Mining Indaba 2020 takes place in Cape Town from 3 - 6 February 2020. It’s the key annual event for mining companies, analysts and the media who cover the sector, and is also recognised as the biggest gathering of mining ministers in Africa. Among those expected to attend are 6 000 senior delegates, 900 mining executives, 280 executives from junior mining companies, 600 investors and 34 ministers from over 94 countries around the world. Make sure you’re part of one of the world’s largest mining investment events.
Insights from our thought leaders
By Shirley Webber, Head: Natural Resources, Corporate and Investment Banking (CIB)
The outlook for the mining industry in South Africa 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.
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.
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.
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.
By Shirley Webber, Head: Natural Resources, Corporate and Investment Banking (CIB)
The recent commitment of 130 banks from 49 countries to the United Nations Principles for Responsible Banking which were adopted in September 2019 marks an important milestone for the banking industry and so for the Natural Resources Industry as well. The principles guide banks on how to align their business strategy with society's goals. This framework will undoubtedly play an important role in building a more sustainable future through a combination of project funding and investments considerations.
The Principles for Responsible Banking consist of six principles that set a global standard for responsibility.
The Principles for Responsible Banking are:
- Alignment (business strategy to society’s goals)
- Impact and target setting (increase positive impacts and managing risks to people and environment because of our activities)
- Clients and customers (activities to create shared prosperity for the future)
- Stakeholders (engaging to achieve society goals)
- Governance and culture (effective governance)
- Transparency and accountability (reviews and reporting on sustainability)
Because stakeholders and society should be equally important for financial institutions, financial services corporates will need to ensure that all risk management categories are carefully considered before committing funding to the projects in future.
As a leading financier of resource projects, with focus on mining, metals, oil and gas, Absa has seen sustainability become an even bigger focus when considering funding projects across Africa. Natural resources in all its forms are diminishing and it’s imperative that we all work in a sustainable and responsible manner to extract what is needed.
The key role of a bank is evolving and now includes also making sure that where we provide funding, the economy and communities should benefit as well. Going forward, when considering funding of certain commercially viable projects which include natural resources and extraction, lenders will place additional focus on the positive impact of our funding and involvement on a country’s developmental goals, the environment and its people. Banks can only grow if they understand the symbiotic relationship between growth aspirations and the positive impact on country development, environmental and social responsibility goals.
As a responsible lender committed to facilitating economic and sustainable growth, Absa acknowledges sustainability challenges such as social inequality, growing population, increasing unemployment, pressure on natural resources, as well as climate change. Given our key role as systemic bank in the majority of markets we operate in, we also understand how energy poverty and infrastructure deficits worsen these challenges.
In this respect, now more than ever before, financial institutions can pave the way to more sustainable economies by lending to economic activities that optimises the best return for the general community.
Capital providers can guide customers and stakeholders in their requirements for funding by applying the Equator Principles which include applicable IFC Performance Standards on Environmental and Social Sustainability (Performance Standards) and the World Bank Group Environmental, Health and Safety Guidelines for various sectors and for funding natural resources extraction transactions.
This therefore means that any lending policy decisions should take a balanced view on the impact on the economies, their development plans, impacted on the communities, stakeholders, investors, clients and the environment at large. These considerations are non-negotiable and should adopted as standards.
By Shirley Webber, Head: Natural Resources, Corporate and Investment Banking (CIB)
Global investor interest in Africa’s mining sector remains strong despite various challenges facing the sector. The African continent has vast resources with sustainable future growth in the exploration and development of commodities, and therefore the growing demand for these strategic resources by foreign investors and commodity users worldwide in the long term.
However, to harness this interest, stable political environments, compliance with legislation, stable labour relations and regulatory certainty will be key to ensure the continent remains an attractive destination for mining investment.
The regulatory environment must be certain and consistent from one year to the next because mining is a long-term business, and from a bank’s view, it is a three to five-year investment. Therefore, both banks and shareholders need consistency, be it regulations or aspects like royalty taxes for example.
The regulatory environment across some African countries is improving for the mining and metals sector as governments realise the importance of providing certainty to attract new investment. As a result, some investors have been considering green-fields projects, especially in West and East Africa. There’s a renewed focus on battery minerals as well and this is evident in the drilling activity on the African continent over the last two years. Increased capital expenditure is envisaged in gold, copper, lithium, mineral sands, cobalt and graphite.
There is a more collaborative approach between governments and investors in order to attract sustainable investment in the regions. The key to unlocking investments into Africa is for industry stakeholders to continue to collaborate responsibly to promote investment in mining and ultimately economic growth in the countries they operate.
Equally important will be the availability of reliable cost-effective power supply. For example, there have been power cuts in South Africa, and this has affected mining companies. Mining companies prefer certainty about the available power so that they can manage their cost structures and plan production accordingly. In the rest of Africa similar energy crisis situations are evident, therefor the need for more renewable energy sources, thereby curbing power interruptions and costs in the long-run.
