An Overview of the South African Minerals Industry and the Impact of the Minerals Development Draft Bill
INTRODUCTION
The following overview consists of four main parts. Part 1 deals with a general review if the relationship between mineral wealth and the way that such an endowment can be used for economic development and growth. Part 2 examines the current status of the South African minerals industry, its role in mineral production, the reserves and exports. Part 2 also takes a view of the Draft Bill in a nutshell and examines how the industry has change over the past decade. There is some consideration given to the new entrants to the industry and some of the broader issues facing the South African minerals industry. Part 3 investigates the role of the mining and minerals industry in the national economy, issues in regard to changes in labour complements and the changing level of mineral production over the past 17 years. Finally Part 4 is simply an attached copy of a paper entitled "Information as an Alternative to Mineral Rights Taxation" by Minnitt and Cawood, published in the Journal of the SAIMM in 1998. The object is to draw the reader’s attention to the importance of the way in which information is handled and it’s value in the debate about mineral rights.
The overview relies heavily on work by Professor John Tilton of the Colorado School of Mines, The South African Minerals publications compiled by the Department of Minerals and Energy, South African Mineral Review (1998-1999) published by the Raw Materials Group and the Minerals and Energy Policy Centre, and a publication by Minnitt and Cawood (1999) in a Journal of the South African Institute of Mining and Metallurgy.
Part 1
GENERAL REVIEW
1 Mineral Wealth and Economic Development
As John Tilton has so aptly stated "Common sense suggests that mineral wealth, like other assets should help countries develop and grow." (Tilton, 1992, p1). The returns from mining (mineral rents) and mineral exploitation can be used to build local and national infrastructure. They can enhance political stability, they can satisfy indigenous community claims and they can bolster economic growth. Mineral rents can provide jobs, promote the development of domestic skills, encourage related manufacturing capacity and provide beneficial linkages with the rest of the economy. This view provides a strong incentive for governments of mineral based economies to create streamlined and acceptable policies in order to attract investment and thereby use their competitive advantage in mineral endowment to induce economic growth. There are however two notes of caution that should be sounded:
The first is that while the linkage between mineral wealth and economic development is historically valid, it is neither simple nor well understood. The presence of coal and other natural resources paved the way for the industrial revolution that started in England and spread to the European continent. Much the same has taken place in the Middle East as oil rents flowed back into countries such as Saudi Arabia, Oman, Kuwait and other oil producing countries that have seen rapid and huge economic growth.
By contrast the second warning is that in some economies, the presence of mineral resources has tended to inhibit rather than foster economic growth. Why this should be is less well understood. The presence of a rich mineral endowment does not mean that it will automatically induce economic development and growth. On the contrary many low income, mineral exporting developing economies have experienced deteriorating standards of living and some have completely stagnated. Furthermore it would be wrong to suggest that countries with a lack of minerals will not experience healthy economic growth. Many have and this raises questions about the relationship between mineral wealth and economic growth suggesting that it is complex and far less favourable than common sense would suggest.
Three critical issues determine the extent to which mineral resources inhibit or promote economic development:
· Firstly, undeveloped mineral resources contribute nothing to economic development. This presupposes that exploration has been undertaken and that mineral deposits have been discovered.
· Secondly, that the flow of mineral rents derived from the exploitation of the mineral deposits is positive. Mineral rents are that portion of the cash flow that remains over and above that which is required to induce the investor to commit his resources to the project in the first place. Rents contribute nothing to economic growth if they are spent on current consumption, if foreign interests expatriate them or if they are invested unwisely. Rents can be dissipated through needlessly high operating costs.
· Thirdly, mining and related mineral activity may affect macroeconomic growth and the domestic economy in ways that they were not intended to.
2 Economic Nationalism and Multinational Mining Companies
The complex and often hostile relationship between host governments of newly independent countries and multinational mining companies in the 1960’s and early 70’s saw the spawning of the concept of National Sovereignty over Natural Resources. Fledgling policy makers did not like the domestic mineral sector dominated by foreign investors regardless of the economic benefits. There was less uncertainty about the magnitude of the mineral rents once projects were commissioned and operating. . In order to capture a larger portion of the rent governments introduced new terms and conditions. By this time sizable investments had been committed and companies that simply withdrew would incur significant loss.
