Mining in Africa is neither for sissies nor the near sighted. While he didn’t say so in as many words in his interview with Alec Hogg, that is the conclusion to be drawn from the comments of Wickus Botha, Mining and Metal Sector Leader for EY Africa, on the coal mining ventures in Mozambique of Rio Tinto and Brazil’s Vale – both of which came to stumble. Apart from them, other mining companies have done well in Africa..admittedly under different circumstances. Doing business in Africa, says Wickus, is expensive and requires lots of experience…and he alludes to the ever present lack of developed infrastructure as the biggest stumbling block in the path of the uninitiated and those whose due diligence may have fallen short. Access to capital (which is not easy right now – especially to those who waste it) is one of the two key stepping stones to success. The other is worker productivity – an arena in which a clear distinction must be drawn between the work force and labour. GK
ALEC HOGG: Productivity, both labour and capital, has become the top business risk facing mining companies around the world. Joining us in the studio to have a look at the latest report that EY has put together – and they do it annually – is Wickus Botha. He’s the Mining and Metal Sector Leader at EY Africa. Wickus, well timed because Rio Tinto has finally gotten rid of this $3.7 embarrassment in Mozambique. The border company called Riversdale in 2011 – last night it sold to an Indian company for fifty-million. If you take fifty as against 3700, that’s the quantum of this disaster, which of course, aligns itself with the risks that you outline in your report, ‘Productivity of Capital’.
WICKUS BOTHA: Very much so, and I think if you look at that investment, it was made during the commodity boom. Companies were very optimistic around the commodity markets and they were willing to invest in that market. Now that there’s been some level of…
ALEC HOGG: But wasn’t there someone who actually stopped and said ‘hang on a minute, boys’? Particularly Riaz, because they’d only made on serious acquisition before that and that was in 2007, where they bought Alcan for an absolute disaster at the top of the market. They’ve therefore had two swings at the pitch and they’ve missed both terribly.
WICKUS BOTHA: Companies got very excited about the prospects of coal (and good quality coal) that’s in Mozambique, but as with many other countries across Africa, it’s challenging because infrastructure is not as developed as Australia, Canada, and other countries where there are large mining operations – and even South Africa. Doing business in many of these countries across Africa is very expensive and requires lots of experience.
ALEC HOGG: And precisely because that, they should have done their due diligence better. If you recall, it’s a massive coal deposit. They were going to mine it and then send it down the Zambezi River.
WICKUS BOTHA: Well, that’s it. I think Vala has also experienced some challenges because they went and wanted to employ their megaships to haul the coal, and they realised that the ocean is just not deep enough to deal with it, so they also had to adapt their strategy.
ALEC HOGG: Well, they couldn’t even get the boats down the Zambezi River because they weren’t allowed to dredge the river. It seems like a very basic mistake in their due diligence.
WICKUS BOTHA: That links very nicely to our number one and number two risk in our report this year. Last year, the capital agenda was risk number one. This year, it’s risk number two. I think it’s equally relevant, still. Firstly, getting access to capital…it’s very difficult to get access to capital at the moment.
ALEC HOGG: You can’t be surprised at that, given the way that the miners have blown so much money, including this Rio Tinto story. Who wants to lend money to people who waste it?
WICKUS BOTHA: I think that getting on your hands on money was quite easy a couple of years ago. It’s quite difficult now and there’s a lot of scrutiny around how you allocate the capital that you have. Probably the biggest focus for the majors is how they allocate the capital. The juniors and the mid-tiers are really trying to get their hands on some money to take forward.
ALEC HOGG: That’s business though, isn’t it? Generally, you like to follow the great capital allocators. Is there anyone in mining who hasn’t fallen into the hole? I’m thinking of Glasenberg at Glencore, perhaps.
WICKUS BOTHA: Well, over the history, I think we should commend many of the majors. I think Xstrata’s done a sterling job over a long time.
ALEC HOGG: Not according to Glasenberg. He thinks they completely wasted their capital.
WICKUS BOTHA: Perhaps, but I think it’s probably own views and perceptions. I think Glencore have done a sterling job as well. They started out with a commodity trading business – and that was the fundamental backbone of the business – and then vertically integrating over time, and I think they’ve done a really good job.
ALEC HOGG:Â Is Anglo doing better under Cutifani than it was under Cynthia Carroll?
WICKUS BOTHA: I think its two different times. The one was very much in the middle of commodity boom – chasing almost everything. This one is about discipline and Mark Cutifani is very good when it comes to discipline and being methodical. I think that’s what he’s bringing to Anglo American is that methodical approach.
ALEC HOGG: Getting back to productivity – labour productivity, we haven’t touched on. Clearly, that is a massive issue when you’ve just come out of a five-month strike.
WICKUS BOTHA: Exactly. Productivity is not a South African issue. It’s a global issue and Australia is grappling with productivity as much as South Africa is grappling. The difference or the nuance probably between the two is that the mining in Australia is not that labour intensive, but is very capital intensive and very equipment intensive. The deep-level mines or the precious metal mines in South Africa are very labour intensive, and so you need to be able to respond to them differently. If we look at the other mines in South Africa, they haven’t necessarily been hit that hard by the challenges between two clear constituents (the workforce and organised labour) because they’re not that labour intensive.
ALEC HOGG: We’re going to be talking to Neal Fronenman in a little while. I’ll be sure to ask him those productivity related questions. Of all the guys in South Africa, he’s probably done the best job.Â
WICKUS BOTHA: I think he has a very good track record and it’s shown again now at Sibanye. We look forward to seeing what he wants to do when he says he’s going to build a precious metals company.
ALEC HOGG: Maybe into platinum – we’ll find out about that in a little while. Wickus Botha is the Mining and Metal Sector Leader for EY Africa.
