Although international mining funds are choosing to invest in other jurisdictions, rather than in South Africa’s mining sector, there is still hope for the local mining sector, Anglo American nonexecutive director and Joburg Indaba international investment panel chair Jim Rutherford said on Thursday.
He told delegates attending the Joburg Indaba, that operating cash flow in South Africa’s mining sector has recovered since 2015 but that capital expenditure has halved.
International mining funds have given up on investing in South African mining, as “they do not see a conducive environment [for] making profits and are investing their funds elsewhere.”
South Africa lags behind Canada, Australia, Peru and Chile in terms of investment attractiveness, mainly as a result of the perception of regulatory uncertainty.
The impact of a lack of investment is evident in mining output, mining employment and mining’s contribution to gross domestic product, said Rutherford.
Nevertheless, he said there was still hope, since investors consider policy perception as well as policy potential, the latter of which is still on par with other countries’ conduciveness to investment.
He suggested, however, that South Africa needed to implement three Cs – clarity, consistency and certainty, to improve its investment attractiveness.
“Investment follows returns, or where there is the prospect of returns, not the other way around. Additionally, a business-friendly and constructive dialogue is necessary.”
During a panel discussion following Rutherford’s presentation, he raised the topic of the sustainability of the mining industry’s performance and an apathetic stance from investors.
Allan Gray portfolio manager Sandy McGregor stated that “we are in a transition phase in terms of what people are looking for.”
For example, the gold industry between 1960 and 2000, the gold dividend yield equalled earnings yield and, at the time, it was rational. investors are increasingly looking at the sustainability of assets and not necessarily just the dividend yield.
“A rational environmental, social and governance policy has become a welcoming aspect for investors and mining companies should focus more on these,” said McGregor.
AngloGold Ashanti investor relations and communication senior VP Stewart Bailey noted that, from a gold industry perspective, the commodity boom ended in 2012, with the industry having tried since to recover balance sheets in a new gold price reality.
“It is a lesson for the industry. We need to go back to the beginning, developing an aversion to equity, while working for balance sheets. We pay R50-million and R150-million in interest, which is not attractive for equity investors, since they are right at the back of the queue.”
This will require a conversation about debt in cyclical industries. “Green shoots are only demonstrated over time.”
Bailey said dividends and equity need to be in harmony with each other, before investment will become attractive again in the South African mining industry.
He further that, on the upside, there was a rise of private equity funds, which were less risk-averse funds; however, these funds may have reduced flexibility in the longer term, for example, pertaining to mines paying off debt over longer terms.
Lonmin corporate strategy, investor relations and corporate communications executive VP Tanya Chikanza, meanwhile, said rebuilding trust is necessary.
In early 2000, the industry was paying dividends and no one expected the platinum price to plunge, but, since then, the industry has struggled to keep the attention span of investors, she added.
“To counter that, there needs to be some [sort] of comfortable yield, but the investors must also recognise that capital injection is necessary for depleting assets and, accordingly, the industry must demonstrate sustainability and long-term views. The industry needs to deliver shorter-term targets as well, with production and expansive projects.”
Impala Platinum corporate relations group executive Johan Theron said investment requires predictable earnings, which is a challenge for platinum mining companies at the moment, since many companies have not declared dividends or have declared lower dividends, since money needs to be spent on continuing operations at a low platinum price.
In terms of real investor confidence at the moment, Theron said North America is sceptical about the recently gazetted Mining Charter 3 and the positive effect of the certainty that the policy now brings, will only be realised in about three years’ time when implementation has taken place.