This is considered to be a unique event (Tilton, 1992, p5) that turned to South Africa’s advantage in the mid 70’s and early 80’s. At this time many foreign mining companies disillusioned by their experiences in mineral-rich developing countries arrived on our doorstep to invest their petro-dollars in mineral exploration. Some were large oil companies who having amassed huge profits from the oil crisis decided that non-fuel minerals sounded like a good investment opportunity. Companies that came to South Africa included Phelps Dodge, Texas Gulf, Aquitane, US Steel, Falconbridge, Cominco, International Nickel Company, BP Minerals Division, Shell minerals Division etc. This period saw a colourful and rich diversity of companies and new exploration techniques followed by financial investments that brought several new mining operations such as the Pering and Black Mountain base metal operations into being. Clearly foreign investment had brought positive contributions. As her pariah status under the old order grew during the mid-80 to mid-90’s many of these exploration and investment companies fled South Africa. Even though a democratically elected government was installed in 1994 these mineral investment companies have not returned. The reason may be partly due to the consistent decline in commodity prices and the enormous increase in the mobility of investment capital
Although some kinds of foreign investments are immune to the dangers of political risk and economic nationalism mining and the minerals sector suffer from a structural vulnerability in this regard (Moran in Tilton, 1992). Even when governments can assure investors of the durability of their agreements they cannot commit future governments particularly when changes in government are likely to take place. Although companies have used the following ways to reduce political risk, they do not offer much protection.
· Developing market control over downstream processing
· Sharing project ownership with government through joint ventures
· Developing projects in a number of discrete steps through incremental investment
Using project finance through international organizations such as World Bank to enforce compliance with the terms of agreement greatly reduces the likelihood of unilateral abrogation. Although this undermines economic sovereignty of the host government it provides a creditable means of binding future governments and negotiating long term agreements with foreign investors. Such strategies provide a mechanism for allowing promising but risky projects that would under normal conditions be left on the drawing board, to be developed.
3 Constraints on Mineral Development
Factors that could in anyway delay the exploitation of or production from mineral deposits should be avoided. Harold Hotelling’s proposition that delaying mineral production would not adversely affect the value of mineral rents flowing from its exploitation have been shown to be without substance. Instead every effort should be made to bring resources to account today – they will not be worth more tomorrow. Some of the reasons given for delaying production include a desire to save mineral wealth for future generations or the day domestic industries will need them (Radetzki in Tilton, 1992).
A reluctance to share the mineral rents with foreign investors may also delay decisions to exploit mineral deposits. This overlooks the effects that technological change and substitution could have on increased mineral supplies flowing into markets as well as the fact that certain deposits well worth exploiting today may become uncompetitive tomorrow. The lack of domestically available human and physical capital, the significant costs associated with entry to the minerals industry and access to markets share means that sharing the rents with foreign investors should simply be viewed as paying your school fees.
Only a rare combination of conditions could justify the deferral of exploitation. Such an example is where increased mineral supply could seriously damage the market by depressing prices; in such cases delay in bringing a deposit to production could be considered. In general terms countries are best off by making use without delay of any profitable mineral resource potential it possesses.
4 The Political Economy of Rents
The way in which countries use their mineral rents strongly determines how mining contributes to economic development. A minerals based economy is defined as one in which mineral sales account for over 40% of export earnings and contribute about 8% to GDP. Mineral rents play a vital role in the economic development of such economies because they are heavily dependant on mining for foreign exchange and government revenues. In a study of 15 low-income minerals based economies by Oliver Bomsel (in Tilton, 1992), the poor performance of 13 of these countries is related not only to the decline in metal prices but also the perverse use of the mineral rents. It should be realized that the adjustments necessary for economic growth might be painful for those for example whose standard of living might be artificially high. Rents must be invested in education health, infrastructure and other activities that raise future income. Once rents are used for current consumption or employed to support unproductive activities (for example importing food without giving due attention to the agricultural sector) the mineral sector will be squeezed more and more. The response to increased urbanization is to create more employment in the public sector. This scares off foreign investment and may force governments to resort to foreign loans to maintain the status quo. The cry for more immediate material wealth means governments are pressured into catering for individual affluence rather than ensuring the future economic well being of the country. It is unlikely that economies caught in such a trap will be able to extricate themselves voluntarily (Bomsel in Tilton, 1992).
Philip Daniel (1992) examined the way in which mineral wealth relates to economic growth. He asked, "…If enough had been learnt about the way that mineral revenues are transmitted through the economies of mineral exporting countries to make appropriate public mineral policy". Daniel describes the basics of three useful theories about economic growth in this regard.
The neoclassical or common sense approach is that economic growth will take place by simply increasing the factors of production. This view was challenged in the 1960’s by structuralist theories of economic development. Structuralists stress the lack of linkages between mining and the rest of the economy, the inhibiting influence of mineral exploitation and the secular declines in the terms of trade for mineral exporting countries. Such a theory as this is surely the most unpopular in a country such as ours and I will not bore you with further details except to say that the recommendation from structuralist economists is that the developing economies should diversify away from mining. Both the neoclassical and structuralist theories are of the view that public policy will have little influence on the predetermined outcomes.
