South Africa is still a mining friendly enough jurisdiction where one can generate returns. Image credit: ©Andrew Macnamara, Mining and Technical Exhibitions (MTE)
By Sharyn Macnamara
The 2022 Joburg Indaba held early October 2022 dealt with ‘the good, the bad and the ugly’ in the South African mining sector in equal doses. Watch this space, as African Mining covers the issues discussed in a series of articles.
The narrative at the Joburg Indaba was frank and to the point, as usual. The challenges the South African Mining sector is currently facing are great – be it regulatory, power, logistics or crime, but mining stakeholders are grabbing the ‘proverbial bull’ by both horns, choosing ‘hope rather than despair’, saying ‘it is on us,’ and are moving forward.
Andries Rossouw, PwC Africa EU&R Leader, chaired a discussion with three captains of the industry – Neal Froneman, CEO at Sibanye-Stillwater, Chris Griffith CEO at Gold Fields (at the time of writing) and Nico Muller, CEO at Impala Platinum – on the pros and cons of moving beyond the bounds of South Africa, and the importance of jurisdiction in investment decisions.
Safe diversification across jurisdictions
Muller noted immediately that the Impala Platinum strategy is one of diversification across jurisdictions within its single commodity portfolio – PGMs (Platinum Group Metals) – to avoid the risk of having ‘all its eggs in one basket.’ The company currently has 60% of its production base in South Africa, 30% in Zimbabwe, and 10% in Canada. He noted, “Each jurisdiction has its own particular flavour. I think that there are advantages and disadvantages to all of them.”
Noting the differences across the three jurisdictions, Muller pointed out that business in Canada was probably most impacted by the pandemic – not only by the spread of the virus, but by the reaction of the government, the policymakers, the legal regulators, and the population itself. With a more sophisticated, more highly educated staff compliment there, during COVID, remote ‘fly in and fly out’ operations became very unattractive, and retention of employees became a massive issue.
“The official response of the Canadian government was also quite brutal. In contrast, the South African government was more supportive as the mining sector in South Africa was one of the first industries allowed to return to 50% capacity, while the first world jurisdictions operated very differently. On the other hand, he said that Canada offers an ease of transacting in M&As versus the difficulty in transacting in South Africa – referring to a current acquisition locally, which has proven to be extremely complicated and drawn out in comparison.
Moving back to current strategy, he emphasised, “We are particularly bullish on platinum, perhaps less so on palladium long term, and neutral on rhodium. We believe that we are in a very robust upside cycle and our strategy is firmly based on strengthening our competitive position within the PGM industry.” To this end, the company is investing in the extension of the LOM of key assets. These include the Two Rivers project in South Africa with African Rainbow Minerals (ARM) on the Eastern Limb of the Bushveld Complex, and the North Hill extension at Mimosa in Zimbabwe, jointly owned with Sibanye-Stillwater. Added to this are three important expansion projects focused on low-cost mechanised, safe assets which promise to increase current production by 260 000 ounces over the next few years, said Muller. Further, he stressed that the investment of significant funds in optimising and debottlenecking base metal refining capacity, increasing smelting capacity and shifting some of the smelting capacity to Zimbabwe was being made at the time of writing (November 2022).
“Our investment pipeline for the PGM business is fairly rich. One last step in that chain is the consideration of a base metal refinery in Zimbabwe to provide greater access to renewable energy in the country and to provide more flexibility in terms of processing capacity in South Africa. Given our life of mine extensions and now capacity expansions, I don’t think that there are any short-term prospects locally other than of course the fact that we have a 50% stake in the Waterberg project.”
The Great Dyke in Zimbabwe is however where Muller sees the best potential for new investment. “Although investments are driven by value, jurisdiction is important as it does impact on access to capital and the cost at which that comes,” he said. However, although Zimbabwe in particular is rated as a high-risk jurisdiction, there is more there than meets the eye according to Muller. Unseen benefits include the ability of the rest of the industry to support the mining industry in the country – manufacturing, supporting industries, infrastructure – and access to appropriate skills. “This is compared to South Africa, being a fairly young democracy – we probably have fictitious requirements from different stakeholders in terms of expectations from the mining sector and a growing social discontent, whereas in in Zimbabwe we find a much stronger alignment between government, the communities and employees in terms of the expectations and regard for what the industry is doing. And in many ways it is therefore more stable and a lot simpler to operate assets in Zimbabwe.”
