While South Africa’s mining industry is in the doldrums, mining in much of the rest of Africa is buoyant. Unless the country moves swiftly to correct the problems besetting the mining sector, it is in danger of being marginalised in favour of nimbler, more investor-friendly peers.

"Frankly, the outlook for South Africa is rather bleak and the past several months have been particularly difficult for the country’s mining sector," says Ursula van Eck, Head of Mining at business advisory, tax and auditing firm BDO, which has a presence in all African countries except Somalia.

"Adding to plummeting commodity prices driven by the eurozone crisis are cost pressures and uncertainties in the regulatory environment; and now that we are approaching 'strike season', conditions in South Africa could become even more fraught," she says.

"As we have seen in the platinum industry, weak eurozone demand for platinum jewellery and vehicles using catalytic converters has forced prices down, making it uneconomical for some mines to continue operating," says van Eck. "In recent weeks we have already seen five closures of mining or smelting operations with announcements from others that they are undergoing a serious review, and therefore more closures are likely to come."

Investors feel the squeeze

In the past, South Africa was attractive for investors in the mining industry due to its vast mineral wealth and relatively low cost of labour and electricity. However, the country’s current unstable and pricy electricity supplies as well as the inflexible labour environment are changing this.

"Other factors that are contributing to a negative environment over which investors have little or no control are increasing labour costs, labour unrest and the perceived heavy handed approach with respect to S54 mine closures after safety-related incidents," van Eck says.

Also clouding the mining investment agenda is talk of nationalisation, which has yet to be convincingly addressed, and various aspects of the regulatory regime.

"In September 2010, the Minister announced that there will be a review of the Minerals and Petroleum Resources Development Act but no concrete proposals have come out of it," van Eck says.

"Then there is talk of BEE ownership being increased from 26 percent to 30 percent, which neither helps to create certainty in an industry with extended lead times for investors, nor will necessarily transform the industry to improve Broad Based Black Economic Empowerment in the way the government and unions expect."

Article continues on page two: opportunities beckon in the rest of Africa...