1
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“Opportunities and challenges facing the South African Mining Industry”
Presentation to the SACEA AGM
By Roger Baxter, Senior Executive,Chamber of Mines of South Africa,
17 February 2011
PRESENTATION OUTLINE
Mining and minerals, integral to modern society
The South African Mining Industry
The future
The global mining industry
Back to the “BOOM”
RSA Coal Mining Sector
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Metals and minerals in a Smart Phone
• Copper (16 grams) ¹
• Silver (0.35 grams) ¹
• Gold (0.034 grams) ¹
• Palladium (0.015 grams) ¹
• Platinum (0.00034 grams) ¹
• Ceramic magnetic switches containing rare earths ²
• Indium²
• Titanium dioxide ²
• Indium tin oxide ²
• ¹ source – USGS http://pubs.usgs.gov/fs/2006/3097/• ² source – NRC critical minerals report
Metals and Minerals in a car
• 960kg iron &steel
• 109kg Aluminum
• 22.7kg Carbon
• 19 kg Copper, 34kg for a hybrid
• 19kg Silicon
• 11 kg Lead
• 10kg Zinc
• 7.7kg manganese
• 6.8kg Chromium
• 4.1kg Nickel
• 0.4 kg Platinum
•+Antimony, barium, beryllium, cobalt, gallium, gold, magnesium, molybdenum, neodymium, indium, palladium, Sulphur, rhodium, silver, strontium, tin, titanium, tungsten, vanadium, zirconium.
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Even a Wind Turbine uses a significant amount of metals and minerals
• 335 tons of steel
• 4.7 tons of copper
• 13 tons of fiberglass
• 3 tons of aluminum
• 1,200 tons of
reinforced concrete
• Arsenic (gallium-arsenide semiconductor chips)
• Bauxite (aluminum)
• Boron minerals (semiconductor chips)
• Cadmium (thin film solar cells)
• Coal (by-product coke is used to make steel)
• Copper (wiring; thin film solar cells)
• Gallium (solar cells)
• Iron ore (steel)
• Molybdenum (photovoltaic cells)
•Lead (batteries)•Phosphate rock •Selenium (solar cells)•Silica (solar cells)•Tellurium (solar cells)•Titanium dioxide (solar panels)
Solar panels need many metals and minerals
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• Barite
• Bauxite (alumina for phosphor; aluminum for end caps & filaments)
• Copper (end caps; filaments)
• Lead (soda-lime glass; ballast; adapter unit)
• Limestone or dolomite (finely crushed stone to make soda-lime glass)
• Mercury (vapor in glass tubing)
• Nickel (end caps; filaments)
• Phosphate rock (phosphor)
•Rare earths•Silica (glass)•Soda ash (soda-lime glass)•Manganese (phosphor)•Tin (end caps; filaments; glass coatings)•Tungsten (electrodes; filaments)•Zinc (end caps; filaments)
Even a compact fluorescent light bulb is minerals intensive?
• Silica
• Limestone
• Aluminum
• Phosphate
• Fluoride
• Titanium
• Mica
• Petroleum
A bright smile, even comes from mining…….
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PRESENTATION OUTLINE
Mining and minerals, integral to modern society
The South African Mining Industry
The future
The global mining industry
Back to the “BOOM”
RSA Coal Mining Sector
182
129
64
26
21
21
20
19
18
3
0 20 40 60 80 100 120 140 160 180 200
China
USA
Australia
Brazil
South Africa
Canada
Russia
India
Chile
Colombia
The global top ten mining countries as measured by Mining GDP (US$ billions)
Rank
1
2
3
4
5
6
7
8
9
10
South Africa has the world’s fifth largest mining sector
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World’s Top 10 Mining Companies by market capitalisation
0
50
100
150
200
US
$ b
illi
on
s
The world's largers mining companies by market capitalisation (January 2011)
0
5
10
15
20
25
%
Comparison of Revenue by commodity (composition of revenues of top 40 mining companies - PWC)
2007
2008
2009
The “big 5” of minerals are coal, copper, iron ore, gold and aluminium
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PRESENTATION OUTLINE
Mining and minerals, integral to modern society
The South African Mining Industry
The future
The global mining industry
Back to the “BOOM”
RSA Coal Mining Sector
Back to the “Boom”• Global economy is recovering from first global recession
in 61 years.
