JOHANNESBURG — The Mining Indaba, being held in Cape Town this week from 5-8 February, comes at a time of a cyclical upswing in the global industry. But South Africa, owing to missteps in recent regulatory decisions, risks missing the rewards of this periods unless it makes some drastic changes. In this interview with Alec Hogg, RMB’s Business Development Director for the mining sector Henk de Hoop gives his views on the Indaba and what South Africa needs to start doing now to get its mining house in order. – Gareth van Zyl
This special podcast is brought to you by RMB and RMB’s Business Development Director for the mining sector Henk de Hoop is on the line from Johannesburg. Henk, you’re going to be in Cape Town next week with pretty much everybody else from the mining world at the Annual Indaba. Does it still get the substance or support from mining specialists as we’ve seen in years gone by?
I think it does. Obviously over the years there’s been increasing competition from some of the more focused side conferences, as quite a few past participants found that the conference was a bit overtaken by the supplier industry. So, some companies started organising competing conferences just around the Indaba and they’ve lost some of that momentum. The Indaba’s trying to get that back, so they’re focusing a lot on investors and junior investment companies, and that will help them in the long-term as well. We still spend a lot of time, outside the conference as well, meeting with clients, organising functions. So, Indaba is much more than just a conference centre.
Also, the mood in mining, I went along to Mines and Money here in London a couple of months ago and the mood certainly seemed to have picked up from a year ago. Is this just happening in London or is it something that you’re feeling in the entire global mining industry?
I think pretty much all the macro indicators indicate that it’s looking more positive for mining, and a lot of that has to do with global growth expectations. They’ve been adjusted upwards. It’s broadening as well, so we’re not depending only on China anymore to provide that upside. Global GDP growth is always good for the mining sector, so we will see increased demands for a whole range of commodities, we’ll see good momentum in pricing. A lot of that was already kicking off about 18 months or two years ago. I think that’s going to broaden and it’s going to look a little bit more sustainable in the year ahead as well. On the back of that, mining companies are churning out decent profits; they are looking beyond just cost savings and looking to grow. I think the M&A will pick up as well so it’s definitely a much more positive momentum than where we were.
That’s for the mining sector as a whole, but of course now we come back to South Africa and talking to Team South Africa in Davos where Cyril Ramaphosa made a huge impact as did his ministers much more friendly reception that they got from international investors, they said, after wowing the guys in Davos and they really did, the next big one for them is the Mining Indaba. However, we have a Mining Minister who has some issues of his own and he’s been fighting with the mining industry. I’m just trying to work out in my head, how do you approach, if you’re a South African mining industry or government, the international community at such a big event.
I think the South African mining investment climate and opportunities are still very difficult to defend to international investors because we’re at a stage now where you cannot judge very well what your future returns will be. There are regulations that are hanging over the industry’s head that can potentially be very painful if the foot is put down and they are implemented. Now nobody believes that is going to happen; there’s, unfortunately, first some court cases, and eventually industry and the regulator have to sit around the table and see what will work. Clearly, what is now on the table, the industry will never accept. I think also due to the way the last set of legislations had been prepared and presented to the industry, which was very much unilateral in the manner it was done, there is absolutely no relationship left between the industry and the minister.
That needs to be resolved first and unfortunately, it is very much in the limelight now. And unless we have clarity on that, to just make lovely promises at the Indaba won’t help, it needs to eventually translate into some concrete actions where the charter is put aside, everybody gets back in the room and we negotiate a new deal. Because what’s currently on the table is simply scaring local and international investors away from the mining sector.
One would think consistent with the message that came out in Davos, which was all about – in fact, Cyril just had three messages. He said, “Policy certainty, fixing the SOEs and attacking corruption”. Now policy certainty is something that has bedevilled the mining sector and indeed is at the core isn’t it, of the problems at the moment.
I think if one looks at what is still coming up and it’s within the next two, three weeks, there are some important court cases that will have to be decided upon. It then depends on the outcome to determine the next steps, because it will be an outcome that will be either positive or negative for the industry and there could be appeals. The main thing is that eventually everybody must go back into the room and ask, “What will work for this industry”, but clearly, the court cannot give us an indication.
They’ll give a ruling that will give some guidance, but eventually you’ll have to come to a negotiated settlement and the sooner we get people back in the room, the sooner we can give the industry certainty that we’re now jointly working towards an equitable solution. If one looks at the returns to be achieved, the South African mining sector is not enormously different or at a huge negative compared to other jurisdictions globally, because we’re still fighting for international capital. It is very important to achieve that. We can talk and we can smooch and we can position ourselves on the global stages as an investment destination. The reality is, our sector currently isn’t appealing, and that’s what needs to change.
It’ been a long journey as well, towards transformation and I guess that both sides want transformation, it just depends on how to get there.
