“opportunities and challenges facing the south african ... · pdf...

1

“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

2

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.

3

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

4

• 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…….

5




The future




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

6

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

7




The future




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?

8

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


-

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

-

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


-

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…….

11

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

12

—

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

13

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)


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


14

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


15

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


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.

16

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

17




The future




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.

18

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

19

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

20

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.

21

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

22

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

23

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!!

24




The future




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)

25

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

26

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!!

27

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

28

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

29

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

30

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

31




The future



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………..

32

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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