. 9. SA Economy – Pressure on the Rand • Current account deficit is expected to increase further: • Exports lagging on slow global demand • Necessitating higher imports • Decreasing foreign investment • Government infrastructure spending accelerates for shortfall from export and foreign investment • Good in the short-term for exports but structurally detrimental to long-term economy • Further dissuades foreign investment • Makes imports expensive >>> stimulates greater demand for domestic products >>> aggravates inflation >>> government raises interest rates to control inflation >>> increasing interest rates slows economic growth
  10. 10. Mining Industry Environment - Global • Value maximization via solely increasing production has shifted to managing productivity & improving efficiencies • Capital expenditures to meet long-term demand will be rebalanced with profitability/returns • capital spending expended to decrease 20+% in 2013 • projects scaled back, higher hurdle rates Sources: PWC, E&Y
  11. 11. Mining Industry Environment - Global • Gravity continuing to shift to emerging countries: • 50%+ of largest mining companies have the bulk of their operations in emerging countries • Emerging marketswill account for 40% of mining capital expenditures in 2013 • Long-term future demand healthy with China and large developing economies such as Brazil, India and Indonesia • Global urbanization drives demand as well • In the next 40 years another 3 billion people globally will urbanize, primarily in emerging market economies Sources: PWC, UN
  12. 12. Mining Industry Environment – China • Estimated to consume ~40% of all mineral and metal products • Function of astronomical GDP growth; still projected at 7-9% per year through 2020 • Also due to urbanization; currently only 50% vs 80-90% of US, Canada and Australia • Fueling own growth, 29% of global mining value • Largest producer of coal & gold and 3rd largest of iron ore • Mining capital expenditures have averaged 35% growth since 2005 • Becoming leading source of capital • Invest directly in mining companies, as well as mine development & construction, and supporting infrastructure Source: PWC
  13. 13. Global Industry Structure • Past few years significant M&A activity driven by opportunity of increased production volumes in a hot commodity cycle • Current focus towards achieving operational cost improvements and delivering projects on budget • Seniors look to divest non-key/non-core assets • Intermediates/Juniors with strong cash positions and a track record of successfully bringing projects on-line will be opportunistic, and look for strategic ―tuck-in‖ acquisitions
  14. 14. • All levels looking to de-risk projects: • Likely via joint venture partnerships • Chinese investors interested partners as they look into increase resource holdings and transfer of skills & knowledge Global Industry Structure • Continued consolidation & diversification expected: • diversification in geography & minerals/metals for seniors • consolidation in the middle & lower tiers to remain competitive • continued search for resources by emerging economy players • integration of downstream operations for synergies 0% 10% 20% 30% 40% 50% 60% Diversified Platinum Gold Other SA Mining Market Capitalization by Commodity 2008 2009 2010 2011 2012 Source: PWC
  15. 15. Mining Industry - SA • Represents 60% of export revenues • Contributes nearly 20% of corporate tax receipts, • 6-9% direct GDP; 13-18% including indirect GDP • ~20% of Johannesburg SE ~8.5M including Dependents ~1.3M including Indirect Mining Industry ~500k Direct Mine workers Sources: SA Embassy, PWC, The Guardian
  16. 16. Mining Industry - SA • From 2008-2012, costs have risen at twice the pace of inflation and productivity has decreased • wages in the industry have risen by 12% a year since 2007 • Over the same period other commodity input costs have also escalated sharply, led by a 237% increase in electricity prices since 2009 • Labor cost percentages vary from above 50% for the deep-level conventional mines to below 20% for those companies that mine predominantly opencast Source: PWC
  17. 17. Exploitation by “Micro-financing” • Interest & fees on a short-term loan of more than 25% a month, or 300% if annualised! • Pension cards, IDs, and bank cards held as ―security‖ with victims often unaware of their rights • Vicious cycle as the debt increases and workers demand higher pay to help them relieve them from their debt • Rustenburg alone has over 80+ formal micro credit outlets, banks, micro financing companies, and underground payday lenders • Employer responsibilities: • Monitor volume and magnitude of wage garnishments to repay such debts • Provide personal finance education, debt counseling, and assist with repayment restructuring
  18. 18. Strikes / Industrial Action • The strikes/industrial action of 2012 cost South Africa up to an estimated R15 billion in lost revenue, and at least half a percentage point off the country’s economic growth 8 78 49 37 47 77 0 20 40 60 80 100 Exxaro Resources* Gold Fields Imapala Platinum Anglogold Ashanti Anglo-American Platinum Kumba Iron Ore Mentions of "strike/industrial action"in FY2012 integrated report * Already experienced more strike/industrial action in 2013 Sources: Respective FY2012 Integrated Reports
