Potential versus reality, Mining as a Case Study South Africa First Click to edit Master title style...

Potential versus reality, Mining as a Case Study

Presentation to FFF Electricity Conference, 25

March 2015

By Roger Baxter, Chief Operating Officer

Putting South Africa First

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Presentation outline

What mining needs to realise its potential?

Global and local context

Mining: key to unlocking SA’s growth potential

SA’s current growth conundrum

Challenges and potential solutions

The critical role of electricity

Conclusion

The mining reality




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This is the Mining Industry

“Long Cold winters and Short beautiful summers”




4PWC Annual Mining Report Titles

• 2005 “Enter the Dragon”• 2007 “Riding the wave”• 2008 “as good as it gets”• 2009 “When the going gets tough”• 2010 “Back to the Boom”• 2011 “The game has changed”• 2012 “The Growing Disconnect”• 2013 “A Confidence Crisis”• 2014 “Realigning expectations”




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Global and local influences on RSA mining

Source: Deloitte

South African Mining

Companies

Urbanisation and industrialisation

Falling commodity

prices

Slow global growth, and slowdown in

China

Resource nationalism

Agitated shareholders

Falling commodity

prices

Margins under

pressure

Rapidly escalating

costs

Rising demands by government

Local influences

Global influences




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Perceptions RSA mining: “Sunrise or Sunset?”




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Perceptions and realities about RSA miningPERCEPTION REALITY

Is a “Dirt Digger”

Is uncaring about the lives of workers and does not pay wellDoes not care about the environment, or communities – Poverty at the doorstep of prosperous minesSuper profitable, and profits and benefits exported to a small bunch of CapitalistsResistant to Transformation

Does not matter to SA- Ingi Saldago-Business Report-”Eskom was right to switch off the Mines”




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Perceptions and realities about RSA miningPERCEPTION REALITY

Is a “Dirt Digger” Another R300 billion and 200 000 jobs created in downstream industries

Is uncaring about the lives of workers and does not pay well

80% reduction in fatality rate, average wages per employee up 12% p.a.

Does not care about the environment, communities –Poverty at the doorstep of prosperous mines

Spent R2 billion on communities, R4 billion on skills and R20 billion in corporate taxes in 2012.

Super profitable, and profits and benefits exported to a small bunch of Capitalists

SA mining not super profitable, Shareholders balanced 50% local, 50% offshore, R12 billion in dividends

Resistant to Transformation >R138 billion in BEE deals concluded, good progress on all pillars of Charter

Does not matter to SA- Ingi Saldago-Business Report-”Eskom was right to switch off the Mines”

18% of GDP, 50% of exports, 1.3 million jobs, 94% of electricity, 17.2% of corporate tax




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Conclusion

The mining reality




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• Progress has been made to get the economy back on to a higher growth path (3.2% 1994 to 2012).

• However, SA’s unemployment rate is too high (>20%), its level of income inequality is very high (Gini coefficient 0.59) and its level of poverty remains high by global standards.

• Government has now placed the creation of meaningful employment as a central pillar of economic policy.

• Higher levels of sustainable, balanced and inclusive economic growth is key to reducing unemployment (NDP).

South Africa requires faster, more balanced and more inclusive economic growth




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South Africa

While SA’s growth rate has risen to 3.2% p.a. 1994-2013, it is just too slow to meaningfully tackle

unemployment & poverty

35

24

18

15

12 10

9 8

7

-

5

10

15

20

25

30

35

40

2 3 4 5 6 7 8 9 10

Year

s to

dou

ble

real

GD

P

% annual growth rate

Number of years to doubling real GDP at different growth rates

Source: StatsSA




12Too much of the economy’s recent growth has been driven by credit fuelled non-tradable demand side, &

tradable export sectors have languished…..

Source: StatsSA

0

200 000

400 000

600 000

800 000

1 000 000

1 200 000

1 400 000

1 600 000

1 800 000

2 000 000

R'm

illio

ns

South Africa: Contribution to GDP in real terms, non-tradable vs tradable sectors of economy (real terms)

Non-tradable sectors (financial services, wholesale and retail trade, etc)

Tradable sectors (mining, manufacturing, agric)




13

-8

-4

1

5

9

13

17

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

% o

f GD

P

.

% g

row

th

.

