PwC’s mining report, SA Mine 2014, reveals that there is still value in South Africa’s mining industry despite significant decreases in profitability, declining market capitalisation and regulatory uncertainty.
Released on Tuesday, the report explains how the industry had not only been plagued by labour unrest locally but also faced challenges, like rising cost pressures and lower prices, which had a global impact.
Of the three main revenue generating commodities in South Africa, the report cites gold as the only commodity to have gained in real-rand price terms over the last ten years. But, even so, gold has dropped by nearly 50% since its ten-year high in 2011. Platinum, in comparison, has fallen to its lowest real price in the last decade, with a 68% decline on its highest price in 2008 and a 40% decrease since its 2011 highs. Coal has dropped 52% from its 2011 high.
While a weakened rand has somewhat shielded the mining industry from these declines over the past year, with rand prices remaining flat, it will not have a positive impact in the long term as it is inflationary.
It is under these conditions, along with increasing costs and regulatory issues (arising from the new mining charter and mining tax regime, which is currently under review, for instance), that South African mining companies have to dig deep to find ways to be profitable.
“When you’re facing double-digit increases in your electricity prices every year, and when labour costs – considering that our industry is still significantly labour intensive – continue to increase it creates a challenging environment,” said PwC energy and mining assurance partner Dion Shango at the report’s launch. “That’s why it is tough [for mining companies] to maintain or improve margins at the moment.”
The report, which is based on the financial results of 37 companies (with a market captialisation of over R200 million that have a primary listing on the JSE), shows that while the declining trend in market capitalisation temporarily halted – increasing marginally from R597 billion to R675 billion as at June 30 2014) – market capitalisation fell by 19% in the next quarter to R545 billion as at September 30 2014.
Combined Income statement of Surveyed Companies
*Numbers does not reflect impact of the strike for Amplats and Lonmin. Comparatives includes their 2012 strike
Nevertheless, companies managed to maintain relatively strong balance sheets, with stable liquidity. Revenue increased by R36 billion last year, with the top 10 companies accounting for 81% (R29 billion) of the revenue increase. And operating expenses increased by 14%, which is lower than the 16% seen in the previous financial year. It is noteworthy, however, that the full impact of the five-month strike on the platinum belt, which ended in June, has not been included in the reported results analysed in the survey, except for that of Impala Platinum.
“Gearing for local companies is sitting at around 13% whereas for global companies it’s about 28%. Only five companies in our survey had a gearing ratio above 28%,” said Andries Rossouw, who is also a PwC energy and mining assurance partner.
However, net profit reduced by 80% from R27 billion to R6 billion, despite an EBITDA improvement of 9% last year. This was due to the substantial impairment charges, which were up 137.8% over the prior year at R49 billion.
“EBTDA margins should be in excess of 35% in order to cover capital expenditure for the future. The platinum sector is well below that and would have had to borrow to fund their capex,” said Rossouw, adding that most companies that had impairments were outside of South Africa.
It is no surprise then that many of the companies in the survey had to increase their gearing in order to fund sustaining capital expenditure and, in some instances, operating losses. This was evidenced by a net borrowing outflow of R23 billion after an inflow in the prior year of R29 billion.
On the bright side, the report showed that safety remains a key priority for mining companies with a substantial decrease in fatalities and lost time injuries over the last ten years.
The report also showed that mining is still a valuable sector to the country and its people, showing an 11% increase in value created for all its stakeholders from R129 billion to R14 billion. It should be noted, however, that only a third of the companies surveyed – accounting for 77% of the total revenue of all companies analysed – provided readily available value added statements.
Most notable of these is that distributions to shareholders decreased by 7 percentage points from R29 billion to R19 billion, further pointing towards limited scope for short-term returns to investors as companies reinvest funds in the form of acquisitions and capital acquisitions. Investors looking for short-terms returns will therefore shy away from the mining sector and therein lies the problem faced by company boards that need to make decisions regarding the best strategy for remaining profitability in the trying times.
“There are differing views out there as to whether this low commodity price environment is the perfect time to invest, or whether management and boards out there should be holding back somewhat to (wait for a couple more years) to so see whether there is going to be further losses or high costs to be incurred by mining companies,” said PwC’s Shango.
Other key findings from the report
- The low platinum basket price is unsustainable with South Africa accounting for more than 70% of global supply. At current price levels, a number of operations are marginal
- Coal retains its positions as the leading South African commodity, representing 29% of mining revenue for the year, compared to 28% in the prior year. Gold decreased from 20% to 14% despite stable production.
- The high percentage of value received by employees is not sustainable and is expected to move back to a longer-term average of 30% through either a return to profitability or, if that is not possible, through a decrease in the number of employees.
- The mining industry currently exceeds the minimum empowerment levels of board representation required by the mining charter, with 41% of board members being Historically Disadvantaged South Africans (HDSA) (down from 43% percent in the prior period), and 18% being females (up from 17% in the prior period). The mining charter requires a minimum of 40% HDSA and 10% female representation respectively, by December 2014.