• Recovery is unevenly distributed, with advanced economies sluggish and developing countries growing strongly.
• The risks of a “double dip” are fading fast.
• Mining companies are in better position having repaired balance sheets and sustained core projects.
• The materials intensive nature of growth in emerging economies will escalate in next decade caused by continued urbanisation and industrialisation.
• Can South Africa “cash in” on the boom?
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Back to the “Boom”
PWC ANNUAL MINING REPORT TITLES
• 2007 “Riding the wave”
• 2008 “as good as it gets”
• 2009 “When the going gets tough”
• 2010 “Back to the Boom”
-6
-4
-2
0
2
4
6
8
10
12
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
% a
nnual gro
wth
rate
IMF outlook for world economic growth for key regions, (source IMF WEO April 2010 and July 2010)
World
Advanced economies
Euro area
European Union
Developing Asia
World economy is recovering
9
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World economy is recovering
-
20 000
40 000
60 000
80 000
100 000
120 000
140 000
2007 2008 2009 2010
To
ns o
f ste
el
pro
du
cti
on
per
mo
nth
Global steel production has recovered to pre-crisis levels (source: IISI)
Total - Oceania
Total Asia (less China)
Total - Middle East
Total - Africa
Total - South America
Total - North America
Total - C.I.S. (6)
Total - Other Europe
Total - European Union (27)
China
World economy is recovering, but the recovery is unevenly distributed
0
20
40
60
80
100
120
140
160
2007 2008 2009 2010
To
ns
of
ste
el p
rod
uc
tio
n p
er
mo
nth
Global steel production has recovered to pre-crisis levels (source: IISI)
China
Non-China production
10
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-
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000
2007 2008 2009 2010E 2011E 2012E
Global automotive production by key region/country, (source: CSM and JDPowers)
Other
Japan
Latin America
China
Europe
NAFTA
World economy is recovering
-
2.00
4.00
6.00
8.00
10.00
12.00
20
06
20
07
20
08
20
09
20
10
% u
ne
mp
loym
en
t ra
te
Unemployment rates in the industrialised countries (source: OECD)
Germany
Japan
USA
Euro area
OECD
Risks remain…….
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Risks remain…….
-10
-8
-6
-4
-2
0
2
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Str
uctu
ral
bala
nce a
s %
of
GD
P
Government structural fiscal deficits as % of GDP
Germany
Japan
United Kingdom
United States
GOOD
BAD
0
50
100
150
200
250
300
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
% o
f G
DP
Gross government debt as % of GDP
Germany
Japan
United Kingdom
United States
Risks remain…….
GOOD
BAD
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—
1 000 000
2 000 000
3 000 000
4 000 000
5 000 000
6 000 000
7 000 0001950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Th
ou
san
ds o
f p
eo
ple
World's urbanised population 1950 to 2050, source UN 2009 revision
Oceania
Northern America
Latin America and the Caribbean
Europe
India
China
Asia (less China and India)
Africa
Back to the Boom…….
The Global Commodities Boom
•Further facts on China:
• 700 000 Engineers graduate annually in China
• 650 million cell phones in circulation in China
• Currently has 160 cities with >1million people (vs 9 in USA)
• 257 new cities expected to be built by 2025
• 500 new coal fired power plants to be built in next decade
• 97 new airports to be built in next 12 years
• 50% of the world’s cement production in 2008 from China
• 50% of world’s steel produced by China in June 2009
• 34% of world’s aluminium production in 2008
• 33% of globes titanium sponge & pigment production
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143 153
149233
160
31686
104
34
120
0
100
200
300
400
500
600
700
800
900
1000
2005 2025
Mil
lio
ns o
f p
eo
ple
China's urban population to reach 1 billion by 2025 (source McKinsey)
Megacity (>10m)
Big (5m-10m)
Midsized (1.5m-5m)
Small (0.5m-1.5m)
Big town (<0.5 m)
Back to the Boom…….