Real annual GDP growth for tradable sectors versus non-tradable sectors, and the current account deficit as % of GDP

Tradable

Non-tradable

Current account % ofGDP

Resulting in large external imbalances, that must be funded by capital flows…..

Source: StatsSA




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Conclusion

The mining reality




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To ensure more balanced, inclusive and higher levels of growth & job creation the country needs its tradable

export sectors to grow at a much faster pace

This is where mining fits in:

•The National Development Plan (NDP) recognises the important role that mining can play as a generator of employment, export earner, creator of jobs and in terms of its contribution to economic development.

•The NDP also recognises the important contribution mining makes to upstream beneficiation (procurement) and downstream beneficiation (as a key feedstock).




16Mining - The “Flywheel” of the SA Economy,• Creates 1.35 million jobs (520 000 direct & 830 000 indirect).• Accounts for about 18% of GDP (8% direct, 10% indirect & induced).• Critical earner of foreign exchange >50%.• Accounts for 20% of private investment (12% of total investment).• Attracts significant foreign savings (R1.4 trillion/ 29% of value of JSE).• Significant contributor to transformation (>R150 BEE deals concluded)• 2012, R28 billion & R5 billion in royalties.• Significant procurer of local goods and services (R389 billion)• R93.6 billion spent in wages and salaries• Significant contributor to infrastructure investment (50% of TFR volume)• 94% of electricity generation via coal power plants• Significant contributor to community development through SLPs and Charter• R4 billion spent on skills development• R2 billion spent on community investment




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Mining has significant potential to contribute to the NDP

If growth constraints can be removed the non-gold mining sector can:– Grow at 3% to 5% p.a., resulting in a much more balanced country

growth rate (double size of non-gold mining by 2028).

– If mining had grown at same pace as rest of economy between 1994 and 2013, it would have increased the country’s growth rate to 4% from 3.2%, a significant difference.

– At a 5% growth rate, the mining industry can double in size in 15 years, significantly increase exports and reduce the savings-investment constraint.

– Significantly contribute to investment, transformation and development.




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Potential of the bulk commodities…Mineral/commodity

Opportunities Key Enablers Risks

1.Coal • Need 100MT extra coal <10 years (> R80bn- R100bn in investment)

• Export market (India/China)• Domestic market – Eskom/synfuels• SA has significant coal reserves• Mature Witbank fields• Relatively undeveloped Waterberg

coalfield

• Investment (capital)• Profitable coal projects• Synergy of domestic sales &

exports• Stable, predictable & competitive

investment environment for mining. (Smart tape)

• Cost effective, efficient , reliable & available logistics

• Demand (global/local)• Uncertainty on policy• Uncertainty on domestic

pricing /export restrictions• Infrastructure.• Cost inflation.• Poor execution• Lack of cooperation

between key stakeholders

1.1 Coal potential: Grow production to >350 MT by 2020 (2012: 258 MT), exports to >100MT (2012: 78 MT), Local sales 250 MT, (2012: 185 MT), and grow employment to >100 000 (2012: 80 000)

2.Iron Ore • Global demand (China)• RSA produces niche product

• Same as above, but logistics is key

• Same as 1 above.

2.1 Iron ore potential: grow production to >100 MT by 2020 (2012: 67 MT) increase exports to 90MT (2012: 59 MT) and growemployment to 30 000 people (2012: 18 000)

3.Manganese • Global demand and supply • Same as above but logistics is key

• Same as 1 above.

3.1 Manganese potential: grow production to > 21 MT by 2020 (2012: 8.8 MT) and grow employment to 10000 people (2012: 5800)

These 3 bulks could add 37 000 jobs and R72 billion extra in sales (based on 2013 numbers)




19Potential of the precious minerals…Mineral/commodity

Opportunities Key Enablers Risks

1.PGM’s • Recovery in global market (EU, USA and China)

• Rising emission and environmentalstandards

• Rising investment and jewellery demand• Development and adoption of new

technologies

• Investment (capital)• Smart tape• Cost efficiency, improving

productivity • Stable labour relations• Cost effective, efficient , reliable &

available energy• Collaborative approach to market

development

• Market demand (global recovery)

• Replacement technology• Policy and regulatory

uncertainty• Labour instability (platinum

belt)• RSA seen as an unreliable

supplier to global market

1.1 PGM potential: Grow production to >322 tonnes by 2020 (2012: 254 tonnes) and stabilise employment at about 190 000 (2013: 190 000)2.Gold • Remains key global reserve asset

