Business

SA mines start to open their capex wallets

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SA’s mining sector is in rude health with commodity prices soaring, gearing levels falling 13% over the last year, and Ebitda (earnings before interest, tax, depreciation and amortisation) margins holding steady at 40%, well above the long-term average of 27%.

The PwC SA Mine Report 2022, based on a survey of nearly 30 of the largest mining companies, shows a 36% overall jump in capex over the last year to R72 billion, a level last seen in 2013.

“There’s generally a two-year lag between an increase in Editda and a corresponding increase in capex,” says Andries Rossouw, PwC’s Africa Energy, Utilities and Resources Leader. “After years of rather low capex, we’re now starting to see capex growth, and it follows the growth in Ebitda we saw in previous years.

“In South Africa, we stand to benefit from the demand growth, but whether South Africa and other resource-rich countries will benefit to the full extent will depend on their ability to address bottlenecks in supply and mine-to-market infrastructure.”

Listen to this MoneywebNOW interview with PwC’s Andries Rossouw about the report:

Mining capex has historically focused on sustaining existing operations rather than expansion, though this appears to be changing.

The capex spend reported by mining companies over the last year relates to maintenance of existing operations, new projects and other ventures such as solar generation.

Minerals Council SA lists 73 self-generation projects currently under development by the mining sector. These include solar, gas, hydrogen, wind and battery storage. Some of the biggest projects are being rolled out by Gold Fields, Sibanye-Stillwater, Kumba Iron Ore and Anglo American Platinum.

Eskom tariffs have increased by about 356% over the last decade, against inflation of just 74%.

Electricity is the second-largest cost component for deep level and electricity-intensive mines, and Eskom’s above-inflation tariff increases and increasingly unreliable supply pose major risks to the sector – which explains the aggressive move by mines towards renewable power.

Read: Anglo signs deal for new renewable energy venture

The mining sector’s recovery has been better than most other sectors, but activity is still 10% below pre-pandemic levels, says PwC. Mining employment is 5% below its pre-Covid level.

Mining output dropped 11% in 2020 when hard lockdowns were announced, but increased 12% the following year when restrictions were relaxed. Mine output volumes were back to pre-pandemic levels by mid-2021, but fell 7% in the first half of 2022 due to labour strikes, high rainfall and supply chain bottlenecks.

The recovery in mining output had a material impact on the country’s broader economic rebound, with minerals accounting for more than half of SA’s export revenues in 2021. Nearly a quarter of SA’s export revenues came from precious metals, 14.3% from ore, slag and ash, and 12.5% from mineral fuels.

The port millstone

A key bottleneck that’s holding back mining exports is port handling.

The World Bank Container Port Performance Index ranked Durban, Cape Town and Ngqura in the bottom 10 ports out of 370 locations analysed globally.

“Years of inadequate maintenance of the country’s rail infrastructure has had a negative impact on mining firms. In 2021, a major iron ore producer flagged concerns pertaining to the country’s rail-to-port challenges and the negative impact this had on the firm’s production output,” says PwC.

Despite the commodity price windfall, mining companies are still facing challenges in getting products to market.

Read: RFA: ‘It will take a miracle to move most road freight to rail in five years’

The coal link to Richards Bay only delivered 60 million tons last year, against its stated capacity of 90 million tons. The road infrastructure of the manganese corridor to Coega in the Eastern Cape and the coal corridor to Richards Bay have severely deteriorated due to the more than 1 000 40-tonne trucks using these corridors due to a lack of sufficient rail capacity.

Operation Vulindlela, a joint initiative by the Presidency and National Treasury, has made some progress in creating an efficient and competitive freight transport system, with the National Ports Authority now established as an independent subsidiary of Transnet, and the corporatisation of the Transnet National Ports Authority (TNPA).

Read:
Operation Vulindlela’s progress in removing SA’s biggest economic growth hurdles
TNPA board backs R100bn expansion plan for KZN ports

Transnet has shortlisted 10 entities for private sector participation in container terminals at Durban and Ngqura from 2023, and its freight rail business unit has asked for proposals for 16 available slots on the Durban-City Deep and Pretoria-East London lines.

Ten-year summary of financial information (Rbn)

Source: PwC analysis

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