Solving the value conundrum
Disruption and volatility have become the new constant for the mining sector—grappling with issues like rising stakeholder demands, talent shortages, tarnished reputation, an evolving threat landscape, and dwindling access to key resources such as energy and water. What leading strategies can miners deploy to succeed in this dynamic business environment?
To thrive into the future, companies must re-envision corporate strategies, boost risk management approaches, and improve relationships with stakeholders, in addition to making rapid strides in digital transformation, expanding capital spend, and fostering an environment of diversity and inclusion.
Now in its 11th year, the 2019 Tracking the trends reveals the top 10 trends that should be on every mining company's agenda. Our global mining professionals once again share insights that miners can leverage in their ongoing pursuit for productivity, capital discipline, strategy development, and sustainable growth.
Download the full article and report to find out what's in-store for miners this year
Marelise van der Merwe
Scientists have found a possible reason why a cache of "super-deep" blue diamonds – like the famous Hope diamond – originate up to four times deeper in the Earth than other types of diamonds.
These diamonds, considered rare on the Earth's surface, can be found a whopping 660 – 750km beneath it.
Fin24 recently reported that more than a quadrillion tons of diamonds, or one thousand times more than a trillion, had been found buried in the earth, some 145 to 240km deep.
Now, a new study has probed how a much deeper layer of blue diamonds got there – and why they have their intriguing colour, despite lying far from abundant stores of the element that supplies it.
The study, titled "Blue boron-bearing diamonds from Earth's lower mantle" published in the latest issue of the journal Nature, argues that these super-deep blue diamonds are different from other kinds of diamonds due to the shifting and sinking of oceanic tectonic plates.
Blue diamonds, the study argues, grew in the presence of rocks that were "essentially once part of the ocean floor".
They get their colour from boron, an element predominantly found in the crust close to the surface of the earth, which suggests they somehow made it all the way down to the super-deep high-pressure environment where the diamonds are formed.
According to the study, blue diamonds "have a connection to deeply recycled seawater from ancient oceans".
Oceanic tectonic plates are pushed down into the mantle at subduction zones – which science website LiveScience describes as "the biggest crash scenes on Earth", due to the fact that they are formed where two tectonic plates collide, and, put very simply, one plate eventually slides under the other.
The study was led by Evan Smith of the Gemological Institute of America and included UCT Professor of Geology Stephen Richardson on the team. "The extent to which Earth's surface materials are recycled into the deep mantle via these subduction zones has until now been difficult to evaluate," UCT said in a statement on Friday.
"The study sheds light on the issue by examining blue diamonds."
Largest and most valuable
Exactly how or where these diamonds crystallise within the mantle has remained unknown to date, UCT said.
However, scientists figured out that enormous and irregularly shaped diamonds stand out "because they are so pure". This gave rise to an acronym, CLIPPIR: Cullinan-like, Large, Inclusion-Poor, relatively Pure, Irregular shaped and Resorbed.
Richardson explained: "A couple of years ago we found that the world's largest and most valuable gem diamonds, like the 3 106-carat Cullinan, formed from metallic liquid deep in the Earth's mantle transition zone."
This led researchers to speculate – based on the elements found in the gems – that the rare blue diamonds, which also tend to be large, could be of the same kind as the CLIPPIR diamonds, and also originate from somewhere very deep.
The new study is also overturning the belief that super-deep diamonds are typically small and never of gem quality, UCT said.
LONDON – A mix of political populism, higher commodity prices and the expectation electrification will spur demand for some raw materials has led resource-holding governments to change the rules for miners operating in their countries.
In most cases, governments are seeking to increase their share of profits, rather than all-out resource nationalism, although Mongolia has been trying to nationalise a stake in a copper mine.
The toughness is not universal.
Some governments see the hardened stance of other countries as a chance to lure investment. Ethiopia is rolling out pro-business reforms after PM Abiy Ahmed swept into office last year.
WHAT'S DIFFERENT THIS TIME?
Typically, resource holders have increased the demands they make of international companies when commodity prices rise.
