If there is a silver lining for the South African mining industry in 2013 it is likely to be found in other African countries where more investor-friendly conditions prevail. For the rest the outlook will remain challenging, says Ursula van Eck, head of mining at audit, tax and business advisory firm BDO.
"For foreign investors and South African companies willing to take the risk and try something new, going up into Africa could provide the growth opportunities that are currently lacking locally," she says. "I believe conditions in the mining sector will continue to be difficult, especially in terms of input costs, commodity prices and the fallout from last year’s wage strikes."
Van Eck says the challenges besetting the mining industry stem from a combination of global and local factors.
"Internationally, commodity prices are still under pressure as a result of the Eurozone crisis and are not likely to recover in the short term," she says.
"The one potential bright spot is China, which is reportedly planning to boost its economic growth by pushing infrastructure investment. If that materialises, it could have a positive impact on the prices of metals such as copper and iron in 2013."
However, mining companies should not bank on an early price recovery, nor should they rule out the prospect of further downgrades of South Africa by international rating agencies.
Nationalisation in another guise?
"Concerns about the risks of investing in this country have not necessarily gone away since the ANC’s Mangaung conference," van Eck says.
"As everyone predicted, the focus of the conference was on leadership politics and not policy decisions. Yet again investors were left without clarity on the issues that have been fuelling anxiety about the future of the mining industry – and that includes nationalisation."
On the face of it, nationalisation was rejected as ANC policy at Mangaung. "Yes, nationalisation as defined by the ANC Youth League is off the cards but there are some indications that another form of nationalisation might be considered," van Eck says. "Specifically, there is talk of increasing government’s interest in strategic minerals."
Strategic minerals are minerals regarded as essential to the national interest such as uranium, the supply and price of which is controlled by the state.
"Now there is talk of classifying coal as a strategic mineral as well with the aim of securing Eskom’s coal supply after 2018," she says. "Depending on how it is done, declaring coal a national asset could amount to nationalising it. There is a very fine line between nationalisation and managing the supply of a strategic mineral."
The Mangaung conference also barely debated another highly contentious issue – the introduction of a super-tax on mining companies.
"Bear in mind that the idea of this tax was first proposed in June 2012 and there are still no concrete proposals on the table. Mangaung did little to provide the clarity that investors are seeking, adding to the ongoing uncertainty in an already fragile industry," says van Eck.
Full impact of strikes to unfold
Meanwhile, the industry is apprehensively awaiting the outcome of the Farnham Commission’s inquiry into the Marikana shootings.
"Marikana will be with us for much of 2013. A lot of 'legacy' issues are coming out such as the hostel system and migrant labour, and the resulting tension could prolong the uncomfortable relationship between labour and employers," van Eck says.
"Similarly, I do not believe that we have yet felt the full impact of last year’s labour strikes and subsequent wage increases. The effect of lost production and higher wages will likely be felt in the first half of 2013 at least. Unless higher wages are coupled with higher productivity, I anticipate closures at marginal mines."
In the wake of credit downgrades, mining companies might struggle to raise capital for new projects or for operational improvements.
Article continues on page two: the outlook for mining companies in 2013 is extremely challenging — but by no means hopeless...