By investor relations specialist Jacques De Bie, on behalf of Exxaro
The South African mining sector is resilient and has survived previous shutdowns and restrictions. These include the South African ’Boer’ War, World War I & II, the 1987 strike which lasted 21 days and the 2008 Eskom crisis which forced PGM operations to shut for five days.
The most violent and destructive period for South African mining was the 1922 Rand Revolt which shut down all Witwatersrand gold mines for 10 weeks. The revolt by 220 000 miners escalated into gun battles, artillery shelling, bi-planes bombing mining quarters and relieving the besieged Brixton police garrison, killing over 200 people and injuring dozens.
At the start of the nationwide lockdown coal suppliers to Eskom (and Sasol) have been granted the approval to operate under strict conditions as a critical service provider during lockdown as it is ‘essential’ to supply coal for power generation. Open cast coal mining is less of a transmission hazard compared to underground mining which is ‘highrisk’ due to hot, wet and confined operating conditions. At the time of writing most South African mines were either shuttered or working at reduced output as COVID-19 impacted on the sector. This adds to production pressures in the sector caused by heavy rainfalls last year.
Dynamics relating to environmental management tie in with the need for competent Environmental Social and Governance (ESG) policies and planning by countries and companies alike. Several learnings can be drawn from the recent global events. Firstly, that business continuity and crisis management plans including prudent financial planning are essential, and all companies in every sector need to adapt to dynamic changes in their environments to survive. Companies are repurposing and adapting their processes to fight the scourge, and also to contemplate alternative business scenarios that mitigate negative social impacts of the crisis and enable positive economic activity.
Secondly, the science behind these events and data driven decision-making cannot be ignored as this applies equally to fighting invisibly small viruses to combating global weather patterns and investment trends.
The COVID-19 pandemic coincided with the oil price war between OPEC and Russia which saw the oil price drop to less than USD20 a barrel, a depressed global market and Moody’s credit rating downgrade of SA to sub-investment grade, impacting the cost of borrowing and limiting investment inflows.
The economic effects of this ‘perfect storm’ are seen in short to medium-term stock market declines, commodity price plunges, including oil and coal, and South Africa’s mine production outputs reduced significantly overall. With the outbreak likely to disrupt the global economy for several months, nobody knows what the new normal might look like in South Africa later this year. Exports are critical for the country to earn hard currency, but it is difficult when ports and import destinations are restricted.
Despite the recent credit downgrade, the macroeconomic factors for South African mining are favourable, with the rand at ultra-weak levels of about R18.25 to the dollar, operations in rands gets covered by increased offshore dollar revenue generating positive cash flows when business-as-usual resumes. Mining cost inflation will likely be reduced given the plunge in oil prices, bringing diesel costs down, 3.3% average CPI forecast for 2020 and the weakness of the local currency.
Governments have launched unprecedented public health and economic responses to this crisis. Initial indications in South Africa are that early intervention and lockdown was the right move especially for a population with a large proportion of immune suppression and respiratory weakness due to TB and HIV.
The Minerals Council, together with the Department of Mineral Resources and Energy, have prioritised the health of employees and are committed to delivering critical services and limiting the damage to the operational abilities of the sector to enable full resumption of operations after the lockdown period.
The entire sector has prioritised the health of employees first, in order to deliver critical services while limiting the damage to operational abilities so that full and quick resumption of operations can ramp up after the lockdown period.
The existing health challenges in the mining sector, such as mining related respiratory diseases prompted decisive preventative responses in the sector. Ironically, it seems that BCG immunisation against TB and anti-retroviral regimes in play across South Africa may yet turn out to be key strengths in combatting Covid-19.
An advantage for prevention in most ‘majors’, is that widescale health and safety regimes were already in place before COVID-19 emerged. These needed to be adjusted specifically for this infectious disease, but South Africa’s mining sector looks likely to emerge from the crisis in better shape than most. But the situation evolves daily and is hard to predict.
Will there be demand?
In a case of a global recession, mining companies are not immune and for some, all the preparedness in the world will not be enough. Most mining projects have either slowed or shuttered. The biggest post-crisis question mark is on ‘demand’, which is less of an issue for coal as Eskom and Sasol consume most of SAs coal production locally. Coal production is an essential commodity necessary to fuel power generation by Eskom and it is the key source within the IRP for base-load power for the next 20-35 years. This crisis is likely to highly impact junior mining companies; however, tax and other statutory fee holidays could assist
companies that need some relief. Retrenchments may also be inevitable as marginal mines are under pressure to downsize most of the time and these restricted economic times are likely to push some over the edge and contribute to higher unemployment.
Exporting of coal through Richards Bay Coal Terminal (RBCT) and other channels should resume soon after lockdown. However, it is unlikely that demand and supply of any commodity rebalances quickly. Some well-positioned commodities in South Africa with bright prospects are the producers in steelmaking such as iron ore and manganese.
The mining industry could be an enormous asset in stabilising and growing the economy post the coronavirus crisis – given the right economic and regulatory circumstances. The recent downgrades present an opportunity to follow through on implementing structural reforms such as opening the energy grid to the private sector to ensure stable electricity supply and to support small businesses. It would only be through the implementation of the necessary economic reforms that the ratings agencies would again take South Africa back to investment grade. There is also room for the SARB to cut interest rates further – by around 150bps-200bps.
The need for ‘long range diversity planning’ may also have been thrust forward in time!