The third theory is referred to as Dutch Disease, an illusion to the experience of the Netherlands in regard to their extremely profitable natural gas sales to the rest of Europe. The strong inflow of foreign exchange resulted in a rise in real wages, an increase in the price of non-tradeable goods (such as houses and real estate) and an increase in the exchange rate of the Guilder. The effects on the economy are that labour moves to the booming mineral sector and non-tradeable sectors. Economic activity in the tradeable sectors, such as agriculture and manufacturing begins to contract as the influence of wages and exchange rates moves trade in favour of imports. This means that a mineral boom can result in deindustrialization in developed economies. The solution for such a perverse result is that government should intervene to curtail the upward movement in wages and exchange rate. Such intervention would mean that the mineral rents could be diverted to needy sectors of the economy or used to balance growth across the rest of the economy.
5 Public Policies for Macroeconomic Stability
It is clear that public policies can influence the economic outcomes – either positive or negative of a mineral boom. The most powerful of these policies is implemented through taxation. This instrument should be designed to ensure an equitable distribution of the mineral rents between the host government and the investor as the primary recipients. Too high taxes act as a disincentive for the investors while too low taxation means that the government loses rents that rightfully belong to the nation. Taxation is sufficiently well understood to offer some good advice to policymakers.
Cyclical instability in mineral prices seriously affects the flow of mineral rents to mineral exporting countries. Wage rates and exchange rates tend to rise during periods of higher prices, but this can undermine the competitiveness of the agricultural and manufacturing sectors of the economy. Public spending during a boom is difficult to curtail when mineral prices begin to fall. Daniel (1992) has suggested that such effects can be neutralized through public policies. He suggests that splitting the flow of rent and investing one portion domestically and the other abroad can mitigate the effects at the macroeconomic level. His primary contribution however is the recognition that "…the pace of domestic absorption should not exceed a level consistent with the countries capacity for medium term growth". (Daniel, in Tilton, 1992). The pace of domestic absorption is only a ceiling and the actual pace should be based on the average level of the flow of future rents. An attempt to stimulate growth above this level introduces inflation and rents are lost because of the inability of the economy to effectively absorb them. The inability to separate mineral rents from other government income makes the implementation of this policy almost impossible.
The third set of policies relates to the way in which mineral rents are invested, spent and absorbed into the economy. A country’s long run growth is only ensured when mineral rents are invested correctly. The traditional pattern of public expenditure on infrastructure and state enterprises in the industrial sector is being called into question because of their poor performance. Instead mineral rents should be used to encourage private enterprise and private investment in agriculture as a means of enhancing the distribution of income, reducing unemployment and stemming the tide of urbanization. Health and education should also be receiving a substantial share of public investment and less should be spent on physical infrastructure and state enterprises.
Daniel concludes:
"There is little a priori inevitability about the outcome of mineral booms and slumps. It is possible to turn a mineral windfall to advantage, but it is also possible to create a development pattern that is worse (in terms of welfare) than that which would have been in place without minerals. The outcomes depend largely on things governments do, and thus on the pressures and interests that form and influence governments…" (Philip Daniel, in Tilton 1992, p16).
Although much is known about the effective use of mineral wealth in promoting economic development low-income developing countries have not applied the returns from these assets successfully. For many countries mineral resources are the only significant bridge linking their economies with the developing world and offer one of the few hopes of attracting foreign investment they need if they are to escape economic stagnation and poverty.
Part 2
THE SOUTH AFRICAN MINERALS INDUSTRY
1 Structure of the Minerals Industry
The mineral wealth of South Africa is legendry. This country’s mineral industry is barely a century old but is known as one of the world’s largest storehouses of mineral and metal commodities. The factors that motivated growth of the national economy, the development of the country’s extensive physical infrastructure and the emergence of a strong secondary industry sector can all be related to the mineral wealth hosted in South Africa’s remarkable geological formations. South Africa is recognized worldwide as a principal and reliable supplier of consistently high quality mineral commodities.