Commodity prices have been increasing since the start of this year, but are relatively low and were still recovering from the crash of 2015-16 when the latest wave of resource nationalism began.
In Africa, Tanzania, regarded as an extreme example, turned on the miners after President John Magufuli swept to power in late 2015 pledging to secure a bigger share of the country's natural resource wealth.
Industry insiders and lawyers say political populism and social media are impelling calls for a greater share, beginning with the local communities around mines.
They also say investment by China and to a lesser extent Russia increases the leverage of resource-holding governments.
"China's growing investment in mining projects has helped spur resource nationalism by giving many resource-rich countries an alternative to Western investment," Henry Hall, associate director at Critical Resource advisory firm, said.
WHICH COUNTRIES DOMINATE?
In Africa, Democratic Republic of Congo, Tanzania and Zambia have been seeking more of the profits from copper, cobalt and gold.
Democratic Republic of Congo in June last year signed off regulations to implement its new mining code that raised royalties and taxes.
Major mining companies, such as Glencore and Barrick, have opposed the code and are seeking negotiations and ways to increase pressure.
Zambia raised royalties from January and introduced a 10% tax when the price of copper exceeds $7 500/t.
Zambia also plans to replace value-added tax with a non-refundable sales tax to help reduce public debt, but has delayed the move until July, pending further consultation.
WHAT IS THE IMPACT ON INVESTMENT?
Mining executives say a first response is to withdraw exploration funding.
The biggest listed miners say they are focusing their exploration in countries with low political risk.
Democratic Republic of Congo's reserves, however, are temptingly rich and include copper and cobalt, needed for an expected upturn in demand for battery vehicles, which gives the government bargaining power.
Figures from S&P Global Market Intelligence show falls in exploration spending in Tanzania, Zambia and Mongolia last year, while investment in Democratic Republic of Congo rose as Ivanhoe Mines and its Chinese partner Zijin Mining have invested in developing a copper mine.
Globally, exploration spending climbed, but is far below the peaks of 2012 at the height of the commodity boom.
Spending was highest last year in countries considered mining-friendly, such as the US and Ecuador, which is welcoming Western explorers into its copper prospects as it seeks to diversify from oil.
WHAT CAN COMPANIES DO TO PROTECT THEMSELVES?
Companies have threatened to leave when the terms of engagement change to their detriment, but resource-holding governments know firms are reluctant to do that when they have invested in building a mine.
Lawyers and mining executives say companies have become more careful about where they invest in the first instance.
As sustainability has shot to the fore following the Vale dam disaster in Brazil in January, the need to get all sections of society on side has increased.
"One of the most important aspects to have a good understanding of is the community landscape - without the social licence, mines will either not start up, or will be disrupted by community activism," Warren Beech, a partner at law firm Hogan Lovells, said.
While the overall mood is cautious, China and Russia have a higher risk appetite, potentially providing negotiating power for resource-holding governments.
"The risk appetite varies, with China and Russia seemingly having a greater appetite for risk, probably to support their strategic intent to control the life cycle ... and to develop geopolitical influence," he said.
As a last resort, international miners can threaten arbitration, which lawyers say is cheaper than political-risk insurance.
Dispute settlement lawyer Samuel Pape of Latham and Watkins said miners can seek legal protection by for instance investing through a company incorporated in a country that has a bilateral investment treaty with the resource-holding nation.
"Many disputes can be resolved through negotiations without the need to commence proceedings under an investment treaty, though the potential for such an arbitration can provide important leverage," he said.
If South Africa's minerals production – which is lower now than it was in 2013 – were to improve, all sorts of further opportunities would open up in the upstream supplier space, writes Terence Corrigan.
A thriving mining industry that generates demand for goods and services running to billions of rands would deliver much greater economic gains than minerals beneficiation.
Yet, beneficiation is the official policy of the Ramaphosa government, despite expert advice that it is a costly mistake which cannot work. Beneficiation, in the South African debate, means downstream industrial development – taking mined minerals and transforming them into industrial products like machine tools, cellphones and motor vehicles.