  19. 19. Unions – Learn from experience abroad • ―Unrealistic Unions Die‖ – Andrew Levy, SA Labour Analyst • SA mining union demands of 60-100+% wage increases are out of touch with economic realities • United Mineworkers of America • Failed to develop its member skills and adapt to a changing industry • Rampant unemployment caused with the increase in mechanisation in mining from 40% in early 1930s to 80% by the end of the decade • National Union of Mineworkers in the UK: • At the start of the unprotected strike in 1985 there were 35 collieries in England and England exported coal • At the end of the strike in 1986 there were 2 collieries left and England still imports all the coal it needs • Both unions not only crippled themselves but also their industries and communities Source: Business Report
  20. 20. Vital to all Stakeholders ―[I am] worried for South Africa, I’m worried for the industry and I’m worried for the people. We have got to get the balance right… The period we are in now is the most important period I’ve seen in my time here in the industry…It is not just the mines – it’s everyone connected - it is so critical for the future of the industry and the future of the country. ‖ "We welcome the fact that all stakeholders agree on the need to stabilise the labour relations environment, especially in the mining sector. What we require from social partners is the commitment to resolve labour disputes peacefully and within the framework of the law, and in the interests of workers, employers and the country as a whole.‖ Mark Cutifani Chief Executive, Anglo American President, Chamber of Mines of South Africa Jacob Zuma President, Republic of South Africa ―Many companies drift towards more automized and mechanized operations as part of the strategy to modernize and improve production...Our members must be ready to change with this technological innovation. We must be equally ready to defend the current jobs in the South African economy...Skills development …must be used to empower workers...‖ Senzeni Zokwana President, National Union of Mine Workers Sources: Financial Times, Business Day, NUM address
  21. 21. SA Sustainability • Water – increasingly scare resource in a growing world • Globally water demand may outstrip supply by 40% by 2030; 1/3 of the world’s population will live in basins where the water deficit is above 50% • Mining requires vast amounts of water while negatively impacting the local communities’ ability to use it for sanitation, consumption, and food security • Byproducts of mining & extraction processes contaminate water (e.g. acid mine drainage) and cause environmental damage that comprises the health & safety of local communities • Water management needs to include: • complying with legislation and the conditions of the water use license • measuring and monitoring use & quality • cleaning up or recycling discharge • building future water treatment costs into rehabilitation provisions • engagement with local communities about use, quality & equitable access
  22. 22. Global economy: • Will emerging economies, especially China, continue their significant growth/demand? What are the next emerging economies (e.g. Indonesia)? Will developed economies, especially the Euro Zone, return to growth/demand? • Will China become increasingly self-sufficient in their mining needs? • Will the volatility of inflation and exchange rates stabilize to provide a favorable growth environment? Technology: • Can mechanization/automation and methodological innovation advance far enough to deliver sufficient cost efficiencies and productivity gains? • What becomes of the workers displaced by automation/mechanization? How does technology lead to new jobs and new training opportunities? Workforce: • Do strikes/industrial action become the norm instead of the exception? Will wage rates come inline with inflation? • Will mines look to cheaper migrant laborers? How much strain will migrants put on existing communities/services? • Do sufficient upstream, side-stream, and downstream opportunities in the mining industry emerge for displaced workers? Uncertainties
  23. 23. Political landscape: • Can a sustainable policy be developed with a long-term lens, not just for the next election? • What will be the dynamics be of stakeholder power (e.g. political parties, trade unions, industry, local communities, etc) over the long run? • How will issues of corruption, transparency, nationalization and sustainability shape the landscape? SA Infrastructure • Will electricity be sufficient and at an affordable cost? Will transportation become more accessible and efficient in its role in the supply chain? • How will industry and government partner to meet the infrastructure needs? • How costly will effective water management become as water becomes more scarce? Uncertainties
  24. 24. Uncertainties Market Size • Will growth in global market demand and cost efficient production enable profitable SA industry growth for currently low production/high reserve minerals (manganese, chromium, etc)? (i.e. horizontal industry expansion) • Are the infrastructure and skills in place to make upstream (e.g. building automation/mechanization equipment) and downstream (e.g. refining, inputs into local manufacturing) beneficiation viable? (i.e. vertical industry expansion) • How will minerals for which SA has significant reserves evolve in their industrial usage (e.g. palladium in place of platinum)?
