With the bottom seemingly having fal- len out of the commodities market, South Africa’s mining industry appears to be at an all-time low. However, international law firm Hogan Lovells partner and mining head Warren Beech argues that the opportunity for corporate activity “far outweighs” the threat to the industry.

He says the slowdown in the global commodities market has unmasked an apparent frailty in the South African economy, with commentators predicting calamity for the local resources sector. Beech comments that, while it is undeniable that the global slowdown has hurt the mining industry, the current state of affairs has to be seen in context.

“That context is that we have come off a commodities supercycle that, in certain respects, shielded resource-rich countries from even greater impacts following the global financial crisis.”

He points out that, with traditional powerhouse economies in Europe and North America faltering and China’s seemingly unstoppable growth and demand for resources, which had fuelled commodity prices to all-time highs, slowing, growth has tempered over the past year, and the mining industry is currently burdened “with the mother of all hangovers”.

“But, as with all hangovers, given time, even the worst pain will pass. A little medication, some careful manoeuvring and an adjustment in attitude, will go a long way in alleviating the suffering,” he states.

Beech cautions, however, that this does not mean that the mining industry can expect to return to the “exhilarating highs” experienced only a few short years ago, as that time has passed.

Nonetheless, he believes that there is a tremendous opportunity to take stock and reassess the excesses of the past that were most evident in acquisitions, expansions and infrastructure projects driven by unrealistic investment decisions.

“The most glaring outcome of this reassessment of operations and assets is the new round of more prudent deal making,” Beech says.

He points out that many of the mining majors have either exited nonperforming assets, or announced interventions to preserve them through care-and-maintenance programmes that aim to limit their losses, while preparing for a turnaround in the markets.

Similarly, Beech notes that companies with “war chests” are picking up selective assets that are in distress, or on the market, in a bid to consolidate interests and gain economies of scale.

“Both these activities are naturally having a negative effect on the labour market, which is always hard to stomach even if the long-term prospect is for these operations to ramp up again once commodity prices pick up,” he says.

Beech contends that the upshot of all this is that the local mining sector presents some very compelling opportunities for companies that are able to take the long-term view.

He says deals done recently by the likes of precious metals mining company Sibanye, which bought some of platinum producer Anglo American Platinum’s mining and concentrating operations, were evidence enough that there is an appetite for those operators who have the ability to turn around assets that are no longer central to the mining majors.

Beech notes that this kind of corporate activity also counters the view that mining is being characterised by disinvestment. He says this is more than just a rearrangement of the decks as it is providing opportunities for new players to step up to the plate.

Beech points out that the scope to drive transformation in the sector is also evident in Mineral Resources Minister Mosebenzi Zwane’s recent comments about government looking to buy assets that are at rock-bottom prices.

“Whether the Ministry pursues this line of action and how it implements such acquisitions will no doubt be followed with close interest by the industry,” he remarks.

Beech emphasises that the long-term viability of such a move will be dependent on the ability to find technically competent operators and probably more specifically buy-in from host communities and the workforce to ensure the stability and viability of such assets.

He further highlights that the shake-up in the market also presents an opportunity for international operators to pick up assets at “near-bargain-basement prices”.

Beech says that, in his experience, this activity has traditionally been driven by companies looking for commodity-specific opportunities rather than scouting generally for distressed or cheap assets.
“Managing a serious hangover inevitably requires a degree of patience and reassessment of the excesses that led to the condition. Now is the perfect time for South Africa’s mining sector to take its medicine and look forward to a recovery, even if it is a muted one,” he concludes.