Gold’s future lies in internationalisation
Turning to gold mining, Griffith explained that Gold Fields has developed as ‘an international company with roots in South Africa’ and is on a drive to be a leading ESG (Environmental, Social, Governance) producer. The company is in a unique position of 20% industry leading growth – already in the pipeline to be delivered in addition to current production. The company produced 2.3 million ounces in 2022 and this is set to grow to 2.8 million ounces by 2024.
However, he noted that to deliver the next phase of value growth, the company is following a strategy of internationalisation and is focusing on the quality of its asset portfolio to address declining production and reserves of gold in South Africa, which is to become an industry challenge in the future. Hence the USD6.7-billion acquisition of Yamana (at the time of writing this acquisition was still on the cards1), a Canadian-based precious metals producer with significant gold and silver production, development stage properties, exploration properties, and land positions throughout the Americas, including Canada, Brazil, Chile and Argentina.
Griffith said, “Gold is a mature industry in South Africa. The opportunities for safer, longer-life, lower-cost, more productive assets to grow a company like ours are not in South Africa. For gold miners in South Africa, the opportunities are international, particularly if one looks at shallow open pit operations, but even in the underground operations – the margins that you can generate offshore are substantially higher than those in South Africa, of course with the exception of the mine that we have retained in the country, which is South Deep.”
He noted the massive investment in PGMs, manganese, chrome and even coal locally, demonstrating that South Africa is still a mining friendly enough jurisdiction where one can generate returns. “One is protected by the judiciary, and relatively speaking, South Africa has tax and fiscal stability, which is actually quite unique in the mining industry globally.” This of course, he juxtaposed to the extreme challenges in South Africa – the unstable and unfriendly mining regulatory framework, the issues with Transnet and Eskom, crime and malfunctioning municipalities.
He pointed out that Gold Fields operates four mines in Australia representing around 45% of the cash flow with good margins; two mines in a joint venture in Ghana; one in South Africa, a mine in Peru and a new mine coming on stream mid-2023 in Chile, added to this, at the time, were the opportunities that Yamana offered in Chile, Brazil and Argentina, but very importantly in the tier-one jurisdiction in Canada – an area that has been targeted by Gold Fields for some time now.
According to Griffiths, the growth opportunities for the company will come in both gold and copper, which is a commodity diversification playing into the energy market and very beneficial for gold miners going forward. “There are lots of very good reasons to be in South Africa, but lots of very good reasons to make sure that one has got a diversified portfolio globally, particularly in gold and copper.”
He noted six selection criteria for new company investments. Quality – both all-in cost and life – and jurisdiction were high on that list as they impact the valuation of a company. Griffith added that this assessment applied to a major, high grade, copper/gold porphyry project Gold Fields was looking at developing, but which is located in Argentina, noting that in his experience, “The best grade is always in the worst place! So, we will have to do the kinds of things that we did when we invested in Chile, for example, get the right stability agreements in place with government with the assurances that one can get one’s money out, otherwise one cannot invest.” He added that partnering is also a means of reducing risk and sharing outlay in these instances.
He noted that the Gold Fields asset in Chile has developed from an exploration find within the company and the plan is to deliver a mine at 4 500m in the Andes – a goldmine that generates all-in, sustaining costs at USD550/ounce. “We are going to have one of the best margin gold mines on the planet. And this is six months away from being delivered.”
Similarly, he noted that over time, the Gold Fields assets in Australia have delivered more than four times the value initially paid for them. Gold Fields has also been successful in Ghana, and although South Deep has taken a while, it is now generating money.
In summary he noted, “South Africa is not the toughest place to work, we’ve got issues here that we do not gloss over, and I think all of us have a responsibility to address those issues.”
