Presented by Old Mutual Investment Group

A rock and a hard place: Urgent policy reforms only way to save mining sector

 ·1 May 2024

By Ian Woodley, Portfolio Manager, Old Mutual Investment Group

South Africa’s mining sector, once a cornerstone of the country’s economic prosperity, currently faces a pressing need for structural reform to regain competitiveness and relive its investment glory days.

While the threat that the sector is currently facing when it comes to its investabilty status is not in question, the critical issue at hand is the pervasive policy uncertainty that is deterring investors from investing in the sector.

Ultimately, South Africa lacks a secure investment environment along with an attractive fiscal regime to attract investment into the sector.

For more than a century, the mining sector has been an essential component of South Africa’s economy, contributing approximately 7.5% to the gross domestic product (GDP) and representing roughly 60% of the nation’s exports by value.

Over the past year, the mining sector saw profits decline by nearly R100 billion due to the challenging operating environment, as well as lower commodity prices.

Following the recent Mining Indaba and the spotlight that this event put on the sector, large mining companies including Impala Platinum, Northam Platinum, Anglo Platinum, and Sibanye Gold all experienced substantial declines, with losses ranging from 3.57% to as much as 7.72% during the week of the event.

Mining Minister Gwede Mantashe recently announced a R400 million fund to support new mining explorations. While this is a positive step, it alone cannot resolve the underlying issues. The fund starts to address the fiscal aspect but, without the comprehensive and welcoming legislation that investors demand for long-term commitment, this is unlikely to yield many positive results.

According to the Fraser Institute’s Investment Attractiveness Index, South Africa ranks among the least attractive jurisdictions in the world, placing it in the bottom 10, and the country has been in consistent decline in the index. This trend highlights the need for immediate attention to the country’s regulatory framework to restore investor confidence in the mining sector.

While the drive towards decarbonisation is considered to be minerals intensive, the South African domestic equities have limited to no exposure to some of the Battery Metals that are viewed as the main beneficiaries of this trend (with the exception of Sibanye).

This leaves SA Investors having to focus primarily on the large mining players, such as Anglo American, BHP and Glencore for exposure to the energy transition.

However, the overreliance on these established mining giants poses challenges for sectoral expansion and may stifle growth of the smaller players, and this cannot be a good outcome for the sector, or the country.

For the sector to regain its vigour and to remain an important part of the South African economy for years to come there is a need for swift fundamental sectoral transformation, and we can only hope that there are productive discussions between the government and the sector to formulate a plan that will enhance the attractiveness of the country’s mining sector.

Without this, South Africa risks degrading a historically significant employer.

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