This is a response to the "man in the pub" level of complaint that South Africa mines all these wonderful minerals yet "doesn't do anything with them". The problem is that this misunderstands how developed economies have achieved success.
Examining the costly misunderstanding is the thrust of the latest report from the Institute of Race Relations, "Multipliers from Mining", which makes the case for focusing on the industries which supply mines – the so-called backward linkages.
Comparative experience shows that having minerals doesn't simply translate into producing finished goods anywhere. South Korea is the world's biggest exporter of steel products despite having negligible iron ore reserves (less in fact that North Korea). Switzerland farms no cocoa yet is a famous chocolate producer.
Renowned development economist Paul Collier of Oxford University argues that, "governments become wrongly fixated about value added downstream. For most minerals, beneficiation does not make sense".
The South African government should know this. The 2008 international panel on the Accelerated and Shared Growth Initiative (ASGISA) says exactly the same thing and concludes that, "privileging beneficiation is unwarranted and it takes government's attention away from other opportunities that may have more potential to create export jobs in South Africa".This is not arcane or secret knowledge.
The paper which makes the point, by Harvard economists Ricardo Hausman, Baily Klinger and Robert Lawrence, was commissioned by the South African government and is available on the National Treasury website.
Even more obvious is the chapter in National Development Plan – supposedly official government policy – which argues that "beneficiating all of the country's minerals is neither feasible nor is it essential for developing a larger manufacturing sector" and "there are important trade-offs to be considered in mineral beneficiation". But South Africa insists on swimming against the tide.
President Ramaphosa has repeatedly affirmed beneficiation as official policy. In his 2018 State of the Nation Address, he stated that "we will reindustrialise on a scale and at a pace that draws millions of job seekers into the economy". Noble words – but the policy instruments the government has designed point in a different direction. And not only is beneficiation policy destined to fail to meet this ambition on any sort of scale, it also does actual harm to the basis of it all: mining itself.
The 2018 BEE Charter for the mining industry is the latest in a series of regulations which inhibit mining investment in South Africa. It allows mining companies to claim "offsets" or exemptions from its black ownership provisions, in proportion to their "beneficiation activities". In other words, if they engage in manufacturing, they do not have to find as many black co-owners. This ignores the fact that there is not a mining company in the world which has manufacturing ambitions.
The charter adds rigid requirements for local procurement and supplier development. It requires that 70% of capital goods are sourced from South African companies and specifies, in a complex matrix, how many of these must be black-owned, how many BEE compliant, how many owned by women and how many youth-owned.
Policy makers need to ask themselves which the more likely outcome is: That there will be a surge in the number of black-owned mining equipment manufacturing companies in South Africa; or will international mining companies with alternatives elsewhere shift their focus to operations outside South Africa? The second is far more likely.
But mining can assuredly be the basis of future industrial development. Ricardo Hausman argues that the formula for development is not "adding value to (a country's) raw materials" but rather "adding capabilities to (a country's) existing capabilities". In other words, the way ahead is to mix new capabilities (say automation) with capabilities a country already has (like getting minerals out of the ground). Thus the basis of development is a thriving mining industry.
If South Africa's minerals production – which is lower now than it was in 2013 – were to improve, all sorts of further opportunities would open up in the upstream supplier space. That means abandoning the present beneficiation strategy together with its misguided premises and false hopes.
Gem diamonds are, arguably, the ultimate luxury available to millions of people around the globe. They are available in quantities that most other gems fail to come anywhere near but the operating costs, the labour and the skills that go into producing even the smallest polished gem mean that prices at the jeweller's counter reflect an individual gem's luxury status.
Diamonds, it is well known, are an intricate lattice of carbon atoms, a crystal structure that imparts a hardness unmatched elsewhere in nature. And it is this hardness that makes the finest diamonds crucial in the manufacture of high-tech cutting, grinding and polishing tools. Without diamond grit (bort or boart as it is known) much of the world's modern manufacturing would be made far more difficult than it is.
While diamond mining has been taking in place in South Africa for almost a century and a half, the country's diamond sector is far from reaching the end of its life. Developments at the country's three largest mines are designed to expand their outputs and to extend their lives to anywhere between a quarter and a half a century.
