Peter Major: Expert insights on the local and global mining industry; advice for SA Govt.
Mining Specialist, Peter Major from Cadiz joined Alec Hogg in the Biznews studio to discuss the upcoming Mining Indaba to be hosted in Cape Town next week.
This focus on Mining Indaba 2015 is in partnership with Absa, a member of Barclays.
Peter, you're going to be at the Indaba in Cape Town next week.
Yes, I'll be there the whole week, Alec.
How many have you been to?
This is going to be the 21st and I've probably missed three or four. With some, I've virtually lived down there. I've lived down there for three or four days, for ten of them.
Are you going to do that this year?
Yes.
Why this year?
So much is condensed in there. When I went down to the Indaba last year, people who thought you'd be keen to see, would hijack/grab you even before you made it to the front door. There is so much going on, the Indaba is everywhere, and you don't always get to go to the talks happening on the inside. There is much to absorb. Cape Town is the Indaba. It's not just the Civic Centre/Convention Centre.
Is it the biggest in the world?
No, it's not. I think it's the third largest. There's an enormous one in Canada, which I think is four or five times bigger. There's one in Australia that's about half the size of the one in Toronto, but we're #3 and the foreigners are quite kind. Most of the foreigners I talk to, say that they enjoy this one more than the others – that this one is very productive. The others are out of control and it's harder to focus on getting quality work/meetings done. I've heard very few bad things about our Indaba in the last 10/12 years.
Who comes?
It's a really broad spectrum. You'll get many Government Ministers from Africa, CEO's from quite large and international mining companies, salesmen, many people properties and projects looking for funding, and the minority is probably funders. However, if you have one big funder, he can take care of 10/20 projects. The majority is probably people looking to sell something. The minority is probably people looking to buy something. A lot of countries are covered, it was the Southern African Mining Indaba. Now you'll see that some of the Northern African countries are getting their foot in the door, and we see more and more projects in the Northern part of Africa. I'm focusing on Southern Africa: Botswana, Namibia, Zambia, and here.
Mining's had a rough year. At this point, is it almost like at rock bottom that bargain hunters will be coming in and squeezing out the last few drops of some projects, or are you seeing it a bit more optimistically?
We're a long way from rock bottom, Alec. Rock bottom is what you got at the end of the nineties in the early millennium. Essentially, commodity prices fell from 1981 until 2001. If you plot the chart, almost every commodity was on a downward spiral. In 2001/2002, many commodities were trading at 150-year low prices. As you can imagine, the companies were in tough shape. On the other hand, companies were productive and efficient back then. From 2003 until literally last year, we saw an insane run in commodity prices – almost across the board. So many bad habits were developed. Yes, now it's a jolt. Oil has fallen from $110.00/barrel last year, down to $50.00, which is a jolt in anybody's book. Every year there is a higher commodity price, you raised your upper limit for when you would look at a project.
When the gold price was hanging around $1700.00 for two or three years, people started looking at gold properties that would break even at $1400.00/$1500.00 per ounce, even though the long-term price of gold was only $600.00. There's a lot more realism now. These are not bad commodity prices. Oil is up to $55.00. Its 100-year average is $48.00, so we're trading above the average. Iron ore's average is about $55.00/$60.00. It's trading at $65.00. Copper's trading above its average. In fact, most commodities are trading at slightly above their average. Gold is trading at double its average. Platinum is trading 50 percent higher. These are actually, pretty decent prices.
Does that tell us that they have some way to fall, still?
It tells us there is that void. There's that gravitational pull. You're right. If an average price over 100 years, is $50.00 for oil that means it spends half its time below $50.00. All through the eighties and nineties, oil was averaging $25.00. Now, people go home and have nightmares that it might just stay at $50.00. It means I won't be looking at any project now that can't cover its costs and give a return, if you have to use a higher than average price. If the world even heads (kind of) towards a recession, these prices can all come back another 10 or 20 percent – easy.
At the Indaba itself, what kind of business is going to be done this time around? Clearly, you would have some companies that are in distress, already. As you say, it's only a year or so from the peak.
Neal Froneman summed it up pretty well. He says 'Peter, whatever company you're running in mining, you're always in a rights issue mode', and that's true. It's because you don't know when you're going to get money but you always have more projects. Greenfields… Brownfields… you always have more projects than you have cash for, and cash can be very erratic. Always raise cash whenever you can get it. If worst comes to worst, you put it in the bank. I've never known a mine that didn't have many good projects, and that's how they motivate their young engineers. 'Find me a project that gives me a double rate of return of the market or that gives me three times the rate of return of cash'. That's how you are promoted on a mine. If you show management that you know how to utilise cash to everyone's advantage, that's how you move up.