  25. 25. Scenario Matrix Industry Innovation GlobalEconomicGrowth Low High High Paralyzed Propped Up Sustainable
  26. 26. Scenario: Paralyzed • Slow adoption of mining technological and methodological innovation keeps costs relatively high & productivity low • Wage concessions and declining commodity prices exacerbate profitability problems; forces mining companies to divest SA mines • Unbundled mines as separate entities (see Sibayne Gold unbundled from Gold Fields) will struggle to survive in their silo • Beneficiation isn’t appropriately funded or tailored to existing mining projects and struggles to get off the ground
  27. 27. Scenario: Paralyzed • 000,000s of workers are displaced with insufficient skills to obtain meaningful employment elsewhere within SA • Multiplier effect to millions without adequate financial support • The now un-employed (primarily young men) and their dependents produce significant civil unrest • The unrest and work stoppages cripple regions of the country and the SA economy • With the exodus of seniors, SA industry structure shifts towards smaller juniors and even nationalization, with the latter intensifying government finance issues
  28. 28. Scenario: Paralyzed • Funding for government programs dries up with lost tax receipts from lost production • Difficult economic environment is ripe for political disruption, putting politics up for grabs • Extractive (vs inclusive) government policies to band- aid short-term issues severely constrict development • Unrest and threats of nationalization dissuade foreign investment exacerbating trade deficit, credit unworthiness, and economic woes
  29. 29. Scenario: • Significant rise in global demand, namely from China & other economies such as India, Brazil, Russia, & Indonesia props up prices • Coupled with increased cost and/or decreased productivity in current cost leaders in North America, Asia, and Australia • SA mines able to temporarily squeak out profitability despite little innovation/enhancements and remain relatively cost competitive
  30. 30. Scenario: • Due to the decades long life-cycle of mining, companies look to diversify • invest more in deposits outside of SA with more favorable long- term structural socio-economic conditions • SA mining industry contracts and expands with highly unpredictable price of commodities • Economic instability likely leads to social/political instability • SA instability constrains long-term sustainable growth & equality and abatement of unemployment & poverty • The market volatility drives a volatile industry structure with significant M&A activity during hot commodity cycles and significant divestment during periods ofweak commodity prices (i.e. a snapshot of the past several years)
  31. 31. Scenario: Sustainable • Shift towards mechanization/automation to increase productivity & safety is required to remain viable • Displaced workforce needs to develop new skills • move up-stream and help produce/service machinery, parts, etc • move down-stream beneficiation/value-addition • n • Greater realization of platinum reserves • Greater market power with the ―platinum belt,‖ home to 80% of the world's known reserves • Requires similar improvements in cost effectiveness • Further diversification in manganese, chrome, etc Source: PWC
  32. 32. Scenario: Sustainable - Beneficiation • In-country processing captures more of the value chain—creating jobs, developing skills, and improving local technology. Note it requires: • Realistic requirements as to not throttle upstream mining projects; tailor to upstream not vice versa • Significant capital and financing for beneficiation plants • Sufficient local & affordable power supply for energy intensive processing technologies • It needs to be competitive advantage of manufacturing skills vs comparative advantage of resource possession • Shining example: Catalytic converter industry in SA has grown ~15% per year since early 1990s
  33. 33. Scenario: Sustainable - Innovation • Reef boring & ultra high strength backfill…transition away from significant inefficiencies & dangers of drilling & blasting • Use of autonomous & remote operation technologies in Australian mining • Use of WiFi to improve safety & efficiency in Canadian mining • Oil & Gas industry • continuously innovating for more efficient & effective extraction • IT and connected machines & workers becoming increasingly important
  34. 34. Scenario: Sustainable - Innovation • Many technologies and innovations that reduce the mining effort require: • A detailed understanding of data and processes critical to capital efficiencies • A workforce that is not only skilled in operations, but also supportive of the implementation process • Implement robust optimization planning tools across their full production supply chain • linkages call attention to the real bottlenecks that are ignored if each area is optimized in isolation • Infrastructure development is key for energy & transportation efficiencies • Inclusive and pluralistic policy decisions enable innovation & prosperity
  35. 35. Scenario: Sustainable - Industry Structure • Trend of consolidation to take advantage of economies of scale as, despite technological & methodological advancement, the cost base faces pressures: • declining yields & resource depletion • more difficult & costly exploration • rising energy prices & labor wages • Investor demand and skills specialization will make expansion & diversification horizontal vs vertical • Emerging economies take an active ownership position in their resource procurement • Govt partnerships & joint ventures key to avoid nationalization and align on environmental sustainability • Will look abroad to ensure sufficient & diverse supply sources and be less vulnerable as purely a buyer
  36. 36. Conclusion 1. Paralyzed: A failure to change creates substantial risk of losses for the entire country Favorable market conditions mask structural industry issues that will ultimately prevent sustainable success 3. Sustainable: Long-term prosperity requires sustained industry adaptation and innovation
  37. 37. Thank You

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