Natural diamonds were formed some 3.3 billion years ago in conditions of intense heat and pressure 150km below the earth's surface.
The primary sources of all of South Africa's diamonds are kimberlites in ancient, vertically dipping volcanic pipes, mostly located in the vicinity of the city of Kimberley and initially amenable to opencast. They were largely discovered in the latter part of the 19th century. Early in the 20th century, the Premier mine's volcanic pipe was discovered near Pretoria and, in the final decades of the century, the Finsch mine's kimberlite pipe was discovered near the town of Lime Acres in the Northern Cape and, later, the Venetia mine's kimberlite near the town of Alldays in Limpopo province.
Alluvial diamonds and small diamondiferous fissures have been known and worked for many years along the southern banks of the Orange River as well as along and offshore of South Africa's west coast.
The underground mining and recovery of diamonds continues to this day in the vicinity of Kimberley, the site of the early main discoveries in the 19thcentury. It is, however, on limited scale with a major focus on reprocessing old tailings dumps to recover diamonds left behind by older recovery processes.
To the west of Kimberley, and on the southern banks of the Orange River some 60km upstream from Port Nolloth, Trans Hex mines largely alluvial diamonds at its Baken and Bloeddrif operations.
Further north in Limpopo province, the Venetia mine owned by De Beers is South Africa's largest diamond producer, recovering some 8Mct a year. Mining is currently by opencast methods but the depth limits of the open pit are being reached and an underground mine is being developed to continue production below the open pit. Underground mining will be by conventional block-caving or sub-level caving methods.
The Finsch mine, part of the Petra Diamonds group, is South Africa's second largest producer and operates exclusively as an underground mine using conventional sub-level caving methods. Finsch produces an annual 2.1Mct.
Near Pretoria and also part of the Petra group, the Cullinan mine (originally called Premier) is being restructured and expanded to mine at ever-increasing depths with a life expectancy in excess of 50 years. Expansion is intended to lift annual production from its current 0.8Mct to 2.2Mct by 2019.
Outlook for South Africa mining sector for 2019 bullish
The outlook for the mining sector in South Africa for 2019 remains fairly bullish despite concerns about labour and power costs. There is also cautious optimism of strong commodity prices.
Shirley Webber, Coverage Head Natural Resources at Absa Corporate and Investment Banking (CIB) says producers are facing more complex reserves, with higher input costs putting pressure on operating margins.
Webber says the cost of power is a concern for mining companies as annual tariff increases are having a negative impact on the cost of production, particularly at high energy consuming mines.
“On the power used by miners, considering early 2008 as a base, South Africa's electricity price was around $4c per kWh and was lower than that of larger emerging economies like Brazil, India and China,” she says.
“However, current energy costs are between the $8c and $10c per kWh prices, also higher than the same group of emerging economies. The annual electricity increases have indeed had a negative impact on the cost of production for high energy consuming industries,” Webber adds.
She believes that Eskom's proposed turnaround plan will be crucial for the success of miners. However, miners are seeking alternative sources of energy in order to remain sustainable.
“This means that captive power plants are a reality for the future. Mining companies have also been investing in renewable energy sources to accommodate power demand in the long-term with natural gas and newer technologies that bring cost efficiencies,” she says.
“Platinum is trading at levels last seen in 2016, with palladium prices increasing dramatically. From a base metals side, copper trades at circa $5,900 per tonne, with current inventory levels lower than in 2015. Iron ore has also been on an upward trend. We foresee improved base metal prices in the short term for copper and nickel on the back of global commodity demand for infrastructure development, with China and the US having a material influence on the demand,” says Webber.
She adds on the diamonds side, reduced supply in the long term will be a reality given the lack of new discoveries.
“Appropriate risk management strategies to weather currency and price volatilities are crucial during these times. Apart from the usual commercial bank or project finance funding, many miners are also considering other sources of liquidity for current expansions or new projects such as streaming structured facilities, asset based finance facilities and accessing the debt capital markets,” Webber says.
