Mining: Where does the revenue go?

Terence Corrigan explains how the industry's monetary benefits are divided

Chasing myths no path to development

There has been a longstanding belief in South Africa that South Africa’s wealth lies beneath its soil, in the bounty of its minerals. For over a century it played an important role in the country’s political mythology. The idea that the mining industry plundered the country’s wealth and enslaved the labour of its working people was seized upon by nationalists of various stripes. It has remerged today in demands for nationalisation to fund expanded state spending.

Whether the industry’s detractors have directed their condemnations at ‘Hoggenheimer’ or at ‘white monopoly capital’, the idea has remained constant: enormous sums of money are to be had in mining, if only the greed and venality of the mining houses and their investors could be moved aside. Cut out the middle-man and the profit-monger – redirect those ‘super-profits’ – and all of this can be funnelled directly into our common development. Most recently, student activists have latched onto this as the route to financing tertiary education.

So what are we waiting for?

Leaving aside the disruption on the that seizing South Africa’s mining industry – or transferring it to the ownership of ‘the people as a whole’ – would have, it is far from certain that the payoffs would be anything like what its proponents expect.

PWC’s recently published report on the state of the industry – SA Mine – makes for uncomfortable reading. A survey of 31 of the largest companies operating in South Africa, it reveals a highly stressed industry.

It is certainly true that the country’s mining industry is worth an enormous amount of money. The value of its assets – including its physical plant and equipment – was some R709bn in 2016. Perhaps more tantalisingly, mining revenue for the 2016 financial year was some R333bn. For perspective, this is equivalent to a little under one third of SARS’ tax take for the country over the same period.

There are however, no ‘super profits’. Overall, profits were largely absent. Once operating expenses, impairments, depreciation and so on is taken into account, the report shows that the companies in the survey registered a net loss of some R46bn. The ‘loss margin’ was around 14%.

While the 2016 financial year was a noticeably more difficult year than those preceding it, the trends have been clear for some time: depressed commodity prices, rising expenses, labour costs have been eating into the profitability of the industry. And attempts to lower these costs have done little meaningfully to address this.

In fact, the data suggest that for all its problems, mining is making a fairly decent contribution to the broader society. This is reflected in the ‘value created’ – the monetary benefits shared by the mining industry’s stakeholders. The single largest portion of this, at 38% of the total, went to the industry’s employees. This was followed by funds reinvested, at 32%. Together these amount to some 70%, These outlays cannot readily be reduced – and in the case of employee remuneration, suggesting doing so would touch enormous sensitivities.

Of the remaining value, half – or 15% of the total – makes its way to the state, in the form of direct taxes, employee taxes and royalties. (The actual benefit to the state is higher, if indirect taxes are included.)

Shareholder dividends, by contrast, accounted for only 3%. True, this is a particularly low point (in 2012, shareholders received 20% of value created). It is also true that commodity markets tend to work in cycles, rising and falling over time.

But mining is increasingly treading on difficult ground – and not just in South Africa. Changing economic conditions in China, for example, and environmental sensitivities around extractive activities are introducing new complications, new costs and new risks. Some months back, Moody’s commented: ‘There is little light on the horizon and we expect the physical supply/demand imbalance to widen further, leaving industry conditions extremely weak and making a return to normality unlikely for several years.’

The message is quite simple. To contemplate state ownership will mean more than accessing it the industry’s resources. It will mean taking in its problems.

In fact, state ownership could well undermine both the mining industry and its benefits to society. The temptation to make politically-driven or short-term decisions can, understandably enough, be powerful. In tough times, it may be politically expedient to divert as much revenue as possible into state coffers, taking away resources needed for reinvestment. Or the political sensitivities of presiding over job losses may result in keeping unviable operations open, effectively draining resources that might better be used elsewhere.

Mining, under pressure though it is, has a role or play in South Africa’s future. A large one. But is it a role that will be played out in an inhospitable environment. It will demand innovation, imagination and forward thinking. It needs long-term perspectives and stable, predictable policy. To contemplate seizing it in hopes of unlocking the treasures within is to misunderstand these realities fatally. For doing so might provide ideological satisfaction, it will not yield the development we as a country so desperately need.

It is time to set our destructive mythology aside.