The principles of private enterprise within a free market system offering equal opportunities to all people are upheld in South Africa. State involvement in the industry is confined to orderly regulation and encouragement of equal opportunity development of its mineral resources. It aims to provide a legal and fiscal environment that enables exploration for, and mining, beneficiation and marketing of the country’s mineral wealth. It also provides a physical infrastructure including road, rail, air and harbour facilities, communications and health facilities, as well as the supply of electricity and water. The Department of Minerals and Energy (DME) is responsible for the administration of the Minerals Act, 1991, that regulates the prospecting for, optimal exploitation of, processing and utilization of the minerals; provides for safety and health in the mining industry and controls the rehabilitation of land disturbed by mining and exploration. In addition the DME and its support institutions The Mines and Health and Safety Inspectorate, the Energy Branch, the Minerals Development Branch, the Minerals Regulations Chief Directorate, the Minerals Promotion Directorate, the Council for Geosciences, the Registrar of deeds, Mintek, the Nuclear Energy Corporation, the CSIR and the CSIR’s division of Mining Technology, administer the following laws:
2 The Minerals Development Draft Bill in A Nutshell
After the installation of a democratic government in 1994 a process was initiated through the release of the ANC Draft Minerals and Energy Discussion Document (1994), followed by the Green Paper (February 1998), the White Paper (October 1998), and the Minerals Development Draft Bill (January 2001), to redress the past exclusions and restructure the minerals industry. As with other sections of the economy this restructuring is aimed at bringing South Africa’s mineral industry policy and administrative practices in line with what is happening in the rest of the world.
It is this very process that has recently stirred the mining fraternity and government officials to seriously consider their positions in regard to numerous mining related issues. The most important of the issues appears to be the way in which mineral rights are owned and the barriers to entry for new investors in the industry that this has created in the past. Government has stated that it’s long-term objective is for all mineral rights to vest in the state, with due regard to constitutional ownership rights and security of tenure. Rather than try and repeat what numerous commentators have already done in regard to the items of concern in the Bill, the intention is to provide a birds-eye view of the issues of concern. These are as follows:
· The State will take a proactive role in development of South Africa's mineral resources. (Section 2)
· Preference MUST be given to historically disadvantaged persons when considering the granting of a prospecting or mining right subject to the provisions of the Act (S3).
· Existing common law to be changed to the extent it applies to mineral rights and ownership of a mineral (S4)
· The State will have the power to force development of a mining project at what it considers optimal production levels by a mining rights holder otherwise the holder must abandon it (S12)
· The State may provide financial assistance to historically disadvantaged persons to conduct mining or prospecting activites. (S16)
· Retrenchments in the mining industry have to take place in terms of the provisions of the Bill to minimise social disruption. (S23)
· Preference in allocating mining rights to be given to those who intend to beneficiate mineral products in the country. (S24)
· Prospecting rights to be valid for 5 years with possible renewal for another three years.(S33)
· Mining rights to be valid for 25 years with possible renewal for another 25 years. (S45)
· Provision for retention permit to hold onto rights but not develop them because of marketing conditions valid for three years with possible renewal for another 2 years. (S54)
· Exemption of "certain category of persons" as well as "any organ of State" from many of the stringent requirements laid down to acquire a prospecting or mining right except requirement for environmental management programme. (S62)
· "Old order" prospecting rights valid for two years after introduction of new legislation after which they lapse. (S91)
· "Old order" mining rights valid for five years after introduction of new legislation after which they lapse. (S93)
· The South African Diamond Board is abolished. (S180)
· New provisions for Petroleum exploration and production. (S187)
Of vital importance is the political stability and fundamentally sound economy that together with the highly efficient banking and finance industry has provided a good destination for mineral investment dollars.
There is very little disagreement about the fact that the State should be the custodian of the national patrimony (NSONR) and that there should be a rapid and efficient transfer of mineral rights to the State so that the minerals beneath the surface belong to the Nation. This is entirely in keeping with what is happening in the rest of the World and in excess of 90 other countries around the world have undertaken to groom their national policies in order to conform to global standards. In South Africa there is a twofold purpose in transforming the Mineral Policy; one to enforce the national policy as expressed through the democratic government in power and two, to create a friendly enabling environment that will attract foreign investment to South Africa. In order to understand the importance transforming South Africa into an investor friendly country the interaction between policies as expressed in the Constitution, The Mineral Policy and the Departmental Guidelines should be appreciated. Together these pieces of legislation can create an enabling environment for investment that recognizes rights, security of tenure and maintains the value of property. Such an environment in which policies are supportive of national objectives should be characterized by the following criteria:
· Neutrality;
· Efficiency;
· Equity;
· Clarity; and,
· Stability
Minerals investors are typically bottom-line orientated and risk averse, but not socially irresponsible or unwilling to take risks. They place strong emphasis on cash flows, costs and risk mitigation or compensation and on sustaining their market positions.