39
26 24
34
16 17
8
14
7
1
63
56
49
4239
36 35
17
9
3
0
10
20
30
40
50
60
70
China's share of global commodity demand (source: BHP Billiton)
2002
2009
Back to the Boom…….
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And India is gaining its own growth and developmental momentum
Total Indian
Population (million)
856 1040 1155 1470
Indian Population
Urbanised (%)
26% 28% 30% 40%
Average Global
Urbanisation (%)
43% 47% 50% 59%
220
290
340
590
1991 2001 2008 2030
Indian Urban Population
(million)
+250
0
10
20
30
40
50
60
70
80
90
100
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
% s
hare
of G
lobal G
DP
Composition of Global GDP, PPP basis, (IMF WEO April 2010)
Developing countries (excluding Asia)
Developing Asia
Advanced economies
Back to the Boom…….
15
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0
5
10
15
20
25
30
35
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Investm
en
t as %
of
GD
P
World investment trends, GFCF as % of GDP- (IMF WEO April 2010)
World
Advanced economies
Emerging and developing economies
Back to the Boom…….
0
1000
2000
3000
4000
5000
6000
7000
8000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
tera
watt
ho
urs
Electricity generation per region
Total North America
Total S. & Cent. America
Total Europe & Eurasia
Total Middle East
Total Africa
Total Asia Pacific
Back to the Boom: China is building 2 X Eskom p.a.
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Mining companies have restructured balance sheets and are ready to grow…….
0
5
10
15
20
25
30
35
40
45
50
Gearing ratio Return on capital
employed
Net profit Return on Equity
Effective tax rate
EBITDA margin
% o
r ra
tio
.
PWC Survey of top 40 mining companies "Mine: Back to the Boom" key indicators, 2009
2003
2004
2005
2006
2007
2008
2009
Mining companies have sustained investment in core LT projects related to commodity boom…….
0
2
4
6
8
10
12
Ca
pe
x U
S$
bil
lio
ns
Capital investment by top 40 mining companies by commodity (source: PWC)
2008
2009
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PRESENTATION OUTLINE
Mining and minerals, integral to modern society
The South African Mining Industry
The future
The global mining industry
Back to the “BOOM”
RSA Coal Mining Sector
Coal, key issues:–254.7 MT local production, R69 billion in sales in 2010.
–Only 65.7mt exported in 2010 vs >70mt target.
–Rail constraints big challenge.
–RSA needs extra 100MT of coal production by 2020, +/- 75 MT for electricity generation and 25 MT for exports.
–All coal fields require substantial new investment just to sustain production +/- R100 billion in investment required.
–Unhelpful public debate on coal quality – only 2 collieries had problems and these have been resolved through new contracts.
–Perception that coal mining companies are exporting “Eskom quality” coals to India is again sensationalist.
–Perhaps biggest challenge is to engage effectively in the debates about Climate Change and carbon taxes.
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United States, 26.5
Colombia, 1.6
Kazakhstan, 6.8
Poland, 1.5
Russian Federation, 11.
