The 2014 financial year was marred by labour unrest, compounded by local cost pressures and international demand weakness, which resulted in shrinking margins and wide-ranging impairment provisions in the South African mining industry, according to PwC director Andries Rossouw.

These trends were highlighted at a public lecture titled Trends in the South African Mining Industry, held at the University of the Witwatersrand (Wits) this month and hosted by the Wits School of Accountancy and PwC.

The trends were identified in PwC’s sixth edition of its yearly ‘SA Mine’ report, which was released this month.

The report was based on publicly available information and the October 1, 2012, to June 30, 2014, financial results of mining companies with a primary listing on the JSE, as well as those with a secondary listing on the JSE whose main operations are in Africa with a market capitalisation of more than R200-million at the end of June 2014.

Diversified companies, including Glencore Xstrata, BHP Billiton and Anglo American, who undertake part of their activities outside the local mining industry, were omitted so as not to distort the data owing to their international operations, while Kumba Iron Ore and Anglo American Platinum were included.

Rossouw highlighted that, despite the trends of higher cost pressures and shrinking margins, the weaker rand provided temporary respite, as it indicated stable total revenue in rand price terms, adding that, however, the flat prices would not support the industry’s significantly increased cost base.

The increased cost base and low price environment led to companies reconsidering their capital expenditure (capex). As a result, capex was down by 19% to R59-billlion, from R71-bilion in 2013.

“Given the uncertainty in commodity prices and announcements of reduced spending by companies, we expect capex levels to be lower next year. This anticipated decrease in expenditure will negatively impact service providers to the industry,” he said.

In terms of revenue generation, coal retained its status as the biggest revenue generator in 2014 at R101-billion, despite a slight reduction in production. Platinum-group metals were the second-highest revenue generator at R82-billion, owing to the increase in the rand price of platinum, which was offset by lower sales volumes.
Iron-ore was placed third at R66-billion, while gold generated R48-biilion.

Meanwhile, balance sheets remained generally strong, with stable liquidity. However, increased gearing is needed for companies to fund sustaining capex and in some cases operating losses.

The R49-billion impairment provisions raised – a 145% increase from the R20-billion in the prior year – highlight the difficulty in making long-term decisions in volatile markets.

As a result, Rossouw advises mining companies to integrate risk and performance management and to evolve risk management to be more predictive in order to anticipate and plan for potential negative events as a result of the changing risk environment.