Global diversification strategy across commodities
Froneman explained the Sibanye-Stillwater green-orientated strategy – “We are proudly South African competing on the international field. Our vision is to create superior shared value by building a green metals company.” He noted that the company’s PGM portfolio is where the company wants it to be, but is looking to grow its gold portfolio, which acts as an insurance policy in a large exposure to industrial metals. Battery metals is a new ecosystem driven portfolio in the company to complement its PGM business. The company is also looking to expand recycling and tailings retreatment businesses with one of the biggest recycling businesses in PGMS in Europe and is expanding into battery metals recycling and retreatment too, while it is a controlling shareholder in DRD-Gold locally.
The company’s strategy, however, he noted, must be seen within the context of the global trends of deglobalisation/multipolarity. He expanded on this saying, “There are distinct divides between the East and the West that are developing, and everything is in short supply. We have to become pandemic resilient,” – equating the Russian-Ukraine War to an additional pandemic. The ecosystems the company has chosen to work in are predominantly in North America and Europe and in the battery metals – locally and regionally, with an approximate 50 years of PGM LOM in SA.
Apart from the right timing and the usual IRRs (internal rate of returns) and NPVs (net present values), Froneman pointed out that the company’s investment criteria included the fact that the investment must be complimentary to the company’s current strategy, it must add value and, more importantly now than ever before, ESGs are a huge consideration – “There’s no point in buying assets that don’t help improve your carbon profile and accelerate your ability to get to carbon neutrality.”
With over 90% of the company’s revenue generated in South Africa and the country’s current infrastructure and regulatory concerns, “the next consideration for us is the jurisdiction – investments must improve the quality of the portfolio from a geographical diversity point of view,” he said. Sibanye-Stillwater is still domiciled in South Africa – and there is no doubt that the country is not a favourite destination from a domicile point of view said Froneman, especially in the light of the negative perceptions Eskom and ‘expropriation without compensation’ have created. However, he emphasised one very important point, “In the field we are focusing in, it is becoming apparent in the context of current deglobalisation – we talk of multipolarity – South Africa is unique in its ability to work with the East and the West. American listed companies are actually almost prevented from working with China, and soon to be India and of course Russia. South African seems to go down a middle road where we can deal with all those countries – ok, perhaps not Russia – but this is a distinct advantage in the battery metal sector, which we will look into and use as a competitive edge.”
Froneman noted that “Every acquisition we’ve made has had a real return. The PGM acquisitions have been a stunning success. They’ve paid for themselves in two to three years – on the local front, Sibanye-Stillwater, which was expensive – in four years and Lonmin pays for itself every few months.
“The benefits of the strategy and the value acquisition trajectory in investments overseas have increased. Although there is no update on the returns on investments we have now made in lithium in North America, lithium in Finland and the nickel refinery in France, we have achieved critical mass in those areas. And again, that’s a bit like the Zimbabwe example that Nico gives, there are unseen benefits. It is easy to quantify the success or failure or return on an investment, but the landscape is much bigger, providing more value creation opportunity with a footprint now in North America, in Europe, and even in Australia. It has allowed us as a company to achieve critical mass, which means our organisational structure has grown to a regional one. And I suppose the ultimate from a mining company perspective is where your organisational structure becomes commodity driven, because then you’re really big in each one of those commodities. But that footprint, that capacity that you’ve established in the US and in Europe, allows another springboard of value creation opportunity without diluting the focus of your operators in those various regions. I have no doubt that it has improved our risk profile and made a good return on investment, and it has positioned us for the next phase of growth.”
In conclusion, he noted, “South Africa is a challenging jurisdiction. It has got good resources and good geological potential. Clearly, we know how to prosper here, I just wish it was not so difficult!
“The grass is definitely not greener on the other side. However, when one is a deep level gold or platinum miner, and one moves offshore, the South African mining experience puts you in a really good position to work in jurisdictions where the challenges are less.”
References:
Go to the African Mining website for more information on the termination of the agreement with Yamana by Gold Fields: https://www.africanmining.co.za/2022/11/15/gold-fields-terminates-arrangement-agreement-with-yamana/