• Likely to be growth in fabrication demand after 10 years of decline

• RSA still has significant reserves and resources

• Investment (capital)• Smart tape• Cost efficiency, improving

productivity • Stable labour relations• Cost effective energy• Team approach to resolving

challenges• Progress on technology

• Fall in gold price• High costs of domestic

production• Depth of mining• Uncertainty• Labour instability

2.1 Gold potential, slow down rate of decline in production to a 2% decline per annum (from current 8.2% p.a.). Production declines to 142 tonnes (2013: 167 tonnes) and employment falls more moderately to 110 000 workers (2013: 124 000)




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Conclusion

The mining reality




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But, SA mining has not met its potential• RSA mining the last commodity boom with mining GDP declining by 1% p.a.

between 2001 and 2008, versus 5% growth rate in top 20 mining economies mining sectors.

• Large shares of the gold & platinum mines are loss-making at current prices.

• The industry has recently been hit by labour market challenges and by the unfortunate Marikana tragedy.

• The industry has faced bouts of policy uncertainty (the nationalisation discussion, the review of mining taxation, carbon tax, etc.) and some licensing challenges.

• The industry has faced binding infrastructure constraints (shortages of electricity, rail and water).

• Declining productivity and rapidly escalating costs have challenged the sector.




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RSA mining production index: mixed picture

0

50

100

150

200

250

300

1990

=100

SA: physical volume of production for selected minerals,1990 to 2013, base indexed to 1990

diamondsgoldPGMsCoalIron oreChromeManganese




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Conclusion

The mining reality




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Mining has a set of characteristics that include:

• It is a high risk industry, with long lead times from exploration through to mine development and ultimately through to closure.

• It is very capital intensive and a large portion of the capital is spent in the development of the mine.

• It is exposed to cyclical commodity markets.• It is generally a “price-taker” and cannot pass on cost increases to the

final consumer.• It is geographically captured.• It requires access to cost competitive and efficient infrastructure.

In order to encourage investment into mining, policies need to recognise the characteristics of mining and help reduce the

risks of investment in long term projects.




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Mining Asset Lifecycle

Explore Evaluate(proofing) Develop Mine Closure

Cash flow over life cycle +

-

Price cycle

Given long life cycle, mining requires predictable, stable and competitive policy and regulatory environment




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What Mining needs to realise its growth potentialMining needs:• A government-industry partnership approach to recognising the benefits

of mining, lowering the negative impacts, and joint problem solving.

• Stable and predictable macroeconomic policies and macroeconomic environment.

• Traditional competitive advantage environment (stable democracy, rule of law, efficacy of courts, educated and skilled workforce, etc.).

• A stable, competitive and predictable mineral and taxation policy and legislative environment characterised by smart-tape and not red-tape.

• Capable government and private sector.

• Access to competitively priced, efficient, reliable and available infrastructure.

• Access to local and global markets.




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Conclusion

The mining reality




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The critical role of electricity in mining

• Electricity is a key input to the mining sector.• It is vital for ventilation, cooling, hoisting, lighting, pumping, processing,

refining, transporting, etc.• For deep level metalliferous mines electricity is vital to creating a suitable

working environment for the labour force. These mines have some of the biggest cooling and ventilation systems in the world. In these mines electricity comprises between 12%-24% of cash production costs.

• For underground mines electricity is critical to ventilation and removing flammable gases.

• Mining therefore requires access to available, cost effective, reliable base load electricity supply.




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050 000

100 000150 000200 000250 000300 000350 000400 000450 000500 000

2004 2013

Rand

per k

ilogr

am

Capex : 235%

Depreciation : 187%

Other cash costs : 288%

Stores and materials :84%Power and water : 231%

Labour : 105%

The real cost of producing a kg of gold has more than doubled in the past decade -

electricity is a big contributor

Gold price

Cost of producing one kg of gold, real terms adjusted for inflation (PPI), % change

Source: Chamber of Mines, SARB




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Conclusion

The mining reality




31Eskom’s installed versus available capacity

35721

6001400

1860

2409

0

5000

10000

15000

20000

25000

30000

35000

40000

Installed

Meg

awat

t

Gas(diesel)

Nuclear

Pumpstorage

Hydro

coal

85

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0

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2010

% o

f ins

talle

d UCLF

Plannedmaintenance

Available 69

8

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2015

% o

f ins

talle

d UCLF

Plannedmaintenance

Available




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Problem statement

• The country’s available electricity supply 27-29 gigawatt is insufficient to meet demand 29-32 gigawatt.