On the regulatory front, Webber says there have been some positive sentiments following the finalisation of the 2018 Mining Charter. The notable feature of the charter is the once empowered always empowered ownership element and the drive for inclusive procurement, as well as supplier and enterprise development elements.
“The procurement element in the Mining Charter is positive for small sized enterprises in effort to grow local content for mining goods and services where mining companies will need to source 70% and 80% respectively from South African entities. In addition, small businesses can ultimately create jobs to curb the increasing unemployment rate,” says Webber.
Looking ahead, Webber says Absa CIB remains committed to the funding of viable mining projects in South Africa and across sub-Saharan Africa.
“As a Pan African bank, Absa has a strategy to use its capital meaningfully in countries to which it operates and beyond while growing shareholder value responsibly. For as long as there are economically viable commodities to be extracted from the ground, we will continue to support corporates who mine the African soil sustainably. Our support spans across various commodities as well as the entire mining and metals value chain,” Webber says.
The mining industry is a key player in the future growth and development of the South African economy, with huge potential for exploration, production and beneficiation, President Cyril Ramaphosa told the Investing in African Mining Indaba.
His investment road show last year, culminated in the inaugural South Africa Investment Conference, in October. “Several companies at the conference made announcements of investments, which amounted to around $20bn in total. The pledge of $20bn is a clear indication that South Africa indeed is still an attractive destination for investment,” he said.
He added that three of these major investment announcements came from the mining sector gives credence that mining in South Africa is a sunrise industry. “Many have often said that the sun is setting on SA mining industry, it having been the leading industry on the whole continent. And it having been the bedrock of South Africa's economy development growth from both a manufacturing and industrialisation point of view. Many have thought it is facing its sunset days and we are firm believers in knowing that South Africa's mining industry is in its sun rising days and long will it last.”
Restoring policy certainty
When it comes to exploration, the president said he asked Mineral Resources Minister Gwede Montashe why exploration tapered off. “We no longer have listed companies on the stock exchange for exploration. He has made it his specific area of focus to encourage and galvanise the industry to start exploring once again. The plateau that we have in South Africa is still very rich with minerals buried underground. We are saying that these are the minerals that can still be exploited, that still can be mined and brought to economic value.”
That's the reason the government has prioritised restoring policy and regulatory environment that is stable and predictable. Significant work has been done to remove the uncertainty that held back the development of the industry, Ramaphosa said.
“We have emerged from a period of strained relations where the courts became the main platform of engagement between the industry and government. Now we want to put this behind us. We no longer want to meet you in court, we want to meet you in your boardrooms and we want to meet you in Minister Mantashe's office. May I also add conflict between industry and labour and communities should be something that belongs to the past.
This is an era where there needs to be more collaboration, more cooperation, more consensus building, more working together.
“I would like to pay tribute to leaders in the industry for airing their grievances and never giving up. Now you have our full undivided attention. Since the minister was appointed he has meet with many of the industry leaders. By and large, he has succeeded to turn this thing around and building the spirit of cooperation. He reported that he had robust debates,” he said.
The government has prioritised removing the barriers for investment in South Africa, such as administered prices for ports, rail and electricity, as well as infrastructure bottlenecks. “We are working on thesec oncerns, such as visa application, reducing the cost of doing business and eliminating bureaucratic constraints. This is work in progress."
The Eskom challenge
“The other important infrastructure challenge you are all concerned about is the security and affordability of energy supply. We have been giving detailed attention to the crisis at the country's power company. Eskom is currently facing significant operational, financial and structural challenges.
“Its contribution to the health of our economy is too great for it to be allowed to fail. Is is too important and is too big to fail. And we will not allow it to fail. Restoring and securing energy security for the country is an absolute imperative.
Mining is important to our economy, but mostly people don't realize how vital and integrated the mining industry is in our everyday lives! Not all of us are aware of a lot of facts related to mining and resources which are quite interesting to know and to let know. Some of the following facts are quite obvious while the rest are something which we surely are unaware of.
Bulk commodity and base metal prices in South Africa have shown an impressive recovery over the last two years from the long-term lows experienced in the beginning of 2016.
