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TABLE OF CONTENTS Feb 28 - Mar 6, 2011 Volume 97 Number 2 - 0 comments

South African miners fall behind

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By: Ian Bickis
Cape Town, South Africa 2011-02-28

Cape Town, South Africa - The mood at the 2011 Mining Indaba conference in South Africa was markedly upbeat as the industry experiences booming growth, but the host nation was left wondering how it had missed out.

The country has fallen in recent years from its long-held perch as the world's top gold producer, now number three behind China and Australia, while other mineral resource sectors in the country have also taken a hit. 

The decline is in part a symptom of more than a century's worth of sustained mining in the country, but a mix of opaque bureaucracy, infrastructure deficits, forced corporate restructuring and fears of nationalization are also hindering a turn-around. 

South Africa's Minister of Mineral Resources Susan Shabangu, in her opening remarks at the conference, expressed the country's concern.

"The fact that our mining industry contracted during a boom," said Shabangu, "which saw our peer jurisdictions recording average growth in volume terms of 5%, was alarming, and said to us something drastic needs to be done."

The ministry's response has been a thorough review of the 2004 Mining Charter with an aim to make it more efficient and transparent, while also working with other government sectors to make the country more inviting and productive. 

But while Shabangu is working hard to improve the system and provide a stable investment climate, there continue to be red flags for potential investors.

 African National Congress Youth League leader Julius Malema has long been loudly calling for nationalization of the country's mineral resources. However, Shabangu reassured delegates at an Indaba press conference that assets would be secure.

"I still believe, I feel very strongly, that nationalization would not be the option for South Africa," she said.

Putting pressure on the government, Anglo American (aal-l) CEO Cynthia Carroll came out strongly against nationalization in her address to the Indaba conference.

"Mining companies simply will not invest if they cannot be assured that the assets they create will be secure," said Carroll. "In ignoring this truth, the false prophets who argue for nationalization are advocating the road to ruin - a path we must not follow."

Speaking with several delegates, the general consensus at the conference seemed to be that Malema continues to mostly posture. Nationalization is neither government nor African National Congress policy. The government is instead working on a state-owned mineral company to focus on strategic resources.

Great Western Minerals (gwg-v) president and CEO James Engdahl, fresh off acquiring a large interest in a rare earth mine in the country, said in a brief interview at Indaba that he did not see nationalization happening and had confidence in the company's future in South Africa.

The pressing challenges in the country are instead more mundane, with issues such a rail and port access or power supplies and blackouts. Shabangu, in her opening remarks at Indaba, described the demand-supply balance of both energy and water as "fairly precarious" and spoke of constraints in infrastructure. 

Great Basin Gold (gbg-t), for one, had to install generators and energy efficient motors to ensure successful completion of its Burnstone gold mine, while negotiations and progress with Eskom, the country's power utility, proved slow-going at times. 

The company has, however, now finalized agreements and is connected to the grid, with the needed full capacity lined up. Platinum Group Metals (ptm-t), which is building a platinum mine in South Africa, recently managed to also secure delivery of 40 megawatts of power to its project. 

For those exploring rather than building, the country's mineral licensing process has provided its own problems, such as corruption in issuing licences, potential duplication or revocation, and hoarding of licences. 

Controversies include the government's decision in 2010 to transfer 21.4% of prospecting rights around Sishen, Africa's largest open-pit iron ore mine, to Imperial Crown Trading, a little-known South African company. The mine itself is owned by Kumba Iron Ore, which is majority-owned by Anglo American. Lonmin (lmi-l) and Impala Platinum Holdings (ipla-l), meanwhile, have contended that they already held permits that have been transferred to a unit of the HolGoun Group.

In working to address these and other issues, the Ministry of Mineral Resources put a moratorium on new prospecting licences last August as it reviewed the system. At the Indaba conference, Shabangu outlined some of the findings and potential solutions, as well as announcing that the moratorium would likely be lifted imminently.

The ministry's review found that in the old system many licences lacked a paper trail, were issued for environmentally sensitive areas, and in 122 cases out of 26,000, had been double-granted. In response, it has invested in a new online application system that should make the system more efficient and accountable. 

Shabangu said that the ministry is targeting a three-month timeline for issuing prospecting licences and six months for mining rights with the new system, a halving of the current timeline. She also said that going forth, the ministry would start to enforce the "use it or lose it" policy in the 2004 Mining Act, as the pace of exploration had not kept up with the number of prospecting rights issued. So far, the ministry has issued 800 notices to companies that had not properly used their prospecting licences.

Power issues and dubious licensing are, however, not unique to South Africa, especially in the African context. The Rainbow Nation's black economic empowerment policy, however, requiring a transition to 26% black ownership of companies, is different and presents its own hurdles and opportunities.

The policy has the noble goal of righting some of the inequalities entrenched in the South African economy, but expectations and regulations can be unclear and open to exploitation. 

Companies at more advanced stages like Great Basin or Platinum Group Metals have been able to find workable ways to achieve the quota through limited joint ventures. Great Western even unveiled a new model at Indaba whereby employees at the mine would become the 26% owners, rather than a questionable shell company.

Junior companies just starting out, however, often have far fewer resources to spare. 

Lois Hooge, a senior policy advisor at Natural Resources Canada based in Johannesburg, said that junior companies often end up giving what amounts to a carried interest when the local company does not have the resources to match exploration spending.

Some juniors have found success in the policy, with Anooraq Resources (arq-v, ano-x) transitioning to a black economic empowerment company. Anooraq secured control of the Bokoni platinum project after Anglo American vended it out as part of its compliance with the program, and Anooraq is moving ahead with cost-cutting measures and optimizing the project.

Shabangu, however, said that the country missed its 2010 target of having 15% of companies transitioned into compliance, with the number closer to 10%, though companies officially have until 2014 to reach the 26% quota. 

She said the government has to improve on the mechanics of the policy, and that the ministry will be going directly to companies and finding out if they will meet the 2014 target, and if not, why.

Throughout the conference in fact, Shabangu urged feedback and dialogue with the industry to find the best solutions to the hurdles that South Africa faces.

Going forward, Shabangu said the mining sector is considered a pillar of growth for the country, which the government is working to make more stable and beneficial for all parties. 

"Mining is key for us as a country," said Shabangu. "It is my firm view that this work will result in a more buoyant and robust minerals sector that will benefit all of those who are involved." 

For the mining industry, it is difficult to ignore the mineral potential of South Africa, despite its problems. As the mining boom continues, the country and the industry look set to continue their long-standing relationship.



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Photos

VisMedia Anglo American CEO Cynthia Carroll.
VisMedia Anglo American CEO Cynthia Carroll.

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