9South
Africa, 7.4
Australia, 8.9
China, 15.1
India, 13.1
Indonesia, 0.4Other, 6.7
Global Hard coal reserves, 2009 (source: BP)
South Africa has the 6th largest reserves of hard coal
0 500 1000 1500 2000 2500 3000
China
USA
India
Australia
Indonesia
South Africa
Other
Russia
Kazakhstan
Poland
Colombia
Millions of tons
Global hardcoal production 2008 and 2009 (source: IEA)
2008 2009
South Africa is the 6th largest hardcoal producer
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293
214
122
119
110
103
88
77
69
21
7
0 50 100 150 200 250 300 350
Kazakhstan
Russia
South Africa
USA
Australia
India
Colombia
Poland
TOTAL/average
China
Indonesia
Hardcoal: years of production left at current production rates and known reserves (source IEA)
South Africa still has enough reserves to support production
0 50 100 150 200 250 300
Australia
Indonesia
Russia
Colombia
South Africa
USA
Kazakhstan
Canada
Vietnam
China
ROW
World hard coal exports, 2007 to 2009 (IEA)
2007
2008
2009
South Africa remains the 5th largest exporter
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0
10000
20000
30000
40000
50000
60000
70000
80000
2005 2006 2007 2008 2009
SA Thermal Coal Exports by Destination (Source: SACR 2009)
Far East/Asia Europe Middle East Americas Africa & Islands
Million tons
There is a shift of SA coal exports from EU to Asia
Climate change is a big issue for the global coal industry
•RSA government has released a Green Paper on SA response to
GCC and Treasury a paper on Carbon Taxes.
•At global level SA accounts for 1.1% of global GHG emissions.
•In RSA coal generates 94% of electricity, 30% of liquid fuels and
accounts for 70% of GHG emissions.
•COM strong emphasis on practical realities of energy supply, the
need for energy security, the risks of being first mover and ensuring
global agreement is achieved.
•RSA must also meet its own growth objectives.
•Coal has a significant future role in primary energy supply, but focus
must be on clean technologies and carbon capture and storage.
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0 1 000 2 000 3 000 4 000 5 000 6 000 7 000
China
USA
Russia
India
Japan
Germany
Canada
UK
Iran
Korea
Italy
Mexico
Australia
Saudi Arabia
Indonesia
France
Brazil
South Africa
Spain
Ukraine
Million tons CO2
Top 20 CO2 Country emitters, 2008 (source IEA)
Top 5 countries
account for 56% of total global CO2
emissions
South Africa produces 1.1% of total global CO2 emissions, 18th largest emitter
Top 5 CO2 emitters account for 56% of global total
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
45 000
50 000
0 2 4 6 8 10 12 14 16 18 20
GD
P p
er
cap
ita
CO2 emissions per capita
Emissions per capita versus GDP per capita (PPP basis), source: IEA/IMF
India
Brazil
USA
Japan
UK
Iran
China
Russia
Korea
CanadaGermany
South Africa
Strong correlation between GDP/capita and CO2/capita
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Coal
41%
Crude oil
5%
Gas
21%
Nuclear
14%
Hydro
16%
Other
3%
Electricity generation by fuel: 2008 (IEA)
Coal
27%
Crude oil
33%
Gas
21%
Nuclear
6%
Hydro
2%
Combustible
renewables &
waste
10%
Other
(wind, solar,
geothermal)
1%
Primary energy supply by source: 2008
(IEA)
Coal remains important to global energy supply, and will remain important in the future…….
South Africa’s electricity demand will grow as energy intensive sectors grow over the next decade
Almost 50% of total electricity usage comes from sectors that are either targeted by IPAP and the New Growth Path, or are most likely to contribute to growth in employment. Currently these sectors also facilitate the majority of our export revenue
and are crucial to the maintenance of the tertiary sectors contribution to the economy.
Non-ferrous metals
14%
Gold
10%
Electricity
9%
Transport services
8%
Trade
7%Other mining
6%
Petroleum
5%
Accommodation
5%
Communications
5%
Soap
4%
Pharmaceuticals
4%
Real estate
3%
Iron and steel
3%
Water
3%
Activities/services
2%
Meat
2%
Coal
2%
Agriculture
2%
General government
2%
Insurance
2%
Source: Frost &
Sullivan, StatsSA
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0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Ra
nd
pe
r k
Wh
South Africa's IRP2010 revised balanced scenario (RBS) versus impact of R100/ton CO2 tax (which adds 18c/kWh)
RBS RBS with Treasury CO2
The new Revised Balanced Scenario price curve
incorporating the effect of carbon taxation as suggested
by Treasury – adds 18c/kWh to the original RBS price curve
The Treasury proposed CO2 tax, if a R100/ton CO2 is added up to 2020 & then R200/ton CO2 for 2020 to 2040, will add 18c/kWh to the
electricity price
Source: Frost and Sullivan
Practical realities facing South Africa
•Country is semi-arid, so limited hydro potential.