These price recoveries were driven by global economic growth and China's focus on greener production. Unfortunately precious metals didn't have the same recovery and platinum prices for example are trading at severe lows, PwC partner Andries Rossouw tells SASCHA SOLOMONS.
This article first appeared in Mining Review Africa Issue 12 2018
“On a global basis mining companies benefited from the improved prices and cost management strategies previously implemented which resulted in an impressive increase in profitability and cash generation,” says Rossouw.
The improved cash generation allowed most companies to improve their balance sheets. However, overhang in supply has meant that capital expenditure was still at 10-year lows.
Commodities in 2018
While bulk commodity producers have enjoyed a more profitable year, precious metal producers have not experienced the same fortunes due to pressure on prices and a significantly higher cost base. This meant significant impairment provisions by precious metal miners.
Whether the trend for bulk commodities will continue into 2019 will largely depend on ongoing economic growth. The impact of global trade wars could negatively impact on prices and eventual profitability.
On the other hand most of South Africa's gold and PGM production still comes from deep level labour intensive conventional mines. These producers weren't only impacted by stagnant or lower prices, but also by significant cost increases over the last number of years.
With labour often making up in excess of 50% of mining costs and electricity approximately 10%, the well above inflation cost increases eroded margins.
These mines are also more severely impacted by the essential additional direct cost in safety measures and indirect cost on productivity.
“Capital expenditure in South Africa has started to show signs of recovery as the historic lack of investment eventually catches up with mines leaving them with no choice but to start spending on sustaining capital expenditure.”
Precious metal companies will continue to battle in the low price versus high cost environment. The ongoing retrenchments and restructuring in this sector is testimony to the tough environment experienced by these companies.
Change in the mining industry is normally driven by long-term trends. However, Rossouw illustrates that the announced strategic review of Impala Platinum's and Lonmin's Western Limb mines is likely to have the biggest impact in next year.
The PGM basket price is reflecting an increase despite the woes of the platinum price on the back of increases in prices for the rest of the basket, notably palladium, rhodium and nickel that are doing well. Since 1970, the only time that it happened previously was in 2000-2002. This lead to good growth period for platinum prices.
The uncertainty with regards to platinum demand, which is really driven by the uncertainty around new technologies on the demand side is currently placing a damper on long-term investment positions and perceptions on long-term prices.
This position might change in the long run if for example hydrogen fuel cells were to emerge as a commercialised preference. The likes of Anglo American Platinum and Impala Platinum are investing in developing these downstream technologies which could eventually support demand.
PGM production in the long-term is likely to follow the same route of moving away from labour intensive mines to mechanised mines. Good examples are Anglo American Platinum's Mogalakwena open cast mine and developments at Ivanplats' Platreef mine and operators in Zimbabwe.
Similar restructuring announcements in the gold industry will continue to impact gold production and bulk commodities are currently impacted by freight rail constraints.
“In the absence of new technological solutions to mining gold at depth our gold industry is likely to struggle in the foreseeable future.”
Further, with regards to commodity prices he foresees bulk commodity and base metal prices impacted by global economic growth.
“Increases in real interest rates in the USA have traditionally put pressure on gold prices. It will be interesting to see whether the global uncertainty and risk would offset that.”
In addition, South Africa continues to see structural reform in the mining sector with a long-term move away from deep level conventional mines to mechanised mines.
At present it means an increased contribution from bulk commodities such as coal, manganese, chrome and iron ore to the total mining revenue basket.
The regulatory environment
Investors in new long-term projects need to price in long-term uncertainty.
“Although we've seen progress in South Africa with regards to certainty around the Mining Charter, other mining jurisdictions such as the DRC and Tanzania elected to raise taxes end regulatory requirements which could place a damper on investment,” states Rossouw.
“For South Africa, there are still a number of areas with uncertainty that should be clarified with the new regulations still to be issued; there was great progress from earlier versions of the charter. We applaud the consultative process that led to the revised charter and hope that the industry and government will continue to work towards a sustainable mining regulatory framework,” he concludes.