south african mining in a global future - mining...

40
South African Mining in a Global Future Mining Lekgotla August 27, 2013 Peter Schwartz SVP, Global Government Affairs & Strategic Planning Salesforce.com

Upload: lamdieu

Post on 08-Mar-2018

214 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

South African Mining

in a Global Future

Mining Lekgotla

August 27, 2013

Peter Schwartz

SVP, Global Government

Affairs & Strategic Planning

Salesforce.com

Page 2: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August
Page 3: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

The true question:

How does South Africa remain an active &

relevant participant in a dynamic global mining

industry?

Page 4: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Ecological

Sustainability of ecosystems

Scenarios a balance at three levels

Economic

Realities of global competition

Human

Pursuit of prosperous & secure livelihood

Page 5: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Outline

• Context / Drivers

• Global & SA economy

• Global mining industry environment & structure

• SA mining environment

• Structural fundamentals

• Investor sentiment

• Sustainability

• Uncertainties

• Scenarios

• Paralyzed

• Sustainable

Page 6: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Global growth

(4.0)

(2.0)

-

2.0

4.0

6.0

8.0

10.0

2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

% GDP Growth

Emerging

World

Advanced

2011 Fcst

2013 Fcst

Source: IMF

Page 7: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

SA Economy

(4.0)

(2.0)

-

2.0

4.0

6.0

8.0

10.0

2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

% GDP Growth

Emerging

World

South Africa

2013 Fcst

Source: IMF, SA Embassy

Page 8: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

SA Economy

• Unemployment rate of 25%+ (~2x for youth); Low labor

participation rate 42% vs 61% peers

• high inequality Gini coefficient of 0.6+; 30+% below

poverty line

0% 2% 4% 6% 8% 10% 12% 14% 16%

Nigeria

India

Japan

USA

Saudia Arabia

Germany

China

SA Imports by Source (ZAR)

2012

2011

2010

0% 2% 4% 6% 8% 10% 12% 14%

Netherlands

UK

India

Germany

Japan

USA

China

SA Exports by Destination (ZAR)

2012

2011

2010

Source: SA DTI

Page 9: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

• Recently downgraded by all 3 major ratings agencies to

2nd lowest investment grade

• cited deteriorating political, social and economic conditions and

uncertainty surrounding critical policy decisions

• first time that the country has been downgraded since the rating

process started in 1994

• Following initial downgrades foreign portfolio investment

flows shrank from R12.5B Q4-2012 to R1.4B in Q1-

2013; well below 4 yr quarterly avg of ~R20B

SA Economy

Source: SA Reserve Bank

Page 10: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

SA Economy – Pressure on the Rand

• Current account deficit is expected to increase further:

• Exports lagging on slow global demand

• Necessitating higher imports

• Decreasing foreign investment

• Government infrastructure spending accelerates for shortfall

from export and foreign investment

• Good in the short-term for exports but structurally

detrimental to long-term economy

• Further dissuades foreign investment

• Makes imports expensive >>> stimulates greater demand for

domestic products >>> aggravates inflation >>> government

raises interest rates to control inflation >>> increasing interest

rates slows economic growth

Page 11: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Mining Industry Environment - Global

• Value maximization via solely increasing production has

shifted to managing productivity & improving

efficiencies

• Capital expenditures to meet long-term demand will be

rebalanced with profitability/returns

• capital spending expended to decrease 20+% in 2013

• projects scaled back, higher hurdle rates

Sources: PWC, E&Y

Page 12: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Mining Industry Environment - Global

• Gravity continuing to shift to emerging countries:

• 50%+ of largest mining companies have the bulk of their

operations in emerging countries

• Emerging marketswill account for 40% of mining capital

expenditures in 2013

• Long-term future demand healthy with China and

large developing economies such as Brazil, India and

Indonesia

• Global urbanization drives demand as well

• In the next 40 years another 3 billion people globally will

urbanize, primarily in emerging market economies

Sources: PWC, UN

Page 13: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Mining Industry Environment – China

• Estimated to consume ~40% of all mineral and metal

products

• Function of astronomical GDP growth; still projected at 7-9%

per year through 2020

• Also due to urbanization; currently only 50% vs 80-90% of US,

Canada and Australia

• Fueling own growth, 29% of global mining value

• Largest producer of coal & gold and 3rd largest of iron ore

• Mining capital expenditures have averaged 35% growth since

2005

• Becoming leading source of capital

• Invest directly in mining companies, as well as mine

development & construction, and supporting infrastructure

Source: PWC

Page 14: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Global Industry Structure

