SOUTH Africa’s mining sector cannot be viewed in isolation from the political and economic landscape, and we must examine the broader SA Inc story to understand what is holding it back.
Recently, President Cyril Ramaphosa encouraged the private sector to contribute at least a third of the capital required for the country’s major infrastructure projects. Although he explicitly discussed aspects that currently have a dire need for investment, such as energy, water, transport, and the digital economy, another critical factor of South Africa’s economy also needs investment to regain its rightful place.
Investment in mining in South Africa has been in decline for several years now, with capital flowing to jurisdictions where there are more stable and viable investment cases. This is on the back of, at times, quite fractious relations between the miners and policymakers, and other issues such as logistics infrastructure challenges and unstable power supply.
Between 1970 and 1998, mining’s contribution to gross domestic product more than halved, dropping from 21.3 percent to 9 percent. For the 2020 year, because of the disruptions brought about by Covid-19, mining’s contribution to the economy declined by 21.5 percent and accounted for just 8.2 percent of gross domestic product.
Mining has long lead times, requiring investment years before a project can go into production.
This means investors must have confidence that a sudden change in policy direction will not significantly alter the investment case after they have committed funding to a project.
South Africa has suffered from low levels of capital investment, as well as low levels of exploration. Coupled with the exit of some of the traditional mining houses, it’s clear that there are many things we haven’t done right.
This does not bode well for the sector’s future.
We need to sort out many aspects, the most key of which is policy certainty. The current elevated commodity prices gloss over inherent structural problems that are evidenced by continued low levels of investment. South Africa is lagging the rest of the continent when it comes to money being spent in extracting commodities.
As with most businesses, the barrier to entry is always capital, which is why investment is so vital.
However, South Africa does have a role to play in a new energy future, especially when it comes to metals that will be in high demand in the green energy revolution the planet is witnessing.
We may not, as a country, be well-endowed with nickel or cobalt reserves, but when it comes to manganese and similar commodities, we can take part in the global move towards the extraction of minerals that are growing in demand.
First, we need to reverse the current malaise, which will require bold decisions, such as the welcome move to allow energy producers to add 100MW on to the grid without regulatory approval.
However, we need to follow this up with an enabling policy framework and proper capacity at all the relevant government and statutory levels to make sure that we can facilitate speedy execution.
It’s one thing to make a policy decision, but you’ve also got to make sure that there’s sufficient collaboration across the spectrum to bring these projects to fruition.
For example, we need to be considering environmental factors. The trend towards independent power generation solves two pertinent issues: the increase in awareness of the Environmental, Social, and Corporate Governance (ESG) agenda and the stability of power supply.
On the one hand, running operations with renewable energy reduces carbon emissions and, on the other, solves for what has become unstable and increasingly expensive supply in recent years. As Nedbank, we are proud to partner with clients who have never wavered from a commitment to responsible mining.
It’s a virtuous combination that attracts capital because the investment case now makes sense, and capital will always follow investment cases that make sense.
As South Africa, we need to be configured to benefit from global trends requiring the minerals that this land is endowed with, but we need to make deals and inward investments possible. We can’t, for example, have potential merger and acquisition activity stuck with regulators and competition authorities for protracted periods.
Government institutions need to be empowered to bring about meaningful change so that we don’t slow down business and investment. We need to solve capacity issues to implement policies that are brave and will result in SA Inc claiming its rightful place once again in the global mining sector.
The bottom line is that capital will respond to viable business cases and projects that make sense.