According to the extensive study undertaken by Cordes (1998) investors want:
· Security of tenure that provides unambiguous access to any economic ore body that is discovered
· A mineral policy environment that is transparent, predictable, stable and that is based on "rule of law" standards so that decisions can be made with reasonable confidence
· Policies that permit the realization of a rate of return on investment consistent with the perception of risks, that minimize distortions in decisions and that preserve incentives for managerial efficiency
· Managerial control over all operating and product sales decisions
· The absence of restrictions on debt servicing and on repatriation of profits and dividends
The new Minerals Development Draft Bill is aimed at increasing investment in South Africa’s mineral industry through creation of a competitive business environment and lowering of barriers to entry. The establishment of a national mineral promotion system (one-stop-shop) will stimulate small-scale mining, job creation and intensify mineral beneficiation.
a)Property Rights
South Africa has no control over the international price of the mineral commodities that she exports and therefore cannot reduce the risk associated with mineral prices. It is essential therefore that the legislative framework over which our ministers do have control, minimises and mitigates any form of government risk. In this regard and with specific reference to the Draft Bill the legal framework must protect property rights that are the cornerstone for ensuring adequate security of tenure and a minimum requirement for the international investor. The fundamental principles of a property right namely, exclusivity, transferability and enforceability are probably more important than whether the mineral rights are owned privately or by the State (Crowley, 1994).
b)Transfer of Mineral Rights
The proposals to bring mineral rights under the control of the State by allowing "old order" mineral right owners to reapply for their rights in the form of a prospecting right or a mining right will require all holders to identify and value their "old order" mineral rights. Failure to do so within the period will mean that holders forfeit the rights. At the end of the period the DME will have a clear inventory of all rights and licences, with clear boundaries and contracts of ownership, to explore and exploit the nations mineral wealth.
While this state of affairs is precisely what is needed it is highly unlikely that it can be achieved within the specified period. The problem is essentially one of how information is handled, stored, retrieved and administered.
c)Property Right Issues
Certain issues of ambiguity between the Constitution and the Draft Bill have arisen. The Bill should recognise that a prospecting right and right to mine are property rights. There is a lack of clarity in regard to definitions of mineral rights and property rights, and the terms expropriation and compensation that need to be resolved.
The focus of mineral investment is geographically specific and the promise of returns on that investment are secured to the investor through a paper contract that gives exclusive, transferable and enforceable right to the two dimensionally defined area. Even the Capital Gains Tax Act recognises the capital nature of the mineral right and that trading in these rights will be subject to CGT and that it is prepared to tax these rights. If a mineral right is defined as a property right then the value of the rights and the security of tenure are no longer in question.
d)Prospecting Right
Applications for Prospecting rights can be made for an initial period of five years with a renewal of three years followed by application for renewal "for longer periods"(S 26). This seven-year period is certainly acceptable and should provide sufficient security for a mining company to bring forth the required investment funds or to consider joint ventures.
e)Retention Permit
Application for a retention permit for a period of three years followed by a further two years is an adequate and necessary provision of the Bill (S 49). The fact that the Retention Permit is encumbered by the restrictions of Section 59 and Section 61, curtails flexibility, restrains corporate activity and reduces commercial value of the right.
f)Mining License
Mining Licences will be granted for a period of 25 years. This is in line with the policies of other countries around the World.
g)Valuation Methods
Comparisons of the fairness and reasonableness of any valuation judgement on a mineral property are essential. As knowledge about the prospect increases through additional exploration information, so too should the level of the feasibility study. Values are established by the Competent Person according to codes of reporting mineral resources and reserves that allow for comparison of technical factors on a common basis. For this reason several methods can be applied:
· Prospectivity Enhancement Multiplier: Monies spent on a property will enhance or reduce the value or "Prospectivity" of the property. Value is added or diminished depending on the results obtained. A discovery of minerals greatly enhances the value of the property, the option value is increased and the right to hold and trade the property becomes a prime concern.
· Expected Value Method: the probabilities of a successful outcome from exploration expenditure are statistically defined, based on geological knowledge, costs and time.
· Comparative Value Method: Sales of a similar nature act as benchmark. Differing geological settings, market conditions, legislative and economic conditions at the time of trade have to be taken into account.
· Discounted Cash Flow Method: Cashflow models are generated. Risks and uncertainty associated with input variables should be known. The discount rate is usually taken as reflection f the aggregated risk associated with each of the input variables in the project.
· Option Pricing: An option is a right but not an obligation to buy or sell an asset and similar to issuing a license or establishing a contract for a period of time. The optionality of a mineral right is intrinsic to the business of an exploration or mining company.
h)Reporting of Assets, Accounting and Net Asset Value
The SAMREC code is the South African standard for reporting mineral resources meaning all South African mineral companies have to report mineral resources and reserves to the same standard. The Johannesburg Securities Exchange now also requires that there is no ambiguity in terms of SAMREC compliance and public reporting to shareholders of mineral companies. The intention of the Minerals Bill to conform to international standards is well timed. These three pieces of legislation should be seen to be working in concert commercially and legislatively.