Absolutely and I think for the past 15 years or so, the standard model of achieving this was selling an asset, introducing a partner with borrowed money at a certain point in the cycle, with the borrowed money needing to be paid back at the end of the transaction. What that would mean is, a certain percentage of dividend flow would help contain the interest build-up that’s running on the debt. In the hope that, at the end of the deal, the share price would’ve rallied sufficiently, so that you had enough value for a certain number of shares to be sold to settle the debt. Then you’ll be left with a certain percentage of the company unencumbered. Unfortunately, that model has turned out to be, basically, the lottery. If you did the deal at the right point in the cycle and you did have a good run in the commodities sector, you could create value.
For the companies that only did the deals when valuations were a lot higher and then faced a down cycle, all these deals ended up being failures. So, to think that we’re going to have broad transformation in the sector using the same model again, hoping that we’re going to have another lucky run, we’re going to have the same outcome where you have some lucky ones and some companies that will not achieve the transformation. I think that model needs to be revisited completely. I don’t think that having empowered assets, every single prospecting right, every single mining right having 26% forced upon ownership issue, is the right model eventually. We do not create entrepreneurs; in many cases, we simply do not create value.
It is far more important to create independently run black-owned mining companies that can compete like anybody else in the mining industry; can develop their own properties; can decide where to spend their capital; can decide with what risk, and when to take it. I think ten years from now, we’re going to ask the same questions; where is the transformation, why didn’t it happen, which ones were successful? We knew the answer already and we know that answer now. It is a lucky outcome rather than a guaranteed outcome, so we’ll need to come up with a different model.
So, we have to think about things very differently.
Absolutely. As a result, the court cases are not going to really give us an outcome. Yes, once empowered, always empowered, but I think we’ll have to sit around the table at the end of that outcome as well, that’s positive for the industry. Obviously, the new legislation will have to look slightly different. There will probably be a change in the approach from government, because there will be howling protests from a whole range of quarters that say it can’t be accepted and we’re going to run back to the courts to see if we can change the outcome. The good thing that I find is, talking to many industry participants, nobody is against transformation, and everybody understands how it needs to be achieved.
I do think that many of the mining company’s execs have a very valid commercial way of looking at these deals. If you squeeze too much out of these transactions, you’re trying to bend them, financially, into an almost impossible outcome that will be punished and then you don’t achieve that outcome. The return rate in this industry, particularly in South Africa, is already under a lot of pressure. Electricity costs have rocketed over the years and labour costs have risen to great extent without offsetting productivity improvement. You’re going to squeeze way too much for people to actually still be willing to commit that capital.
It is simply not going to generate the returns, and what often is forgotten in, empowerment deals, is that they do cost shareholders money. If there is a whole range of factors nibbling into those returns, we simply will not have capital committed, and it is exactly this that creates far bigger spinoffs for South Africa as a country. Fiddling with who’s got what part of a sinking ship won’t help. The ship needs to stay afloat and it needs to go faster. It is almost sad to see that we’re fighting over something that is effectively starting to go into decline. We need to turn that around, and the debate is therefore, on the wrong focus. The ownership issue is only a small part of what this industry needs to achieve.
So, what’s the message that should be given to foreign investors at the Mining Indaba?
I think it’s important that government does come with a message, saying, “We do realise that mining has a very important role to play in the future transformation and growth of the South African economy. We realise that where we are now, is not where we want to be – in constant conflict with the industry. We will work towards a working group that will speedily come up with an equitable solution that will prove that South Africa will still be a profitable mining destination, while at the same time recognising that communities and previously disadvantaged people in the country play an important role in the transformation aim, and will also benefit from that growth.”
And that we’ll listen presumably because as you said a little earlier, that hasn’t been a hallmark of negotiations up to this point.
No, I think it is also where eventually the local mining industries will say “So far and no further”. I think we could’ve, about 18 months ago, come up with a different answer and unfortunately, at the time it was a very one-sided decision to take all the negotiated settlements off the table and come up with a very unilateral document. It was a grave mistake because it has cost us a lot of time, and particularly the timing was so poor because we were heading into an upswing.
If we would have had a clear piece of legislation and shaken hands 18 months ago, agreed, we wouldn’t have been a drag on the economy, but a help to the economy which would’ve been benefiting from a positive momentum in the global mining cycle. We now run the risk that as we go to the world selling our story, if it takes us another 12 to 18 months to come up with an equitable solution, the world might be in a bear market or a down cycle of the mining industry again, and to attract capital will again be a mission. The timing is just very unfortunate that we’re facing what we’re currently facing.
At Davos, the IMF’s Managing Director, Christine Lagarde, called this a cyclical upswing, not a long-term cycle that has now kicked in and it’s to your point, time is of the essence. If you want to participate in this cyclical upswing, you’d better get things sorted out right now, but what is the prize, Henk? South Africa used to be the treasure chest of mining for the whole world. Is there still a lot left or is the country just not up there anymore as a premier destination? What I’m trying to get at here is, if all the legislation was correct, would people still be scrambling to get a slice of South Africa?
