JOHANNESBURG (miningweekly.com) – Over the last few years, South Africa’s mining industry has staggered into the new year increasingly the worse for wear, having been ravaged by a myriad of challenges over the course of the previous year, including mineral policy uncertainty, labour-management disputes, waning investor confidence, ever-rising operating costs and falling commodity prices.

The effect of these challenges over the course of the last four years is firmly illustrated by the fact that mineral exports, as a percentage of total merchandise exports, declined from 35% in 2011 to 26% last year, while mining’s contribution to the JSE declined from 38% to just 15% and its contribution to foreign direct investment inflows fell from some 33% to 15% over the same period.

While it is certainly clear that South Africa’s mining industry has had a rough few years, it is anticipated that 2016 will be one of the most challenging years yet.

Undoubtedly, what will prove most debilitating to the functioning of the South African mining sector this year is not only continued uncertainty over mineral policy but also the leadership challenges within the Department of Mineral Resources (DMR).

Regulatory Uncertainty
At the heart of this uncertainty is the fact that since December 2012, following the introduction of the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill, the industry has had little clarity around the direction or the future of mineral policy and regulation. While government attempted to make some headway in promulgating the Bill in 2014, contentious clauses relating to the oil and gas sector halted the process and eventually compelled President Jacob Zuma to send the draft legislation back to Parliament to be reviewed.

However, since being sent back, the Bill has languished in Parliament with little progress being made in reviewing problematic clauses.

Speaking to Mining Weekly, Democratic Alliance shadow Minister for Mineral Resources and member of Parliament’s Mineral Resources Portfolio Committee, James Lorimer, argues that the Bill made little progress in 2015 as the African National Congress (ANC) members within the portfolio committee insisted that the issues in the Bill were complex and should not be rushed. “However, we believe that those committee members deliberately stalled the Bill because of a disagreement over policy within the ANC,” he points out.

Numerous attempts have been made to engage the DMR on the issue of policy uncertainty as well as the prospects of the MPRDA Amendment Bill being promulgated in 2016 but, by the time of going to press, the department had failed to respond to such queries.

On the subject of the future of the contentious legislation, mining law expert Peter Leon believes that there is little prospect for the Bill in its current form.

“My own recommendation is that the DMR should use this opportunity to withdraw the MPRDA Amendment Bill and produce a Bill that gives proper effect to the National Development Plan, which is somewhat missing in action in relation to the industry,” Leon tells Mining Weekly.

However, whether the Bill will continue to be debated in Parliament or withdrawn and replaced by a new draft, it is likely that certainty over policy and regulation will continue to dominate the industry in 2016.

Another factor that will further deepen uncertainty over the country’s mining regime is government’s intention to update the Mining Charter during the course of this year. The chief objective of the new charter will be to increase black economic-empowerment (BEE) ownership requirements and introduce sanctions as a way of forcing compliance with empowerment targets.

Commenting on this latest development, Leon states that there is a risk that the Mining Charter III could be more dirigiste, allowing the State to exert a stronger directive influence over investment. “But there is an equal possibility that what is currently contained in the Mining Charter as an expression of policy could simply be swept up into the MPRDA. In other words, the regulatory regime would become more difficult, rather than less,” he says.

Any update to the charter, particularly an increase in BEE ownership requirements, could prove yet another investment disincentive, adds Lorimer. As the industry has been struggling under the weight of waning investor confidence over the last few years, any further disincentives could have serious consequences for South African mining companies looking to raise capital.

While government has stated its intention to have the amended charter ready by the end of March, that objective could be hampered by the still pending High Court application, submitted by law firm Malan Scholes to set aside the Mining Charters of 2004 and 2010.

The basis for the application, according to Malan Scholes director Hulme Scholes, is that the Mining Charters are unconstitutional, vague and contradictory and allow for abuse by the Mineral Resources Minister and officials. Malan’s founding affidavit has alluded to several troublesome issues in the charters, including the definitions of historically disadvantaged South Africans, “meaningful economic participation”, procurement, housing, beneficiation and community development.