The mineral companies will according to the codes, have to report mineral properties and their associated values in the annual balance sheet as assets and can be used to calculate part of the company’s Net Asset Value. Accounting practice around the world does not yet present mineral property values as part of annual accounts, but these values will be required in the event of any CGT liability.
3 Recent Corporate Activity
The private sector has seen significant change in the past five years. Corporate restructuring has seen smaller, focussed, commodity specific mining companies replace the old order mining houses. Mining houses have unbundled their holdings, shed their non-core and industrial interests, and have globalised their reach and interests through international mergers or acquisitions of foreign companies. Other transformations have included consolidation of ownership through minority buyouts, transfer of primary listings and corporate head offices offshore and the purchase of South African assets by foreign resource companies.
Corporate activity in1999 included the transfer of Anglo American Plc from Johannesburg to London, the merger of Gold Fields Limited with Driefontein and Harmony’s acquisition of Kalgold and Randfontein. Metorex has emerged as a diversified junior base metal company through consolidation of the assets of Miranda and Consolidated Murchison. Local junior mining companies particularly those with black participation such as African Rainbow Minerals, have move into the spotlight.
Numerous smaller companies also carry out mining and mineral beneficiation activities creating employment and exploiting the relatively smaller mineral deposits. The National Small-scale Mining Development Framework established in 1999, provides a mechanism to assist, first-time entrepreneurs entering the industry.
4 South Africa’s Role in Mineral Production
One of South Africa’s chief assets is the variety and diversity of the geology that hosts the country’s mineral wealth. Formations such as the Archaean terranes, the Witwatersrand, Transvaal and Karoo supergroups, the Bushveld Complex and the Phalaborwa Igneous Complex, metamorphic terranes of the Northwestern Cape, the kimberlite intrusions and the mineral-rich beach sands are world renowned. The number of producing mines and quarries in the mineral industry since 1983 is shown in Figure 1. The number of mining operations reached a maximum of 1100 in 1989, but has fallen steadily since then and currently stands at about 723 mines and quarries.
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
5 Mineral Reserves, Production and Exports
South Africa holds the world’s largest reserves of manganese, chromium, PGM’s, vanadium, gold, and alumino-silicates. It is also a leading holder of reserves of fluorspar, phosphate, titanium, vermiculite, and zirconium (Figure 2).
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
South Africa is the leading supplier providing in excess of 40% of world mineral production for alumino-silicates, chrome ore, vanadium, and vermiculite. It is also the leading supplier of gold contributing 20% of world gold production (Figure 3).
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
The small domestic market for most mineral commodities means that the industry is export orientated, being the worlds largest exporter of gold, vermiculite, vanadium, alumino-silicates, ferrochrome, ferromanganese, manganese and chrome ores (Figure 4).
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
6 Other Issues Facing the Minerals Industry
Other aspects of note are the application of advanced technology in deep-level mining and beneficiation and strong manufacturing capabilities in minerals related industries for mining equipment, processing plants and beneficiation. There is a large pool of mainly unskilled labour for which Government is pursuing ways to enhance the levels of education, training and improved productivity.
Exploration
A trend worth noting is the declining level of local mineral exploration expenditure that has occurred over the past decade. Prior to the early 90’s the belief that much remained to be found in the country as well as the sanctions against South Africa led most mining houses to spend the bulk of their exploration budgets within the borders of the country. South Africa’s acceptance back into the global economy following the political changes in 1994 saw a flow of exploration funds to mineral prospective countries that did not exceed the risk perception threshold of mining companies. Local exploration expenditure fell to somewhere less than 10 per cent of what it had been less than four years before. The shift in exploration expenditure was not this country’s only loss; with the relocation of budgets came a shift in technological expertise and the removal of highly skilled personnel from the exploration arena in South Africa. The exceptionally long lead time for minerals development projects means that the effects of the removal of funds, technology and personnel from the South African exploration arena will only become apparent in 7 to 15 years time. Unfortunately a myopic view on this problem means that unless steps are taken now to increase our level of exploration expenditure in the country, minerals production cannot be sustained in the long run.
