New EY report identifies top risks and opportunities for miners in South Africa in 2020
12 November 2019
A new EY research report entitled Top risks and opportunities facing miners in Africa 2020 released today reveals common challenges faced by miners across the African continent and a particularly vexed state of the industry in South Africa.
Wickus Botha, Mining Team Leader at EY Africa, said: “The main insight from the report was that is that the themes of license to operate and disruption run throughout the continent. Social responsibility and stakeholder needs are intensifying, as does the need for digital transformation, innovation and managed risk.”
Looking at South Africa, the report identified three key areas of business risk: license to operate, competitive shareholder returns and digital effectiveness.
The main opportunity was seen as more gold mining, as initial drilling has indicated significant untapped gold reserves.
License to operate
Looking deeper at the business risks, the main risk for South African miners was license to operate, which assesses the operating environment for miners.
Said Botha: “In South Africa miners face increasing cash costs as labour unions pursue wage increases and engage in strike action. Coupled with commodity price volatility, we have an operating environment which could lead to tight cashflow or even suspended operations.”
South Africa remains uncompetitive in terms of the ready supply of skilled labour with higher labor costs compared to Sub Saharan Africa. Poor economic performance coupled with strict labour market regulations and high unionisation levels have been a structural barrier to employment in the country.
Botha suggested to counteract labour challenges, maintaining a strong communication channel and transparency was imperative to pre-empt issues that are likely to lead to strike. “While legislation on minimum wage of workers will further increase labour costs for miners, companies can tie-up with universities and institutes to invest in developing the right skills for youth for the future.”
Competitive Shareholder returns
Declining gold production, high cost of production, diminishing ore grades and a strict regulatory environment has seen economic value being eroded for South African miners.
“Allocation of capital to mining has been challenged by relatively lower returns on equity compared to other sectors and asset classes with Sibanye as an example freezing new South Africa capital spend on uncertainty in the country. Higher extraction costs from lower grade mineral deposits and from increasing complexity of operations, is making many mines uneconomic,” Botha noted.
He warned that South African miners risk even harder to access capital markets and therefore higher capital costs if shareholder returns do not match competing projects in other countries.
Digital Effectiveness
Decline in gold productivity is due to falling grades, increasing depth of operations, and ageing infrastructure.
“But digitally enabled productivity could fundamentally change operating models to become more profitable and remain a going concern. This should be an urgent priority in South Africa, “ Botha noted.
However for fear of losing employment due to automation, digital effectiveness faces major resistance from the labour intensive mining industry which accounts for 450 000 direct jobs.
“Miners need to engage labor unions on their changing role following the adoption of technological innovation, avoiding notion of unemployment. For example Siemens has launched a Digital Mining Incubator, aimed at developing digital use cases for the South African mining sector,” Botha concluded.
Issued by Grant Henry on behalf of EY Africa, 12 November 2019