I think you’re right. There are different opinions on what the potential growth of this industry could be if all the circumstances – macro, micro, and legislative – were all pointing in the right direction. I do think South Africa faces some stark realities. The realities are that, first, the gold sector has obviously been in decline for many years now and that is very difficult to stop. It’s based on the cost of power and the cost of labour. It’s going to be very difficult to see anybody committing to sinking a three-kilometre deep shaft that will take 12 to 15 years to get into full swing. The risks, the venture’s returns are not sufficient to justify that. What we are seeing is an optimising of what is still left and using existing infrastructure. But brand-new gold mines are going to be very difficult to justify. It’s going to be very much focusing on the tailings operations and squeezing more out of that.
Henk, what about platinum?
I think we do face the risk, and that is completely out of the hands of the mining industry. If there is indeed further damage to platinum demand, and battery electric vehicles eventually pick up, it’s going to be a flat lining industry. I don’t think you would expect major growth, we’re going to move sideward there. The focus will be replacing maturing deep level assets which lower costs, with shallower, quicker-into-production assets. Everybody’s trying to get those particular assets.
The coal industry is probably a different story. Obviously, we have an issue with Eskom and the overall volumes that have flat-lined because of electricity demands not having picked up. If there would be a change in the economy and we get going again, there will still be requirements for particularly replacement tonnages, and to a certain extent attacking the ore bodies that have been left behind. There’s still quite a bit of capital to go into the coal sector.
If you move from coal to iron-ore, the iron-ore sector has obviously seen quite a few new big mines coming up. I think the general view is that it can be further optimised – we can still look at some of the lower grade deposits and through particularly upgrading those, we can actually see further investments coming into the sector. I don’t think we’ll see big new mines develop there. There are many smaller deposits that are being attacked in the right pricing environments, so that’s positive.
Manganese, because of our dominant position and because we’re getting our transport linkages sorted out, will still see some momentum as well. That region still has further growth and capital absorbed in my view. Your biggest question is, to enhance exploration, if we would come up with bigger exploration kitties, then we would hopefully see some of the benefits coming through. The big ore bodies are well-known, the bushveld is well-known, but that can even kick out some surprises. The discoveries by Platinum Group Metals was a phenomenal exploration success and have won global prizes, so who knows, maybe in some of the other regions we might still find some surprising deposits. But it needs exploration money and a regulatory framework that stimulates people to take that risk.
Well, it’s an interesting point you make about the exploration possibilities because I suppose that’s it with mining. As you get more technically competent in discovering the ore bodies or what is under the ground and you have this treasure chest in South Africa, who knows, as you say, what might come up next.
Absolutely, and I think that’s also where a punishing regime where the new proposals were 51% empowerment, is the absolute wrong answer because you simply kill the upside potential in exploration. Essentially exploration should be a free for all, and you could always come up with your transformation requirements when it comes to converting to your mining licence. But the exploration sector should be thrown open because that is really the initiator and the generator of the next mine.
If you should make it as friendly as you can, as we have seen in Botswana you can be extremely successful at attracting mining capital. Their regulatory regime was very clear, transparent, quick, and it’s paid off for Botswana. We need to come back with something similar in South Africa. The fact that De Beers, who’s willing to look at spending lots of money in exploration in South Africa, had to wait for two, three years and only now is getting the licenses coming through, is ludicrous. It shouldn’t be taking those types of timelines, it’s an opportunity missed.
It’s interesting and it’s probably a good place to end off with. I was listening to a BBC programme taken from the 1960s; I think it was where they interviewed the geologist who discovered the diamond pipe in Botswana, the very first one. Up until that point, it was just a land of desert and he said in this interview that he was incredibly lucky, not just for finding the kimberlite there, but because 80% of geologists in exploration never find a thing. So, it just shows how difficult it is or how you need to incentivise these guys to keep on digging if only 20% of them is ever going to find anything.
Absolutely, and I think what we also suffered a bit from is that in the period from 2000 to 2008, when everything one touched turned into gold because the prices just kept on rising and asset values just kept creeping up. Some of the distribution of assets and the empowerment of some of these assets made it look so easy. You could cut pieces of the manganese fields and bam, somebody walked away with a billion Rand because somebody would buy him out.
Coal and the PGM fields as well, a lot of it was known, but pure exploration is a far higher risk game. Your hit rate is so much lower than what the perception is that was created in the good years – particularly in South Africa which had a well-known geology, particularly in the well-known existing operating fields. So yes, exploration is real risk-taking and you need to reward investors sufficiently – at the end of that big pot of money they spent, there are enough rewards for them to keep on coming back.
Henk de Hoop is the Business Development Director for the mining sector at RMB and this special podcast was brought to you by RMB.