South African mining is in crisis

The industry faces tough times, made worse by foolish policies

AT THE start of a 4am shift, gold miners scan their fingerprints and squeeze into tiny “mantrap” turnstiles, designed to prevent thieves from slipping through. Then they pile into cages and descend nearly three kilometres (2 miles) underground at Sibanye Gold’s Driefontein mine. A warren of increasingly narrow tunnels leads to the reef, where miners blast a rock face rich with gold. It is gruelling work. Deep in the bedrock, the air feels as hot and humid as a tropical jungle.

Most of the world’s deepest (and historically richest) gold mines are clustered some 70km (40 miles) south-west of Johannesburg. The deeper they go, the more expensive and difficult the work of extracting the ore. Most mines are mature (Driefontein is 65 years old), and the cost of extracting the gold may soon exceed its value. Illegal miners known as “zama-zamas” (“taking chances”) are another problem, undeterred by the extreme depths and high-tech security. At Sibanye’s nearby Cooke mine, a recent wildcat strike had the unexpected side-effect of flushing out 461 zama-zamas who were being abetted by legitimate miners. Nash Lutchman of Sibanye estimates that roughly 3.5-4% of gold production across all of the company’s operations is lost to illegal miners. Industry wide, they pilfer some 20 billion rand (about $1.5bn) a year. Sibanye’s tactical response team has faced gunfire and even grenades in chasing after zama-zamas. “We are fighting a depressing war,” Mr Lutchman says. “It’s really eating into the business.”

South Africa’s mining industry is shrinking. At its peak in 1980, mining accounted for a fifth of the country’s GDP; the number now stands at 7.3%. High costs, low commodity prices, labour strife and falling productivity have all taken their toll. Mines have shed 70,000 jobs over the past five years. More cuts are coming. AngloGold Ashanti, a gold-mining giant, last week announced plans to lay off 8,500 workers, a third of its South African workforce, at mines that are now deemed unprofitable. At Sibanye, many of the zama-zamas are former miners who return to work underground for powerful syndicates.

Mining firms are also being hurt by government policies. A new mining charter introduced last month by South Africa’s mining minister, Mosebenzi Zwane, would force companies to ensure that at least 30% of their shares are in black hands, up from the current minimum of 26%. Under the new charter, companies would be required to maintain this level of black ownership regardless of whether black investors sell out.

They would also have to pay out at least 1% of their turnover each year to their black shareholders. Had this rule been in effect in 2016, black shareholders would have received 5.8bn rand out of the total of 5.9bn rand paid out as dividends to all mining shareholders, leaving pension funds and the like with practically nothing, notes the Chamber of Mines of South Africa, an industry body.

The industry’s top brass remain mostly white; workers toiling in the mines are nearly all black. The government claims to be outraged about this; perhaps this explains why it drafted the new rules in such a hurry, without bothering to consult mining firms properly. Whereas South Africa’s first-ever mining charter, introduced in 2004 and revised six years later, was the product of extensive talks with the industry, the new rules are simply handed down from on high.

They are also hard to understand. The Chamber of Mines has gone to court seeking to block the charter, calling it “so confusing and confused, and so contradictory in its core provisions”, that it has left mining companies and legal experts perplexed. The chamber’s CEO, Roger Baxter, argues that the new rules would deter investment and put up to 100,000 mining jobs at risk. The charter’s release triggered a sell-off of South African mining stocks. A drawn-out legal battle is looming, which means more uncertainty.

South Africa is already a tough sell. In a 2016 survey of attractiveness to mining investors, the Fraser Institute, a free-market think-tank, ranked South Africa 74th of 104 mining jurisdictions, well behind neighbouring Botswana (19th), Namibia (53rd) and many other African countries. Meanwhile South Africa dipped into a recession last quarter, and official unemployment has reached a 14-year high at 27.7%.

Adding to the confusion are differing messages from Mr Zwane and other senior members of his party, the African National Congress (ANC), which is deeply divided as it prepares to elect new leaders in December. The charter is championed by President Jacob Zuma and his supporters, who have backed populist policies under the guise of “radical economic transformation”, perhaps to distract public attention from a growing mountain of corruption scandals. The deputy president, Cyril Ramaphosa, a former union leader turned businessman who is seeking to succeed Mr Zuma, leads a separate faction that has called for the new charter to be reconsidered. The policy uncertainty will probably only end with change at the top.

Source: economist