• The lack of available plant and the thin reserve margin has forced Eskom to continue to load shed the large industrial sectors (since 2007) but now has spread the load to the commercial and household sectors.

• The lack of a reserve margin increases the risk of load shedding, and of a total blackout should the system become unstable.

• The maintenance backlog has simply increased:– Older power stations run for longer periods require longer downtime for

maintenance.

• A critical issue for Eskom is the lack of sufficient flexibility to catch-up on unplanned maintenance.

• Eskom is having to run very expensive OCGT as base load capacity.• The country’s economy is affected from a production and confidence

perspective.




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Root of the problem• Significant increase in demand due to growing economy and electrification

process.• The non-implementation of the Energy Policy White Paper (separate

distribution, transmission and generation and allow private competition in generation – the globally accepted practice).

• Inadequate execution of plans.• Limited private sector involvement in generation (conditions not suitable).• The late start to the Eskom build program.• The sole reliance on Eskom to provide the country’s electricity needs.• Inadequate planned maintenance.• The aging power station fleet - more than half of the power station fleet is

beyond mid-life.• Eskom’s development of technically complex new power stations (Medupi

is the world’s largest dry cooled power station) – when off the shelf technologies would have been quicker.




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Mining sector contribution to stabilizing the grid• Mining accounts for 14.1% of electricity demand, but this is probably closer to

30% when smelters and refineries are included.• The mining sector has consistently contributed to lowering load for Eskom

between 2007 and 2015.• In 2015:

– Total peak notifiable demand for the gold and platinum mines is about 4 gigawatt.

– The industry shifts 450 megawatt off evening peak demand (slightly less in the morning)

– The industry has installed energy efficiency measures that saved about 500 megawatt.

• In 2015, the increased risk of instability has resulted in Eskom asking mines to do more in peak periods – with some companies going as low as 60% electricity availability.

• Smaller mines connected to municipalities have been cut-off with increased safety risks (gas build up in coal mines).

• The mining industry has limited room to reduce demand further, with out significant reductions in production which is negative for the viability of mines and for the economy.




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Clarifying the coal supply situationThere has been significant speculation about the coal supply related issues, including coal quality sold to Eskom and the “so-called” exports of Eskom quality coals to India. The following points will hopefully provide the facts:• The Chamber’s coal members supply about 65% of Eskom’s coal needs in tied

collieries. With the exception of 2 collieries, all the other collieries are supplying coal to Eskom at the specified condition in their coal contracts (i.e. the specified coal quality that the power station is designed to run on).

• Eskom’s power stations are designed to run on coals with an energy content of between 16 to 22 megajoules/kg, with an average of 19 mj/kg. Exported coals are generally in the range of 22 to 27 mj/kg – so there is a small overlap of export versus coal supplied to Eskom.

• In the next decade South Africa needs another >80 million tonnes of extra coal production costing about R100 billion in order to supply Eskom, to grow exports and to replace exhausted mines.

• In order to generate this investment (which will guarantee primary energy security) there needs to be a partnership approach to generating the synergistic relationship between export coals and Eskom supply.

• Talk of strategic minerals, export restrictions, etc., will simply stop investment and undermine primary energy security.




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Proposed national response:

• The country has to have a game changing attitude change to conserving electricity (electricity usage simply has to be reduced across all sectors of society – where possible).

• It is critically important to stabilise Eskom and to give the utility sufficient space to catch-up on the maintenance back-log.

• Private sector participation in base load projects should be expedited (including allowing of wheeling, etc.).

• Eskom and municipalities should encourage the installation of smart metering and allow private households to feed back electricity into the grid (such as through PV solar).

• The longer term strategy needs to be finalised and implemented.• A partnership approach to encouraging investment in coal mining is

critical.




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Conclusion

The mining reality




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Conclusion

• The electricity crisis requires a collaborative problem solving approach by all stakeholders.

• Without sufficient, cost effective and reliable electricity supply mining cannot grow to its potential which will undermine the achievement of the objectives of the NDP.




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Conclusion

Mining matters for the growth, development and transformation of South Africa

Potential versus reality, Mining as a Case Study South Africa First Click to edit Master title style...

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