THE NEW MINING CHARTER – WHAT IF IT GETS IMPLEMENTED ?
“If the Mining Charter is implemented, the already low credit ratings of South African resources groups might suffer”, Moody’s warned….
But what does this mean for our fragile SA Mining Industry?
Although different companies will be affected to various levels, the experts have highlighted the following facts and consequences if this Charter is implemented:
- The credit ratings agency “estimated $2.5bn (about R33bn) in equity value has been wiped out of the combined $31bn (R407bn) value of the six mining groups it rates”.
- The ratings Agencies might cut the credit ratings of South African miners, making it more difficult and more expensive to borrow for sustenance, mechanisation or expansion projects
- Most miners would “need to fund the required increase in black economic empowerment shareholding to 30% from 26% with debt”. This would likely require miners to use cash or raise debt.
- The new charter’s “proposed 50%-plus-one-share black economic empowerment rule for prospecting rights means underground reserves that were previously assumed to be available for profitable mining, will have to be accounted for as resources that cannot be profitably mined”.
- Regarding procurement, “South African companies will be required to provide 70% of content, with 44% of it empowerment compliant — which requires a number of conditions beyond ownership — and 21% black-owned”
- Also a “further 5% of content will have to come from 50%-plus-one-vote female-black-owned companies and from 50%-plus-one-vote youth-owned companies”.
- The unavoidable consequences will be that “these requirements will add to the costs of operating mines and will reduce free cash flow generation… for those miners not already in compliance”.
- This implies that “free cash flow generation……… will likely decline significantly”
- And of course……. “reduced cash flow would reduce mining companies’ ability to continue to reduce their debt or invest in expansion”
Potential investors in the SA Mining Industry, needless to say, will either place their money elsewhere or at best, sit out on the side lines for the foreseeable future (of perhaps the next 3 years?) until the courtcases brought up by the SA Chamber of Mines get concluded or expecting the SA Rand to tumble to pick up good assets cheaply.
In any case, current shareholders of these companies are likely to exert pressure on the Boards of Directors to cut costs immediately, stop any capex projects to improve productivity, and worst of all close all marginal operations to preserve cash flow and harvest all ‘low hanging fruit’. Miners will be directed to maximise early and quick cash flow by ‘ripping’ all the high value mineral pockets of highest grades at highest margin, thus shortening the Life of Mines in SA and hence endangering the fabric of the SA economy. Moody’s further concludes that “current shareholders are unlikely to support a further dilution of their equity interests.”
There is an additional real risk that if current Global Shareholders bet on lower investment in mining, this will affect longer term supply shortages of SA mined minerals and precious metals, creating a supply shortage of essential commodities, thus pushing up longer term prices and improve profitability and dividend pay-outs in other operations outside South Africa.
The CEO of Old Mutual /Nedbank (Mike Brown) described the New Mining Charter as “clumsy, inconsistent and lacking clarity…..expecting a lengthy legal process and a long period of uncertainty”
There is however a way forward during this uncertainty period for the mining sector not to stall. Because we know capital expenditure or new debt will be placed on hold with almost immediate effect, the only option that the SA Mining Industry will have is to improve labour productivity of throughput to levels last seen a decade ago. SA Mining will have to adopt a novel approach to reverse the slippery slope of falling productivity and profitability if it is to survive.
Edutouch has developed unique IP technology based solutions and platforms that enable Management and Supervisors regain the competitive edge – Through Low Cost Technology using a micro-focus approach to eliminate adverse variances. It addresses workforce optimisation and supervisor enablement to adopt or revert to Best Practices and improve labour productivity with immediate urgency. This is the only current option to save the mining community from decline. The technology now exists to reverse pessimism. It has been developed over years together with the SA mining industry, ‘adapts and plugs-in’ using your current systems, it is feasible, proven, sustainable and ready for implementation. Contact us for more information.
Edutouch can be found at www.edutouch.co.za