•Country faces food security risks if biofuel is pushed.
•Nuclear is very expensive from a capital cost point of view.
•Solar plant are useful but small (max concentrating solar plant is
about 250 MW).
•Wind power is small in the grand scheme of things:
•To replace on 3000MW coal fired plant would require 15000MW
equivalent of wind to be installed (20% energy availability factor)
•Would require 7500 X 2MW wind turbines to be installed.
•That is 1 wind turbine installed every 240 meters between
Durban and Cape Town!!
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PRESENTATION OUTLINE
Mining and minerals, integral to modern society
The South African Mining Industry
The future
The global mining industry
Back to the “BOOM”
RSA Coal Mining Sector
Mining - The Essential Core Of SA Economy
• Creates 1 million jobs (500 000 direct & 500 000 indirect).
• Accounts for about 18% of GDP (8% direct, 10% indirect & induced).
• Critical earner of foreign exchange >50%.
• Accounts for 18% of investment (9% direct).
• Attracts significant foreign savings (>30% of value of JSE).
• 18.5% of corporate tax receipts (2007 R22 billion, 2008 R33 billion, 2009 R11 billion)
• 50% of volume of Transnet’s rail and ports
• 93% of electricity generation via coal power plants
• 15% of electricity demand
• About 37% of country’s of liquid fuels via coal (R30 billion worth)
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Recent Citibank research note rates South Africa as the richest “in situ” mineral resource holder in the world:
Source: Citibank
0 10 20 30 40 50 60 70 80 90 100
PGM's
Manganese
Chromium
Gold
Alumino-Silicates
Vermiculite
Vanadium
Zirconium Minerals
Titanium minerals
Fluorspar
Antimony
Phosphate rock
Nickel
Uranium
Lead
Coal
Zinc
Silicon
Iron ore
% of global .South African reserves for key minerals, 2008
1
1
1
1
1
2
2
2
2
2
4
4
5
5
6
8
8
8
9
Global rank
SA has significant geological prospects…..
Source: USGS/COM/DMR
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A large share of the industry’s expenditures are captured locally
Source: StatsSA
Other purchases and operating costs, 192.9
Labour costs, 71.2
Interest Paid, 12.2
Depreciation and impairments, 35.3
Taxation, 10.1
Dividends, 25.5
Capital expenditure, 51.5
Income and Expenditure of SA mining industry (2009: source StatsSA), Total Expenditures R399
billion, total income R332 billion
I.E. THE BENEFITS OF SOUTH AFRICAN MINING ARE MOSTLY
CAPTURED LOCALLY!!
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Two scenarios were developed for the forward looking scenarios
Current constraints are
relieved
Constrained by current
bottlenecks
Costs grow at
historic rates
Cost increases are
reduced to half of
historic rates
Cost Management
A‘Low
road’
‘High
road’
CB
D
Pro
du
ctio
n g
row
th
A “high road” is very possible for South Africa’s mining industry…..
Source: McKinsey
For period 2010 to 2020, conservative modeling indicates that a 3.9% growth rate for the non-gold mining sector is
realistically possible, with another >100 000 jobs possible…..