Because mining is a capital-intensive business, factors such as rising production costs, infrastructure challenges, electricity supply as mentioned and rising labour costs continue to be of major concern to mining companies. And these are issues which need to be dealt with responsibly.
As costs rise and margins come under pressure, diversification will be important for the mining and metals industry to ensure that companies remain competitive with volatile economic cycles and commodity prices.
Diversification is a key differentiator as it is not only about various commodities but also geographical diversification too. Some of the mining companies are expanding into both Africa and globally. On the other hand, consolidation remains a key theme that includes large players forming one entity for efficiencies or even selling of parts of the value chain.
The long term sustainability is dependent on sourcing, developing and mining high grade reserves. Change in the reserves’ estimates or development prospects pose a risk to mining companies. It will however be important to achieve efficiencies particularly as the cost of extraction continues to rise due to the geology of some minerals which is forcing mining companies to access more difficult reserves underground. It is important to focus on enhancing operational efficiency to perhaps look at inclusion of automation and new technologies where applicable.
Equally of concern to mining companies is the volatility in commodity and foreign currency markets which will need appropriate risk management strategies in order to ensure financial institutional funding of investments in mining. Innovative hedging solutions to clients who have exposures to interest rate fluctuation, foreign exchange fluctuation and commodity variability are necessities for operational project success.
Banks such as Absa, which is one of the 130 banks from 49 countries who are signatories to the United Nations Principles for Responsible Banking, now have an increasing and important role to play by funding not only commercially viable projects but also ensuring that they complied with sustainability principles which align business strategy to society’s goals.
The key role of a bank like Absa now includes making sure that where we provide funding, the economy and communities benefit. Going forward when considering funding of certain commercially viable projects which include natural resources and extraction, lenders will place additional focus on the positive impact of funding and whether it aligns with a country’s developmental goals, the environment and its people.
Non-compliance with environmental laws can lead to production interruptions, reputational damage, and substantial fines/clean-up costs. Mining operations are subject to various stringent and complex environmental, health and safety laws and regulations. In this respect, capital providers can guide their clients and stakeholders in their requirements for funding by applying the Equator Principles which include applicable IFC Performance Standards on Environmental and Social Sustainability Guidelines for various sectors and for funding natural resources and extraction transactions.
Moreblessing Chanakira: Senior Coverage Banker for Natural Resources at Absa Corporate and Investment Banking (CIB)
The outlook for commodity prices “is by in large a mixed bag” driven by a combination of factors such as changes in global demand and supply on the back of changing consumer preferences, political and regulatory changes, says Moreblessing Chanakira, Principal Natural Resources at Absa Corporate and Investment Banking.
The ongoing US and China tit-for-tat tariff war currently playing out will continue to dominate in the short to medium term.
“Precious metals were resilient in 2019 with the star performers being gold and palladium. The gold price steadily rose keeping with the 2017/2018 trends. Investors view of gold being seen as a store of value has bolstered the metal in the face of geopolitical and global economy uncertainties. One saw the rise in the gold price fluctuate between $1 340/oz and $ 1400/oz during this period and in the latter part of 2019 the price hovered just under $1 500/oz,” she says.
“We expect the trend to carry on into 2020 supported by the US presidential elections and the US and China trade peace talks. This is positive for the marginal mines to the extent they can contain their costs,” Chanakira says.
Chanakira says, “palladium has outperformed its other sister metals in the PGM basketdriven by persistent supply deficit in the palladium market, a trend that has gone on for almost a decade. One has seen the price of palladium climbed steadily over the last few years with a rapid increase in 2018 and 2019 and finally breaking a record high of 2,500/oz in mid-January 2020”.
Supporting the rapid palladium price increase was high demand for the metal driven by stricter emission standards. The supply deficit is expected to widen further driven by the implementation of new Chinese emission standards (requiring more palladium per vehicle) and higher demand of renewable energy which will in turn positively impact prices. Although palladium prices will rise going forward, “…what goes up must come down and one will eventually see palladium prices self-correct,” she says.
On other hand, Platinum’s performance has been subdued in the last few years driven by a supply surplus in the market. Platinum saw reduced demand in 2019 as we saw a shift away from diesel cars (that mostly use platinum) to petrol fuelled cars (that use palladium). Going forward we expect platinum prices to remain flat.
“Base metals had a mixed performance in 2019. Nickel was the best performer in the complex on the back of the ban on nickel ore exports from Indonesia. Copper prices stabilised on the back of easing US-China trade war tensions. Aluminium was the laggard driven by weak market fundamentals throughout 2019 and is expected to remain flat in the medium term,” she says.
Coal overall has seen a significant decline in prices in the past 10 years. Metallurgical coal prices took a knock due to slow down production in the steel market. “The reduction in thermal coal prices was driven by a drive for cleaner sources of energy. We therefore expect the drive for greener fuel to remain a threat for thermal coal going forward and prices to remain subdued,” Chanakira says.