Unbundling and Ownership of South African Assets
A further trend worth noting is the changing face of the South African minerals industry. This was initiated in 1990 when Barlow Rand unbundled into industrial, coal and gold divisions and Randgold emerged. In 1993 Sankorp unbundled Gencor who sold off the industrial sector Malbak and then focussed on minerals through the purchase of Billiton from Royal Dutch Shell in 1994. By the end of 1998 Gold Fields of SA Ltd was in the final stages of dismantling. The new Gold Fields Limited consists of the old GFSA gold mines combined with those of Gencor. JCI virtually imploded after a short attempt at black empowerment that left the former respected industry leader as a mere shadow. Anglovaal divested itself of the industrial holdings and reorganised itself into Avmin and Avgold. The overall effect was rapid and huge asset swapping, destruction of corporate cultures, dismantling of white job security and mounting retrenchments (South African Minerals Review 1998-1999).
Control over the industry is now globalised as ownership of the mineral assets has gradually changed hands and now resides with new owners in London, Switzerland, Vancouver and other places. In 1975 mining companies based in South Africa controlled 22% of the total value of minerals production in the western world. In 1985 the figure was still almost 20%, but by 1995 it had dropped to 13%. The initial drop was a reflection of the increase in gold production outside South Africa. However between 1995 and 1999 South African control of the value of all non-fuel minerals had dropped to only 5%. The consequence of these changes on the national economy, employment and is as yet unclear. Decisions by foreign investors to take positions in South African mining operations suggests confidence in the long term economic development and political stability of the country. Apart from some mild protest from the trade unions there has been surprisingly little opposition to companies leaving South Africa (South African Minerals Review 1998-1999).
Other significance issues facing the South African minerals industry include developments in the diamond industry in regard to the role of the Government Diamond Valuator and the availability of unpolished diamonds to the local industry. The crisis surrounding the gold price and the establishment of the Gold Crisis Committee that addresses issues in regard to down scaling of the gold mining industry, loss of employment and reskilling has occupied the time and minds of industry, Government and Labour. Other issues include the creation of a vibrant small-scale mining sector, mine health and safety, occupational health and compensation issues, HIV/AIDS on mines, human resource development, migrant labour, industrial relations and unemployment (South African Minerals Review 1998-1999).
Source: Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
7 New Entrants to the Minerals Industry
Over 30 foreign companies of variable size have entered South Africa in search of diamonds with the following companies representing the spread of new and emerging participants in the industry (South African Minerals Review 1998-1999):
· Noble Minerals listed in June 1999 to exploit Storm manganese and the Refentse project, a small alluvial diamond mining operation.
· Thabex Exploration listed in 1997 and raised R 3 M to explore diamond projects in the Barkley West area, but failed and merged with the Canadian company Pure Gold. This company has been more successful at exploring alluvial diamonds in the North West Province.
· Gem Diamond Mining Company came to the JSE in 1998 raising R 150 M to develop diamond-bearing gravels along the Orange River.
· Mazal Mining and Exploration listed on the JSE in 1999 with about 20% of shares being held by a black empowerment group Thuo Investment Holdings (Pty) Ltd. The company has spent R 12 M exploring a 28-hectare kimberlite pipe on the farm Paardeberg East where preliminary mining has commenced.
· Newco is a new black empowerment venture set up by De Beers to exploit the exceptionally rich diamondiferous kimberlite at the Klipspringer mine. De Beers, New Diamond Corporation (controlled by Kwezi Mining, Letlotlo and African Renaissance) and three other black groups Domba, Umnotho we Sizwe and Vuwani as well as a trust will hold varying control over the deposit.
· New Mining Corporation chaired by Dr Wiseman Nkuhlu, entered the diamond mining business in mid-1999.
· Mvelaphanda Diamonds (MPD) owned by Tokyo Sexwale, owns 34% of Gem Diamond Mining Corporation. A joint venture between Trans-Hex and MPD owns 28% of Canadian Diamond Field International and MPD could potentially see a further acquisition following a merger between Namco and ODM.
· Nabera is based at Alexkor the former State Alluvial Diggings was operated by a contract mining company Mmakau Mining set up by Bridget Radebe. Mmakau Mining subsequently withdrew and has entered the coal market.
Only two significant black empowerment groups are known to be operating gold mines:
· African Rainbow Minerals run by Patrice Motsepe
· Petmin a small consortium of mining contractors
The following successful coal mining operations have been established:
Kuyasa Mining formed in 1996 by a group of black mining engineers from Ingwe Coal. Now operates the Ikhwezi Colliery near Delmas.
Sebenza Mining a 70/30 joint venture between Sebenza and Anglo Coal produces coal from the Phakama Colliery south of Kriel.
NewCoal a black empowerment company established by Anglo and Ingwe will acquire a share in the Richards Bay Coal Terminal and have an 800 kt export entitlement. Three consortia namely Eyesizwe Mining, Ilanga Mining and Sebenza Consortium have been selected to bid for NewCoal.
