“repositioning the south african mining industry for...

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Presentation to Portfolio Committee on Minerals, in Cape Town

By Roger Baxter, Senior Executive, Chamber of Mines of South Africa,

25 March 2011

“Repositioning the South African Mining Industry for Sustainable Growth and Job

Creation”

PRESENTATION OUTLINEIntroduction: Going for Sustainable, Balanced

and Labour Absorptive Growth

The Current Economic Performance of the South African mining sector

Going for Sustainable Growth and Meaningful Transformation

The True Economic Potential of the South African Mining Sector

MIGDETT, unpacking the growth constraints

The Mining Industry Growth, Development and Employment Task Team (MIGDETT)

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South Africa: Going for Sustainable, Balanced and Labour Absorptive Growth

•Progress has been made to get the economy back on to a higher growth path (3.3% 1994 to 2010).

•However, SA’s labour participation rate at 42% is low vs peers (~61%), its unemployment rate is too high (>20%), its levels of income inequality are very high (Gini coefficient 0.59) & too many people are caught in the poverty trap.

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

•All parties recognise that higher levels of sustainable, balanced and labour absorbing economic growth is key to reducing unemployment

•Government has developed the New Growth Path focusing on

economic growth and employment creation.

South Africa

While South Africa’s growth rate has risen to 3.3% p.a. 1994-2009, it is just too slow to meaningfully tackle unemployment & poverty

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

have languished…..

Non-tradable sectors

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

Tradable

Non-tradable sector growth has sucked in imports & created external imbalances, such as large current account deficits…..

Source: SARB

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To ensure more balanced 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.

•Mining has a very large employment, foreign exchange earning and GDP multiplier.








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Mining Industry Growth, Development And Employment Task-team (MIGDETT)

Tripartite, leadership driven. Setup in December 2008.

• Short-term mandate (2008/2009): focus on limiting negative

impact of global financial crisis on RSA mining sector.

• Long term mandate (2010-): to reposition the industry for

sustainable growth and meaningful transformation.

Agreement by tripartite MIGDETT leadership to develop “Strategy For Sustainable Growth And Meaningful

Transformation Of The South African Mining Sector”

– To better understand the real potential of the RSA mining sector

– Unpack the competitiveness & transformation constraints

– Agree on a set of key priorities that need to be addressed

– Move to “SA Inc” approach

– Implement the agreed solutions

SUBSTANTIAL WORK DONE IN PAST 14 MONTHS

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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 (2010 R14bn) & R5 billion in royalties.

• 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

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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

South Africa has significant geological prospects…..

Source: USGS/COM/DMR

Precious metals

and jewellery,

4.7% share,

3.2% growth,

$13.5bn

Coal, 6.2%

share,-2.5%

growth, $3.4bn

Metal Mining and

Manufacturing, 15.5

Hospitality and Tourism,

7.4

Prefabricated Enclosures

and Structures, 0.9

Production Technology, 4.0

Automotive, 5.6

Oil and Gas Products, 3.3

Forest Products, 1.5

Agricultural

Products, 3.6

Chemical

Products, 3.3

Heavy

Machinery,

1.0

Transportation and

Logistics, 1.5

Textile, 0.6

Business

Services, 0.8

The mining and beneficiation cluster remains key to South Africa’s export performance, & can be significantly enhanced

8

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

(2008, US$ billions)Rank

1

2

3

4

5

6

7

8

9

10

South Africa has the world’s fifth largest mining sector measured by real GDP

The South African mining industry is the world’s fifth largest by GDP value…

Source: McKinsey

RSA

South Africa has most of the World’s Top Mining Companies participating in the country

0

50

100

150

200

US

$ b

illi

on

s

The world's largest mining companies by market capitalisation (January 2011)

9

0

5

10

15

20

25

%

Comparison of Revenue by commodity (composition of revenues of top 40 mining companies - PWC)

2007

2008

2009

South Africa has exposure to most of the top 10 minerals in demand at the global level

For period 2010 to 2020, conservative modeling indicates that a 3%-4% growth rate & 100 000 jobs for the RSA mining sector is

realistically possible…..

Source: COM/MIGDETT

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For period 2010 to 2020, conservative modeling indicates that another 90 000 to 100 000 jobs for the RSA mining sector is

realistically possible…..

PGMs38%

Coal14%

Gold32%

Iron ore3%

Manganese1%

Diamonds3%

Other9%

2009, direct mining jobs 491 710

PGMs43%

Coal16%

Gold22%

Iron ore4%

Manganese1%

Diamonds3%

Other11%

2020, direct mining jobs, 580 000

In an optimistic scenario, McKinsey estimates that 200 000 direct mining jobs are possible (creating a further 200 000 indirect jobs in the economy)

Source: COM/MIGDETT/Mckinsey

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

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South Africa’s mining sector has underperformed in terms of economic growth relative to peers

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

South African mining has performed poorly versus its global peers

RSA

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Non-ferrous exploration budgets

$bn nominal

SA’s contribution to global exploration expenditure has declined from 6 to 3% of global spend, between 2003 and 2008

SOURCE: MEG; McKinsey & Company analysis

0

1

2

3

4

5

6

7

8

9

10

11

12

13

SA

Australia

Brazil

Canada

Chile

US

Peru

Russia

Other

20082003

33 40

2 5

5 5

7 7

4 4

21 19

5 3

16 14

6 3

% contribution to

global spend

2003 2008

South Africa’s share of global exploration spend has fallen

RSA mining employment fell from heights of late 1980’s to bottom in 2002 & is now up to about 500 000 people.…..