• Past few years significant M&A activity driven by

opportunity of increased production volumes in a hot

commodity cycle

• Current focus towards achieving operational cost

improvements and delivering projects on budget

• Seniors look to divest non-key/non-core assets

• Intermediates/Juniors with strong cash positions and a track

record of successfully bringing projects on-line will be

opportunistic, and look for strategic “tuck-in” acquisitions

Page 15: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

• All levels looking to de-risk projects:

• Likely via joint venture partnerships

• Chinese investors interested partners as they look into increase

resource holdings and transfer of skills & knowledge

Global Industry Structure

• Continued consolidation & diversification expected:

• diversification in geography & minerals/metals for seniors

• consolidation in the middle &

lower tiers to remain competitive

• continued search for resources

by emerging economy players

• integration of downstream

operations for synergies 0%

10%

20%

30%

40%

50%

60%

Diversified Platinum Gold Other

SA Mining Market Capitalization by Commodity

2008

2009

2010

2011

2012

Source: PWC

Page 16: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Mining Industry - SA

• Represents 60% of export revenues

• Contributes nearly 20% of corporate tax receipts,

• 6-9% direct GDP; 13-18% including indirect GDP

• ~20% of Johannesburg SE~8.5M

including Dependents

~1.3M

including Indirect

Mining Industry

~500k

Direct

Mine workers

Sources: SA Embassy, PWC, The Guardian

Page 17: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Mining Industry - SA

• From 2008-2012, costs have risen at twice the pace of

inflation and productivity has decreased

• wages in the industry have risen by 12% a year since 2007

• Over the same period other commodity input costs have also

escalated sharply, led by a 237% increase in electricity prices

since 2009

• Labor cost percentages

vary from above 50%

for the deep-level

conventional mines to

below 20% for those

companies that mine

predominantly opencast

Source: PWC

Page 18: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Exploitation by “Micro-financing”

• Interest & fees on a short-term loan of more than

25% a month, or 300% if annualised!

• Pension cards, IDs, and bank cards held as “security”

with victims often unaware of their rights

• Vicious cycle as the debt increases and workers

demand higher pay to help them relieve them from

their debt

• Rustenburg alone has over 80+ formal micro credit

outlets, banks, micro financing companies, and

underground payday lenders

• Employer responsibilities:

• Monitor volume and magnitude of wage garnishments to repay

such debts

• Provide personal finance education, debt counseling, and

assist with repayment restructuring

Page 19: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Strikes / Industrial Action• The strikes/industrial action of 2012 cost South Africa up to an estimated R15 billion in

lost revenue, and at least half a percentage point off the country’s economic growth

8

78

49

37

47

77

0 20 40 60 80 100

Exxaro Resources*

Gold Fields

Imapala Platinum

Anglogold Ashanti

Anglo-American Platinum

Kumba Iron Ore

Mentions of "strike/industrial action" in FY2012 integrated report* Already experienced more strike/industrial action in 2013

Sources: Respective FY2012 Integrated Reports

Page 20: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Unions – Learn from experience abroad

• “Unrealistic Unions Die” – Andrew Levy, SA Labour Analyst

• SA mining union demands of 60-100+% wage

increases are out of touch with economic realities

• United Mineworkers of America

• Failed to develop its member skills and adapt to a

changing industry

• Rampant unemployment caused with the increase in mechanisation in mining

from 40% in early 1930s to 80% by the end of the decade

• National Union of Mineworkers in the UK:

• At the start of the unprotected strike in 1985 there were 35 collieries in England

and England exported coal

• At the end of the strike in 1986 there were 2 collieries left and England still

imports all the coal it needs

• Both unions not only crippled themselves but also their industries

and communities

Source: Business Report

Page 21: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Vital to all Stakeholders“[I am] worried for South Africa, I’m worried for the industry and I’m worried

for the people. We have got to get the balance right… The period we are

in now is the most important period I’ve seen in my time here in the

industry…It is not just the mines – it’s everyone connected - it is so

critical for the future of the industry and the future of the country. ”

"We welcome the fact that all stakeholders agree on the need to stabilise the

labour relations environment, especially in the mining sector. What we require from

social partners is the commitment to resolve labour disputes peacefully and

within the framework of the law, and in the interests of workers, employers

and the country as a whole.”