There are many small and mid-sized companies, particularly now, that have no cash. They are going broke and so big companies are going to give a good, second look at these companies because they can pick them up for five or ten cents on the buck. A lot of work has been done. You have SANRA compliant resources and reserves, so little companies are going to be here, trying to find enough money to stay alive. Big companies are going to be here, showing off their better projects and hoping to raise some money for acquisitions/mergers. The main focus here is raising money.
What kind of role do the bankers play?
As we know, bankers play an indispensable role in mining because they're masters of the Monopoly board. Bankers get their money from Central Banks and we know Central Banks have been printing money, as we've never seen. Central Banks have been loaning out money at zero percent. Central Banks loan it to the banks and they are expecting the banks to find good projects, good companies, and good borrowers.
They must be squeezing hard because currently, they do have that leverage.
You're right. Banks will squeeze people harder when they have an excess of people, projects, and companies asking them for money. Sure, when the gold price was running at $1700.00/$1800.00 per ounce, bankers had to watch it because they had to compete with private equity. They had to compete with stock markets that were having an easy time raising money so, as with everybody else, bankers started loaning money on risky projects. Now, bankers can really lay down the terms.
Because there's not that much equity raising at the moment, or equity capital.
That's right. It's very tough to get equity capital, so bankers will ask for anything they can get and they're wary. Bankers don't want to lose money and now that they have a plethora of mining companies that are starving, dying, and really desperate for money, they can play the whole field.
What are you looking out for? What should we be looking out for, next week at the Mining Indaba?
I've always said this is the best forum Government has to put its case to the world. They can say things on TV, but it's just sound bites and they're not really sure who's watching South African TV. If you're in America, Europe, or Asia, there are one hundred TV channels to watch. There are 200 countries on the planet. Investors are definitely the second most important people. Foreign countries didn't build South Africa. Foreign money built South Africa. Foreign mining companies built South Africa. You can actually make a good case. Foreign investors are actually, more important to this government/this country than even foreign leaders.
And they're here, or they will be here, at the Indaba.
That is correct. I have never heard any businessman who's turned down any opportunity to meet with any Government Minister or Deputy Minister. I really don't know how Government can justify not sending half their ministers down here for a week. Not flying in for a one-hour talk to the Indaba or giving a half-hour press conference, and then flying out but rather, come down here for a week because you're not dealing with small people. You're dealing with very important people who control billions and billions of dollars.
Who can create jobs…
We know how many jobs mining creates.
Is there a good story to tell? We hear President Zuma rattling off this credo of his: 'there's a good story to tell' but currently, maybe not so much, with what's happening with Eskom for instance. If you don't have power, how will you build a mine? Perhaps also, with the taxes that are going to have to go up, almost certainly, in the Budget later this month. Is that not a smart reason to have a lower profile?
You mentioned 'is there a story to tell' Alec. I don't think so and I don't think the foreigners want to hear any more stories. That's all we've heard from Government for so long now. From this whole mining boom and since the new Minerals Act came out in 2004, there've been stories. People, who come here, are businessmen. They're astute. They have good experience, good educational credentials, and good contacts in Government industry. The last thing they want to hear is a story. They want to see some facts. They want to see some action. They don't need any Government minister or spokesman to get up, talk for half an hour, and repeat things we've heard 100 times before. They would be happy with a five or ten-minute talk that had few words and a couple of good slides/documents. I think we have to get past this 'story to tell'.
Nobody's going to buy any story from this country anymore. They've heard stories for way more than a decade. They can see what's happening. They see it in the results, on graphs, on the financials, on currency, in our production rate, our labour strike, and our 8.5-million people unemployed people that keeps growing every year. What story can you put that's going to change the facts? It's a great opportunity for Government to come down and say 'what facts can we show these people or tell these people that we can deliver on' – that's what they should do. Government should say 'what have we delivered on, that we're proud to show' and 'what can we deliver on, going forward' and 'how can we show them we're going to deliver on it'.
What can we learn from it, perhaps?
You can learn a lot by listening. If you just sat in one day's worth of presentations and make notes, you'd have more than enough ideas on how to formulate and improve our Government policy and legislation for the year.
Peter Major is with Cadiz.