Sunday / May 19.
HomeMarketsSpectre of regulation and policy changes weigh on mining

Spectre of regulation and policy changes weigh on mining

If you want to check the pulse of the mining sector one of the best places to go is the Mining Indaba in Cape Town.

For this year’s annual gathering, with the sector in a far better place than it was 12 months ago when the mining industry was wallowing in debt, many executives, bankers and government officials may have been looking forward to some warm weather and fine wine.

Yet the mood this week was far from celebratory. In part that was due to South Africa’s mining minister Mosebenzi Zwane. His opening remarks and comments highlighted one of the key issues facing the industrial world — changing rules and regulation.

In a stumbling opening address on Monday, Mr Zwane said a new mining charter would be implemented in about six weeks’ time that would encapsulate the “radical economic transformation” objectives of the ruling African National Congress.

While he gave no further details, the latest draft of South Africa’s mining charter requires companies to keep the level of black equity ownership topped up to at least 26 per cent, even when original investors sell out.

Predictably, this has triggered a furious response from the industry, which has threatened to take the government to court if its views are not taken into consideration.

In a combative press conference following his speech, Mr Zwane said the legal system should not be used as a tool to threaten the government.

“We are here to make the rules and govern and we will do that,” he said, and went on to accuse Anglo American chief executive Mark Cutifani of making comments that were “out of order”.

In his address to the conference, Mr Cutifani said one really had to question the personal motives of those “who paint false and misleading images of the industry today”.

“To not acknowledge the progress we’ve made seems intellectually dishonest. Despite our challenges, we have come a long way,” said Mr Cutifani.

Mr Zwane is a controversial figure in part because of his involvement in the sale of coal assets, once owned by Glencore, to the Gupta family. Meanwhile, Anglo is looking to sell half of its assets in South Africa, the continent’s commodities powerhouse.

Politics and policy aside, there was an air of cautious optimism among many delegates regarding the outlook for commodity prices even after last year’s sharp rally.

At the same time, not many miners were talking up greenfield projects. The uncertainties created by Brexit, the new US administration and policy changes in China meant that running more conservative balance sheets was a priority for companies along with higher dividends and cash returns for investors who stuck by the sector in the downturn.

Indeed, this year’s Mining Indaba coincided with annual results from Rio Tinto and news of a large dividend payment and share buyback.

Equally, there was little talk about dealmaking. What discussion there was centred on gold producers, which have cut spending and exploration budgets and now find themselves struggling to replace declining reserves.

Mark Bristow, the straight-talking chief executive of London-listed Randgold Resources, said that problem could only be solved by a wave of consolidation, arguing none of the large producers had a growth story because no one had invested in the future. 

But given their chequered history of dealmaking — the industry wrote off almost $80bn between 2009 and 2015, according to BMO, a Canadian bank — most gold executives were wary of saying too much about M&A. Indeed, many were at pains to highlight their ability to grow by expanding existing mines. Canada’s Endeavour Mining, which is in merger talks with Acacia Mining, highlighted its plans to increase production by 50 per cent to more than 900,000 ounces by 2019.

“The theme of returning cash to shareholders was paramount, with all companies agreeing on the importance of reducing costs to a level . . . sustainable through the cycle, strengthening balance sheets,” said Richard Hatch, analyst at RBC Capital Markets. 

The one exception was Neal Froneman, the deal-hungry chief executive of South Africa’s Sibyane Gold. He said the company, which has moved from gold into platinum, wanted to buy a South African company with smelting and refining assets once it had digested its latest acquisition. One rumour doing the rounds at the conference was that he might look to buy Lonmin, the struggling London-listed platinum producer.

The Commodities Note is an occasional online commentary on the industry from the Financial Times

Source link