Source: StatsSA

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MIGDETT, unpacking the constraints to growth


Assessing the competitiveness of the RSA mining sector

•There are both

•Controllable factors -infrastructure, regulatory environment,

management efficiencies, etc.) and

•uncontrollable factors (geology, grade, location, etc),

•that affect the competitiveness of the RSA mining sector.

•The competitiveness assessment looked at six key areas:

•General competitiveness

•Inherent potential

•Market context

•Product demand

•Regulatory environment

•Enabling factors

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At a general level South Africa ranked 54th most competitive economy in WEF 2010-2011 report out of 139 countries

0

1

2

3

4

5

6

Institutions

Infrastructure

Macroeconomic stability

Health and primary education

Higher education and training

Goods market efficiency

Labour market efficiency

Financial market sophistication

Technological readiness

Market size

Business sophistication

Innovation

WEF global competitiveness scores, South Africa vs other Efficiency Driven Economies, 2010-2011

South Africa Efficiency driven economies

South Africa compares relatively favorably with 12 other key mining countries on the problematic factors for doing business

- 2 4 6 8 10 12 14 16 18 20

Inefficient government bureaucracy

Inadequately educated labour force

Crime and theft

Restrictive labour regulations

Corruption

Inadequate supply of infrastructure

Poor work ethic of labour force

Access to financing

Policy instability

Poor public health

Foreign currency regulations

Inflation

Tax rates

Tax regulations

Government instability/coups

Average score per factor

WEF 2010-11, survey of most problematic factors to do business, South Africa vs average of 12 other key mining comparator countries

South Africa Avg of 12 mining comparators (excl RSA)

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Inherent country mineral and human potential:

•RSA has significant geological potential.

•The country does have significant human capital potential.

•However, human capital challenges remain large, the

industry has shortages of engineers, which does impose a

constraint to growth.

•There are areas where South Africa performs well such as

in the ranking of the quality of our Business Schools.

Recent Citibank research note rates South Africa as the richest “in situ” mineral resource holder in the world:

Source: Citibank

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Mining engineers

No.

▪ Even with the

influence of the

global financial

crisis, SA will have a

severe skills

shortage of mining

engineers

▪ The shortage is

likely being

exacerbated by

poaching from other

sectors and other

countries

Pre-crisis scenario

South Africa faces shortages of Mining Engineers

SOURCE: McKinsey & Company (BMI Basic Materials Institute)

340

151

532

731772

2007-13 supplyTalent gap3

652

2007-13 net

project

demand

2007-13

attrition

2013

demand

1 263

2007

vacancies

1 383271

Post-crisis scenario

1 Vacancies from MQA Scarce Skills Survey and JIPSA estimates engineer attrition rates are 10-17% (10% used)

2 Difficult to quantify as many mobile skilled engineers leave for extended periods but are not classified as having emigrated

3 In 2006, 428 mining engineers graduated from SA universities, so this gap is more than 25% greater than this

▪ Attrition includes aging and retiring workforce, but not switching to other industries

▪ Net growth modelled for gold, platinum and coal which represent ~80% of current vacancies

▪ Post-crisis scenario assumes exploration and prefeasibility projects are put on hold

ILLUSTRATIVE

SA Mining facing shortages of engineers…..

SA ranks poorly in terms of the quality of the secondary education system (rank 137 out of 139 for maths & science)….

Qu

ali

ty

Low

High

0 20 40 60 80 100 120

Canada

Australia

China

India

Indonesia

United States

Botswana

Ghana

Chile

Brazil

Tanzania

Peru

South Africa

WEF, quality of secondary education

Quality of educational system Quality of maths & science education

RSA

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SA business schools ranked in top quartile (rank 21 out of 139)…

Qu

ali

ty

Low

High0 20 40 60 80 100 120

Canada

United States

Chile

Australia

South Africa

India

Peru

Indonesia

China

Ghana

Brazil

Botswana

Tanzania

WEF, quality of business schools and access to training facilities

Quality of management schools Availability of research & training services

RSA

Market context:

South Africa’s market context is seen as generally competitive

•The financial markets are world class.

•For example, the JSE is ranked as the world’s 18th largest

stock exchange & is ranked number 1 on quality of regulation.

•South Africa’s financial services sector’s sophistication is

ranked only second to Australia (and above Canada).

•The goods and services markets are generally efficient and well recognised.

•However, there has been challenges in the pricing of certain

inputs, e.g. electricity prices rising very rapidly.

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0 20 40 60 80 100

Australia

South Africa

Canada

India

United States

Chile

Peru

Botswana

Brazil

Ghana

Indonesia

Tanzania

China

Country rank

WEF Ranking of Countries Financial Market

Sophistication

0 20 40 60 80

Canada

United …

South Africa

Peru

Botswana

Chile

Ghana

India

Australia

Indonesia

Brazil

China

Tanzania

Country rank

WEF Ranking of Countries, strength of investor

protection

0 20 40 60 80 100 120

Australia

Indonesia

Canada

Chile

South Africa

United States

India

Botswana

Peru

Brazil

Tanzania

China

Ghana

Country rank

WEF Ranking of Countries Ease of Access to Loans

0 20 40 60 80 100 120 140

United States

Australia

Indonesia

Canada

India

Chile

South Africa

China

Botswana

Peru

Brazil

Tanzania

Ghana

Country rank

WEF Ranking of Countries, