At the 25th anniversary of the African Mining Indaba, the focus will be on sustainable development and renewable energy. As a pan-African bank, we fully agree with these goals and are committed to continue supporting corporates who mine our continent’s soil sustainably.
Insights from our thought leaders
Outlook for South Africa mining sector for 2019 fairly bullish
28 January 2019 - The outlook for the mining sector in South Africa for 2019 remains fairly bullish despite concerns about labour and power costs. There is also cautious optimism of strong commodity prices.
Shirley Webber, Coverage Head Natural Resources at Absa Corporate and Investment Banking (CIB) says producers are facing more complex reserves, with higher input costs putting pressure on operating margins. Webber says the cost of power is a concern for mining companies as annual tariff increases are having a negative impact on the cost of production, particularly at high energy consuming miners.
“On the power used by miners, considering early 2008 as a base, South Africa’s electricity price was around US$4c per kWh and was lower than that of larger emerging economies like Brazil, India and China,” she says. “However, current energy costs are between the US$8c and US$10c per kWh prices, also higher than the same group of emerging economies. The annual electricity increases have indeed had a negative impact on the cost of production for high energy consuming industries,” Webber adds.
She believes that Eskom’s proposed turnaround plan will be crucial for the success of miners. However, miners are seeking alternative sources of energy in order to remain sustainable. “This means that captive power plants are a reality for the future. Mining companies have also been investing in renewable energy sources to accommodate power demand in the long-term with natural gas and newer technologies that bring cost efficiencies,” she says.
“Platinum is trading at levels last seen in 2016, with palladium prices increasing dramatically. From a base metals side, copper trades at circa US$5 900 per tonne, with current inventory levels lower than in 2015. Iron ore has also been on an upward trend. We foresee improved base metal prices in the short term for copper and nickel on the back of global commodity demand for infrastructure development, with China and the US having a material influence on the demand,” says Webber.
She adds on the diamonds side, reduced supply in the long term will be a reality given the lack of new discoveries.
“Appropriate risk management strategies to weather currency and price volatilities are crucial during these times. Apart from the usual commercial bank or project finance funding, many miners are also considering other sources of liquidity for current expansions or new projects such as streaming structured facilities, asset based finance facilities and accessing the debt capital markets,” Webber says.
On the regulatory front, Webber says there have been some positive sentiments following the finalisation of the 2018 Mining Charter. The notable feature of the charter is the once empowered always empowered ownership element and the drive for inclusive procurement, as well as supplier and enterprise development elements.
“The procurement element in the Mining Charter is positive for small sized enterprises in effort to grow local content for mining goods and services where mining companies will need to source 70% and 80% respectively from South African entities. In addition, small businesses can ultimately create jobs to curb the increasing unemployment rate,” says Webber.
Looking ahead, Webber says Absa CIB remains committed to the funding of viable mining projects in South Africa and across sub-Saharan Africa.
“As a Pan African bank, Absa has a strategy to use its capital meaningfully in countries to which it operates and beyond while growing shareholder value responsibly. For as long as there are economically viable commodities to be extracted from the ground, we will continue to support corporates who mine the African soil sustainably. Our support spans across various commodities as well as the entire mining and metals value chain,” Webber says.
Mining companies investing in captive power projects look to renewable energy to reduce electricity bill and stabilise supply says Absa
28 January 2019 – Mining Companies’ interest in renewable energy and captive power supply from Independent Power Producers (IPPs) is rising on the back of concerns relating to the availability, cost, quality and reliability of electricity supplied by national utilities.
The pace of investment in renewable energy is expected to accelerate in the coming years as a result of a significant drop in renewable energy prices, says Theuns Ehlers, Head: Resource and Project Finance at Absa Corporate and Investment Bank.
South Africa is currently leading the region in renewable energy following the signing of the agreements for the 27 projects procured under the Renewable Energy Independent Power Producer Procurement Programme (REIPPP). This represents an investment of about R56 billion to produce approximately 2 300 MW of generation capacity to be added to the national grid over the next five years.
Theuns says there are currently three types of miners considering captive power solutions. These are:
- Companies who do not an alternative option, particularly mines in Africa located far away from a utility’s transmission and distribution networks. These mines have to self- provision / contract with IPPs to generate power in situ (captive power), typically using diesel / HFO generators, at a cost significantly higher than conventional grid power.
- Companies who want to improve power stability. These are instances where, even though a national grid / distribution network connection is available, the power supply is not always stable or available. This presents significant risk to the mining operation. In these cases mines either self-provision / contract with IPPs to supply baseload power to cover their critical operating requirements, whilst the balance of power is still sourced from the grid.
- Mining companies who want to decrease power costs by taking advantage of the significant drop in renewable energy prices, a trend that has been gathering momentum over the past two years, with several mining companies entering into contracts with IPPs to develop solar photovoltaic captive power plants for their offtake. With an increased focus on the environment, investment in green power also helps miners to reduce their overall carbon footprint.
“We are now seeing mines looking to replace a portion - typically 20% to 30% - of overall power demand with renewable energy sources for specific operations. Renewable energy developers are, for example, offering South African mining companies power tariffs at rates which are at parity or better than what Eskom charges – with the added benefit that future tariff increases will be capped at CPI. This provides greater price path certainty when compared to potentially higher tariffs increases which may be imposed by the utility,” says Ehlers.
Consolidation taking place in the global gold sector after years of speculation
28 January 2019 - Two mega deals in less than four months have heralded the much talked about consolidation in the global gold sector which has been speculated about for the past couple of years, says Craig Brewer, Co-Head of Banking Africa at Absa Corporate and Investment Banking (CIB).
First to be announced was the US$6.5 billion deal announced in September 2018 between Barrick and Randgold; and the most recent is the US$10 billion mega merger between Newmount and Goldcorp, which will create the world's biggest gold producer by output.
He says while this deal could be positive for the gold industry, it will create material uncertainty for the remaining larger producers as to who is next to be acquired or needs to merge.
Brewer says so far the market reaction has generally been positive to these mega mergers but cautions it is worth remembering the constant refrain from gold hedge-fund manager John Paulson who has historically criticized the gold industry for entering into bad deals that destroyed shareholder.
The continued complaint of investors was that ‘undisciplined growth results in poor returns’ and has over time caused all gold companies to hold back on development and exploration,” he says. This time round, hopefully these mega merges create real value over the long term.
Gold companies have over the last ten years or so been focused on earnings and cash dividends over exploration. Current mining rates of existing resources causes’ net depletion and therefore a motivator for these mega mergers is needing to add projects to boost production profiles and simultaneously obtaining geographic diversity particularly from higher risk regions.
Brewer says from a South African perspective, the recent mergers now move AngloGold Ashanti up to the third largest producer albeit some way behind the two goliaths, with AngloGold producing in 2017 3.8m ounces, behind Newmont Goldcorp 7.9m ounces and Barrick-Randgold 6.6. Behind these three are Kinross with 2.7m ounces and Newcrest 2.3 m ounces.
This contrasts with the situation twenty years ago when Anglo American created the world’s No. 1 gold miner by merging its South African assets to create AngloGold.
Nowadays the miner only gets about 15% of its production from South Africa and “is facing a dying South African gold industry, with its primary South African mine Mponeng (the world’s deepest mine), having to cut costs along with all its south African peer group”, Brewer says.
He says the questions is whether AngloGold will dispose of its remaining South African mine and go hunting abroad and complete the final leg of its internationalisation process.
“Will it be AngloGold or a Kinross and Newcrest as the new combination, which will provide potentially much needed scale and dual listings?”
Brewer says the alternative to the merger activity-taking place will be outright acquisitions, and cites Vancouver-based B2Gold - with operations in Africa, South America and the Philippines - as a potential target with its growth profile and operational expertise in particularly West Africa.
“At the asset level, a potential bidding war may be appearing over TSX listed junior gold miner SolGold that is undertaking exploration work in Ecuador. With the share price up 30% last year with Newcrest now holding 15% and surprising entrant global mining behemoth BHP holding 11% albeit for the copper deposits,” he says.
Brewer says consolidation in the gold sector in South Africa may still occur although the backdrop is less certain.
“Not only politics with the upcoming election, strikes on some of the local gold mines, dwindling grades and output ever deeper in the ground, but there are limited options in the South Africa gold sector. Perennial dealmaker Sibanye-Stillwater will soon be bedding down Lonmin and after recent strike action may well look offshore after its very successful palladium acquisition in North America so may not be the consolidator in South Africa.
Harmony showed appetite in acquiring a cash positive mine from AngloGold but may be more focused on its Wafi Gulpu copper gold deposit in Papua New Guinea which if successfully developed will be a massive kicker for the group along with its joint venture partner Newcrest.
“This leaves Goldfields and it has clearly demonstrated an appetite for non-south African assets and would be hard pressed to acquire locally whist it continues to work on production issues at South Deep to meet its production forecasts,” Brewer says.
In fact, he predicts a possible de-consolidation in South Africa with the major South African gold producers offloading assets to the second tier miners and then focus on acquiring offshore. The overriding caution is that costs will not come down in South African gold sector, which will make any M&A difficult at current prices but not insurmountable.
“On a global level, M&A will definitely continue, and the more optimal strategy to take by all gold mining groups with M&A supportive balance sheets may be to hold out for some of the disposals that will occur post these mega mergers. Quality assets could be available as the leading groups optimise their portfolios,” he says.