In addition to that High Court application, the declaratory order to clarify empowerment clauses in the Mining Charter, particularly the ‘once empowered, always empowered’ issue, which was submitted by the Chamber of Mines in April last year, has yet to be resolved.

“Although the court case is ongoing, we are still engaging with the DMR on whether we can find a solution to the issue of ‘once empowered, always empowered’ out of court. These discussions are ongoing,” Chamber of Mines President Mike Teke tells Mining Weekly.

Leadership Challenges
Amidst such legislative volatility looms an even larger question over the nature and stability of leadership within the DMR. This stems from the fact that, as the new year dawns, the department finds itself without a director-general,Thibedi Ramontja having resigned in mid-December. According to a statement issued by the DMR, Ramontja, who had served as director-general for four years, resigned “for personal reasons”. An acting appointment is expected to be announced “in due course”.

Ramontja’s resignation comes just three months after Zuma replaced Ngoako Ramathlodi, who had served as Mineral Resources Minister for just 18 months, with little-known ANC MP Mosebenzi Zwane. While the move was initially criticised by the mining sector, which believed that Ramathlodi had understood the key challenges affecting the industry and that his removal might jeopardise progress made on key issues, Zwane has since made a favourable impression on industry leaders.

However, says Lorimer, Zwane starts from a weak position, being known only to the industry and national media through two government scandals. “With the best will in the world, the only type of Minister who can turn around the mining industry is one with political clout. Zwane does not appear to have the Cabinet experience or the political clout to do what needs to be done,” he argues.

Weak Commodity Outlook
As if regime uncertainty was not enough of a challenge to contend with, three of the world’s largest financial institutions, Goldman Sachs Group, Morgan Stanley and Citigroup, have asserted that commodity prices are unlikely to rebound this year and could remain at a relatively subdued level for years to come. Given that metals prices fell by some 16% year-on-year in 2015, the outlook does not bode well for miners.

Factors that will contribute towards the continued subjugation of the commodity market include persistent oversupply, the potential further weakening of Chinese economic growth and ongoing negative sentiment toward commodities.

According to Citigroup, platinum is expected to average $1 105/oz, gold $1 000/oz, coking coal $97/t and iron-ore just $40/t.

Depressed commodity prices, coupled with increasing operating costs, especially in light of the country’s most recent fiscal woes, is anticipated to put significant pressure on the country’s mines, particularly those already operating at a marginal level.

While commodity prices, operating costs and regulatory uncertainty will no doubt hamper the industry this year, Teke believes that the relationship between mine labour and management, which has proved highly problematic in recent years, has and will continue to improve.

“The levels of violence, which marred the industry and peaked during the Marikana incident in August 2012, have abated dramatically. Moreover, the unions seem to be more sympathetic to the current plight of the industry, particularly in terms of the low commodity prices and increasing operating costs,” he states.

Having said that, Teke adds that workers, feeling entitled, will no doubt continue to push boundaries. In addition, while the relationship between the industry and the Association of Mineworkers and Construction Union has improved, challenges remain and the tense relationship between labour and management is likely to persist in 2016.

Teke also believes that, as illegal mining is on the increase, there is likely to be more violence related to illegal activities on mines.
As with the last few years, 2016 promises to be a difficult year with the industry facing a perfect storm of exogenous and endogenous factors. “On the former, it faces ever declining commodity prices and, on the latter, a confluence of regulatory, labour and energy issues that all need to be addressed properly,” states Leon.

Despite this, however, Lorimer concludes that there is some cause for optimism.

“I believe that the shattering effects of a weak industry on jobs and foreign exchange earnings may have started to sink in to some quarters of government. But, if the decision-makers refuse to change direction, the industry and the country are in for a torrid time.”