JOHANNESBURG (miningweekly.com) – South African mining companies are increasingly shifting their focus from maximising volumes to ensuring more profitable production to remain sustainable as margins continue to shrink.

PwC's latest ‘SA Mine’ report, released on Thursday, shows that mining companies have experienced flat revenues and higher-than-inflation cost increases over the last five years, forcing them to manage what is under their own control – production volumes and costs.

Despite the weaker rand somewhat offsetting the prolonged low commodity price environment, mining companies were suffering increased pressure on balance sheets and income statements, said PwC Africa mining industry leader Michal Kotzé.

“Companies have no choice but to cut back on new developments, refocus on profitable production rather than maximum production and to save costs,” he said during a presentation in Johannesburg.

In its eighth edition, SA Mine shows record impairments of R60-billion during 2016, with R157-billion in impairments recorded over the last five years, almost “wiping out” the last three years of capital expenditure (capex) in the mining industry. This resulted in the first aggregated loss, some R46-billion, recorded since inception of the publication eight years ago.

The reported earnings before interest, taxes, depreciation and amortisation margin of 20%, which was 2% lower than in the previous year, was not sustainable, as it was too low to support required capex and borrowing repayments, said PwC assurance partner Andries Rossouw.

“Last year reflected the worst free cash flow position since the financial crisis in 2008. This year shows an improvement largely due to cash management practices,” he added.

The report noted a 5% increase in operating expenses during 2016, a significant slowdown on the 14% increase last year and below the 10% increase experienced over recent years.

“The low increase in operating cost is testimony to the various savings initiatives implemented by management, including reduction in marginal production, renegotiation of supply agreements and a reduction in overhead structures,” Rossouw pointed out, noting that a large number of companies have made an effort to restructure their balance sheets, preserve cash and contain costs.

Dividends had also been drastically cut in 2016, down to R8-billion from the prior year’s R22-billion. Labour remained the biggest cost component, its share of total costs increasing by 5.2% in 2016; however, excluding the impact of platinum wage increases, it decreased by 2%, as the impact of staff reductions started to show.

Meanwhile, revenue increased marginally by 2%, with coal remaining the highest-earning commodity in South Africa.

“Although coal’s share of revenue decreased marginally to 29% in 2016, total coal mining revenue increased by R1.3-billion from a high base of R104.4-billion in 2015,” Rossouw said.

Gold’s share of revenue increased from 15% in 2015 to 20% in 2016, owing to stronger gold prices and the weakening rand, while platinum-group metals’ share of revenue grew from 25% to 27%. Other commodities aggregately reflected a decrease, mostly weighed down by lower iron-ore prices. Iron-ore’s share of mining revenue continued its downward trend from 14% in 2015 to 10% in 2016.

“The long-term nature of mining investments translates into a significant lag in the supply response to price changes. This lag contributes to the cyclical nature of the mining industry. Although there is no consensus, we have probably reached the bottom of the cycle, but may stay here for some time,” Kotzé concluded.