Source: COM/MIGDETT
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19
12
10
8
7
7
7
7
6
4
-1
-5 0 5 10 15 20
China
Chile
Russia
Indonesia
India
Colombia
Australia
Brazil
Peru
Venezuela
South Africa
The global top ten mining countries as measured by growth in mining value added
(2001-2008 real US$ terms)
Source: Global insight
1
2
3
4
5
6
7
8
9
10
13
Rank
However, during the past commodity boom South African mining performed poorly versus its peers…..
South Africa was unable to take advantage during the commodity boom mostly due to domestic issues
• Mining production declined in period 2006 to 2008, despite significant increase in investment in that
period.
– Binding infrastructure constraints (electricity, rail,)
– Red tape constraints (e.g. water licenses)
– Policy uncertainty (changing the rules of the game)
– Mine closures for safety related issues (some valid, some not) –s54’s
– Human capital constraints
– Stagnant productivity and rapidly escalating costs
– Volatility in rand-dollar exchange rate
– Then the global crisis hit
local
International
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Competitiveness drivers
The key threats to
competitiveness of SA
mining are
▪ Infrastructure
(electricity, rail)
▪ Social licence to
operate1
▪ Human capital/ skills
▪ Institutional capacity
The lack of growth is due to a combination of drivers eroding the sector’s competitiveness
SOURCE: McKinsey & Company
Competitiveness threat
Competitive advantage
Mixed picture
Market context
Regulatory environment
Product demandEnabling factors
Infrastructure
Ease of doing business▪ Social licence
▪ Security of tenure▪ Rule of law
▪ Macroeconomic stability
Factor market efficiency
Industry structure
Inherent potential
Natural resource endowment
Human capital/ skills
Geographical factors
Accessibility of markets
Domestic demand
International demand
Regulatory and legal requirements
Institutional capacity
1 Dealt primarily in sustainability and transformation workstreams
Mining Industry Growth, Development And Employment Task-team (MIGDETT)
• Tripartite, leadership driven. Setup in December 2008.
• Long term issues (repositioning the industry for growth):– Must get infrastructure right for the next boom
– Address longer term regulatory constraints
– Develop sufficient human capital to enable the sector to grow in future
– Move to “SA Inc” approach
– WORK IN PROGRESS
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Agreement by tripartite leadership to develop “Strategy For Sustainable Growth And Meaningful
Transformation Of The South African Mining Sector”
• To be developed by tripartite under auspices of MIGDETT
– Competitiveness task team
– Transformation task team
• Mining Charter review part of the process
• Strategy document debated at Mining Summit in late March
• Final declaration signed 30 June 2010
• Revised Mining Charter released in September
• Substantive tripartite declaration on 13 topics signed on 30 June:1. Promoting growth and transformation
2. Infrastructure
3. Innovation, productivity and cost competitiveness
4. Sustainable development in mining
5. Beneficiation
6. Regulatory framework
7. Human resource development
8. Employment equity
9. Mine community development
10. Housing and living conditions
11. Procurement
12. Ownership and funding
13. Monitoring and funding
Proposals to help SA Mining Industry Back on to Growth Trajectory
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PRESENTATION OUTLINE
Mining and minerals, integral to modern society
The South African Mining Industry
The future
The global mining industry
Back to the “BOOM”
Substantial work is being done to get the “rubber” to “hit the tarmac”
• The regulatory task team is discussing amendments to MPRDA.
• There is a review in DMR of problems on licenses.
• The infrastructure task team is working on a matrix of infrastructure constraints per commodity.
• Industry is cooperating with government on wide range of areas to promote competitiveness and growth.
• The future is in our hands………..
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Mining is now back on top 5 priority sector list of government (MIGDETT has played large role)
•All government Ministers need to indicate in their plans and performance agreements how they are going to assist the priority sectors.
•Government is increasingly recognising the important role that mining does play and can play.
•Government has recognised that the exchange rate is too strong.
•Mining has the opportunity to turn around its recent slow growth performance.
•The future is in our hands…….
MINING AND MINERALS MATTER FOR THE GROWTH, DEVELOPMENT AND
TRANSFORMATION OF SOUTH AFRICA
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