Is SA’s mining sector investible?

South Africa’s decline as a mining destination is underlined yet again in the Fraser Institute Annual Survey of Mining Companies 2022, which ranks us in the bottom 10 countries according to investment attractiveness.

We were once a prime destination for mining investment. Now we’re in a spectacularly troubled neighbourhood alongside Zambia, China, the Democratic Republic of Congo, Papua New Guinea and Tanzania – although Zambia has made radical reforms aimed at winning back investors in the past two years.

This shows how far SA has sunk as a mining capital destination. In 2018, we ranked halfway down the 83 jurisdictions measured by the Fraser Institute. In 2022, we dropped to 57^th spot out of a total of 62.

Read: SA falls to its lowest-ever ranking for mining investment attractiveness [in 2021]

Interestingly, SA’s neighbour Botswana makes it into the top 10 for investment attractiveness, ahead of Ontario and Alaska.

On policy issues, Morocco ranks 10th in the world. Ivory Coast, Burkina Faso, Ghana and Namibia are placed well above SA as a reward for their efforts to streamline licensing procedures and simplify policies. When it comes to actively encouraging investment and adopting best practices, Guinea Conakry scores the highest in Africa at sixth place overall.

Land claims and labour relations

Among the issues likely to cause a drop in rankings are disputed land claims, inadequate infrastructure, political stability and labour relations – areas where SA has typically scored poorly.

The Fraser Institute’s annual survey ranks countries’ attractiveness in terms of policy, mineral potential and other measures based on responses from companies in the sector.

One of the benefits of the survey is that it allows governments to assess the impact of their policies relative to other jurisdictions and adopt best practices.

In SA’s case, that has not happened, despite assurances in 2022 from mines and energy minister Gwede Mantashe that the impediments raised in the Fraser surveys had been noted and that “we need to work hard to improve internal factors and influence external factors that contribute to these concerning results”.

Read: Glencore willing to improve Teck takeover proposal as deal falters

Terence Hove, senior market analyst at Exness, says there is a tangible cost to these low rankings as mining companies seek out friendlier jurisdictions, such as Canada.

“The policy landscape in SA was what triggered this exodus, followed by the crippling load shedding,” says Hove.

“While the cost of actual mining and return on mined commodities are favourable in SA, the policy and business climate, aggravated by load shedding is hampering growth of the industry.

“It is concerning reading the Fraser report and SA’s now consistent underperformance seen through the low ratings of the 2022 Investment Attractiveness Index.”

Backlogged system

One ray of hope is the request from the Department of Mineral Resources and Energy for a new cadastral system to register and licence mining land.

The existing South African Mineral Resources Administration System (SAMRAD) system has been criticised as dysfunctional, backlogged, and holding up investments in excess of R20 billion. That prompted the Minerals Council to cooperate with government in de-bottlenecking the key mining choke points of logistics, crime, corruption and bureaucracy.

Read: Troubling whistleblower allegations and law suits hit Eastplats

One way to measure the investment attractiveness of SA’s mining sector is to look at capex of the industry as a whole over the last decade.

The following chart from PwC’s SA Mine 2022 report shows capex (the black line) virtually unchanged over the last decade, despite notable increases in revenue and earnings.

Expressed otherwise, the commodities boom of 2020-2022 has been great for shareholders, but relatively little of this windfall is going into mining expansion.

Source: PwC SA Mine 2022 report

Another measure of SA’s attractiveness is investment in exploration – a precursor to larger-scale investment in mining.

SA currently accounts for about 1% of global exploration, which is well short of the 5% target set by Mantashe.

Risks to business

Sibanye-Stillwater’s operating update for the first quarter of 2023 explains that the deteriorating quality of public services and an increase in organised criminal activity have become risks for businesses. Eskom’s declining energy availability has increased the extent and frequency of load shedding, forcing mining companies to take themselves off-grid as fast as possible.

The two critical bottlenecks to mining growth are load shedding and lack of transport infrastructure.

The latter is costing SA close to R400 billion in 2022 due to logistics problems at Transnet, according to Stellenbosch University logistics professor Jan Havenga. Some R300 billion of this loss was because companies could not get exports to port, mostly coal and iron ore, with another R100 billion due to overpaying for logistics.

Read: Economy would’ve hit 10% growth in 2022 but for Eskom and Transnet

‘’The [Fraser] survey noted South Africa slipped sharply in its policy score because of concerns about infrastructural constraints (electricity and rail) and the availability of skilled labour,” says Minerals Council SA in a statement.

”Respondents flagged regulatory duplication and worries about the administration and enforcement of existing regulations to also be a deterrent to investment.”

Says outgoing Minerals Council CEO Roger Baxter: “It is disappointing that South Africa remains poorly perceived as a global mining jurisdiction, but there are fundamental problems in our country that need to be addressed.

“The Minerals Council continues to work with the DMRE, other government ministries, the Presidency and business organisations to create an investment-friendly environment to encourage sustainable, inclusive growth.”

Virtually all major mines have embarked on self-generation projects to wean themselves off the Eskom grid, and very few new investments are being made into mining that are not flanked by alternative energy sources, such as solar and wind.

The mining houses already in SA are pumping capex into maintenance and the occasional brownfields expansion.

But the lack of large-scale greenfields investments tells its own story: there are better pickings elsewhere, and until SA gets its house in order, it will remain that way.