Part 3
ROLE OF THE MINING INDUSTRY IN THE NATIONAL ECONOMY
1. Contribution to Gross Domestic Product (GDP)
The contribution of mining to GDP rose to a peak and reached a maximum of 15.6 per cent in 1986, but ha fallen steadily since that time and currently (1999) stands at about 6.5 per cent of GDP. This decline is due to the huge growth in the secondary (mainly manufacturing) and tertiary sectors of the economy and the contraction of the gold mining industry. If the contribution of beneficiated minerals (that is reported in the manufacturing sector GDP) is added to that of mining the impact on the national accounts is significantly higher.
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
2. Contribution to Gross Domestic Fixed Investment
Mining’s contribution to GDFI over the past seventeen years is much the same as that of the contribution to GDP except at a slightly higher level with the contribution to GDFI being about 8.9 per cent. Overall mining’s contribution to State Revenue has declined from 4.4 per cent in 1990 to 1.2 percent in 1999. State aid to marginal mines and pumping schemes has fallen to approximately R 30 000 while mining taxation and total revenue have increased from their low position in 1993 to levels of about R 2.1 M and R 2.2 M, respectively.
3 Mineral Sales
Sales of primary mineral products over the past 17 years are shown in Figure 7. While the Rand value of mineral sales has steadily increased in nominal terms because of the depreciation of the Rand, the value in real terms has probably declined if the negative effects of inflation and weaker mineral prices are taken into account.
The contribution of gold to export mineral sales has fallen from about 52% in 1983 to about 15% in1999 as shown in Figure 8. The contribution of mineral exports to the value of total exports from the Republic was 33.5 % in 1999, but it has shown a declining trend over the past 17 years (Figure 9). This thought to be due to weakening mineral prices and contraction of the contribution from the shrinking gold mining industry. Again it should be noted that the sales contribution of value-added mineral products such as aluminum, ferroalloys and steels is accounted for under manufactures rather than minerals. Had their value been added to the contribution from mineral sales this sector could have been some 6.5 % higher in 1999.
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
The value of local mineral sales has increased steadily over the 17 years (Figure 10) and clearly indicates a growing use of mineral products within the country. This is largely a reflection of growing value-added uses and increased manufacturing by local fabricators.
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
3. Employment and Wages
During 1999 the mining industry employed 437 000 people which is about 2.7 % of the South Africa’s economically active population, approximately 9% of the labour employed in the in the formal non-agricultural sector of the economy. Employment in the mining sector reached a peak in 1986 when 833000 persons were employed (Figure 11). This means that in the 13 years since 1986 about 396000 jobs have been lost in this sector of the economy. Taking the fact that one job in the mining industry can affect the livelihood of 10 dependants, job losses over this period have probably affected in the order of 4 million people. One should note however that in the period from 1983 to 1999 the total wage bill has risen from R 3.6 M to R 20 M (Figure 11). In addition since 1990 the real annual wage per worker has risen from about R 34 000 to R 46 000.
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
The distribution of employment in the provinces is however lopsided. 84.1 per cent of the mining workforce is employed in the four provinces North–West, Gauteng, the Free State and Mpumalange, and they earned 80.8 per cent of the remuneration.
As the number of people employed in the industry has fallen there has been a consistent increase in productivity of the labour force. This is evident from the way in which the value of mineral sales per employee has risen over the period 1983 to 1999 as shown in Figure 12.
Source: South Africa’s Mineral Industry (SAMI) 1983-1999.
4. Mineral Production
The following diagrams illustrate the annual production levels for 13 different minerals produced in South Africa over the past 14 years as a confirmation of the importance of South Africa’s mineral production. They also show that production of iron ore, chrome ore, ferrochrome, PGM’s aluminum and coal production have all increased, while production of gold, silver, copper, vanadium and fluorspar has all decreased.
Source: South Africa’s Mineral Industry (SAMI) 1986-1999.
Source: South Africa’s Mineral Industry (SAMI) 1986-1999.
References
Cordes J A . Minerals Taxation: Issues and Perspectives. Presentation at Global Mining Taxation Workshop, Cape Town, 6th February, 1998.
South African Minerals Review 1998-1999. 1999. Raw Materials Group and Minerals& Energy Policy Centre. Johannesburg. 108 p.
South Africa’s Mineral Industry 1999-2000. Published by the Department of Minerals and Energy, Pretoria.
Tilton J E 1992. Mineral Wealth and Economic Development: An Overview :In: J E Tilton (Editor) Mineral Wealth and Economic Development. John M Olin Distinguished Lectures in Mineral Economics. Resources for the Future. Washington D. C. 121pages.