Mark Cutifani

Chief Executive, Anglo American

President, Chamber of Mines of South Africa

Jacob Zuma

President, Republic of South Africa

“Many companies drift towards more automized and mechanized

operations as part of the strategy to modernize and improve

production...Our members must be ready to change with this

technological innovation. We must be equally ready to defend the

current jobs in the South African economy...Skills development

…must be used to empower workers...”

Senzeni Zokwana

President, National Union of Mine Workers

Sources: Financial Times, Business Day, NUM address

Page 22: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

SA Sustainability• Water – increasingly scare resource in a growing world

• Globally water demand may outstrip supply by 40% by 2030; 1/3 of

the world’s population will live in basins where the water deficit is

above 50%

• Mining requires vast amounts of water while negatively impacting

the local communities’ ability to use it for sanitation,

consumption, and food security

• Byproducts of mining & extraction processes contaminate

water (e.g. acid mine drainage) and cause environmental

damage that comprises the health & safety of local

communities

• Water management needs to include:

• complying with legislation and the conditions of the water

use license

• measuring and monitoring use & quality

• cleaning up or recycling discharge

• building future water treatment costs into rehabilitation provisions

• engagement with local communities about use, quality & equitable access

Page 23: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Global economy:

• Will emerging economies, especially China, continue their significant

growth/demand? What are the next emerging economies (e.g. Indonesia)? Will

developed economies, especially the Euro Zone, return to growth/demand?

• Will China become increasingly self-sufficient in their mining needs?

• Will the volatility of inflation and exchange rates stabilize to provide a favorable

growth environment?

Technology:

• Can mechanization/automation and methodological innovation advance far

enough to deliver sufficient cost efficiencies and productivity gains?

• What becomes of the workers displaced by automation/mechanization? How

does technology lead to new jobs and new training opportunities?

Workforce:

• Do strikes/industrial action become the norm instead of the exception? Will

wage rates come inline with inflation?

• Will mines look to cheaper migrant laborers? How much strain will migrants put

on existing communities/services?

• Do sufficient upstream, side-stream, and downstream opportunities in the

mining industry emerge for displaced workers?

Uncertainties

Page 24: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Political landscape:

• Can a sustainable policy be developed with a long-term lens, not just for the

next election?

• What will be the dynamics be of stakeholder power (e.g. political parties, trade

unions, industry, local communities, etc) over the long run?

• How will issues of corruption, transparency, nationalization and sustainability

shape the landscape?

SA Infrastructure

• Will electricity be sufficient and at an affordable cost? Will transportation

become more accessible and efficient in its role in the supply chain?

• How will industry and government partner to meet the infrastructure needs?

• How costly will effective water management become as water becomes more

scarce?

Uncertainties

Page 25: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

UncertaintiesMarket Size

• Will growth in global market demand and cost efficient production enable

profitable SA industry growth for currently low production/high reserve minerals

(manganese, chromium, etc)? (i.e. horizontal industry expansion)

• Are the infrastructure and skills in place to make upstream (e.g. building

automation/mechanization equipment) and downstream (e.g. refining, inputs

into local manufacturing) beneficiation viable? (i.e. vertical industry expansion)

• How will minerals for which SA has significant reserves evolve in their industrial

usage (e.g. palladium in place of platinum)?

Page 26: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario Matrix

Industry Innovation

Glo

bal E

con

om

ic G

row

th

Low

High

High

Paralyzed

Propped

Up

Sustainable

Page 27: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August
Page 28: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario: Paralyzed• Slow adoption of mining technological and

methodological innovation keeps costs relatively high &

productivity low

• Wage concessions and declining commodity prices

exacerbate profitability problems; forces mining

companies to divest SA mines

• Unbundled mines as separate entities (see Sibayne Gold

unbundled from Gold Fields) will struggle to survive in their silo

• Beneficiation isn’t appropriately funded or tailored to

existing mining projects and struggles to get off the

ground

Page 29: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario: Paralyzed

• 000,000s of workers are displaced with insufficient skills

to obtain meaningful employment elsewhere within SA

• Multiplier effect to millions without adequate financial support

• The now un-employed (primarily young men) and their

dependents produce significant civil unrest

• The unrest and work stoppages cripple regions of the

country and the SA economy

• With the exodus of seniors, SA industry structure shifts

towards smaller juniors and even nationalization, with

the latter intensifying government finance issues

Page 30: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario: Paralyzed

• Funding for government programs dries up with lost tax

receipts from lost production

• Difficult economic environment is ripe for political

disruption, putting politics up for grabs

• Extractive (vs inclusive) government policies to band-

aid short-term issues severely constrict development

• Unrest and threats of nationalization dissuade foreign

investment exacerbating trade deficit, credit

unworthiness, and economic woes

Page 31: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario:

• Significant rise in global demand, namely from China &

other economies such as India, Brazil, Russia, &

Indonesia props up prices

• Coupled with increased cost and/or decreased

productivity in current cost leaders in North America,

Asia, and Australia

• SA mines able to temporarily squeak out profitability

despite little innovation/enhancements and remain

relatively cost competitive

Page 32: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario:

• Due to the decades long life-cycle of mining, companies

look to diversify

• invest more in deposits outside of SA with more favorable long-

term structural socio-economic conditions

• SA mining industry contracts and expands with highly

unpredictable price of commodities

• Economic instability likely leads to social/political instability

• SA instability constrains long-term sustainable growth & equality

and abatement of unemployment & poverty

• The market volatility drives a volatile industry structure

with significant M&A activity during hot commodity

cycles and significant divestment during periods ofweak

commodity prices (i.e. a snapshot of the past several

years)

Page 33: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario: Sustainable

• Shift towards mechanization/automation to increase

productivity & safety is required to remain viable

• Displaced workforce needs to develop new skills

• move up-stream and help produce/service machinery, parts, etc

• move down-stream beneficiation/value-addition

• n

• Greater realization of platinum reserves

• Greater market power with the “platinum belt,” home to 80% of

the world's known reserves

• Requires similar improvements in cost effectiveness

• Further diversification in manganese, chrome, etc

Source: PWC

Page 34: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario: Sustainable - Beneficiation• In-country processing captures more of the value

chain—creating jobs, developing skills, and improving

local technology. Note it requires:

• Realistic requirements as to not throttle upstream mining

projects; tailor to upstream not vice versa

• Significant capital and financing for beneficiation plants

• Sufficient local & affordable power supply for energy intensive

processing technologies

• It needs to be competitive advantage of manufacturing

skills vs comparative advantage of resource possession

• Shining example: Catalytic converter industry in SA has

grown ~15% per year since early 1990s

Page 35: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario: Sustainable - Innovation

• Reef boring & ultra high strength

backfill…transition away from significant

inefficiencies & dangers of drilling &

blasting

• Use of autonomous & remote operation

technologies in Australian mining

• Use of WiFi to improve safety &

efficiency in Canadian mining

• Oil & Gas industry

• continuously innovating for more efficient &

effective extraction

• IT and connected machines & workers

becoming increasingly important

Page 36: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario: Sustainable - Innovation• Many technologies and innovations that reduce the

mining effort require:

• A detailed understanding of data and processes critical to

capital efficiencies

• A workforce that is not only skilled in operations, but also

supportive of the implementation process

• Implement robust optimization planning tools across

their full production supply chain

• linkages call attention to the real bottlenecks that are ignored if

each area is optimized in isolation

• Infrastructure development is key for energy & transportation

efficiencies

• Inclusive and pluralistic policy decisions enable

innovation & prosperity

Page 37: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Scenario: Sustainable - Industry Structure• Trend of consolidation to take advantage of economies of scale as,

despite technological & methodological advancement, the cost

base faces pressures:

• declining yields & resource depletion

• more difficult & costly exploration

• rising energy prices & labor wages

• Investor demand and skills specialization will make

expansion & diversification horizontal vs vertical

• Emerging economies take an active ownership position

in their resource procurement

• Govt partnerships & joint ventures key to avoid nationalization

and align on environmental sustainability

• Will look abroad to ensure sufficient & diverse supply sources

and be less vulnerable as purely a buyer

Page 38: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Conclusion

1. Paralyzed: A failure to change creates substantial risk

of losses for the entire country

Favorable market conditions mask

structural industry issues that will ultimately prevent

sustainable success

3. Sustainable: Long-term prosperity requires sustained

industry adaptation and innovation

Page 39: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August
Page 40: South African Mining in a Global Future - Mining Lekgotlamininglekgotla.co.za/presentation2013/day-one-presentations/SA...South African Mining in a Global Future Mining Lekgotla August

Thank You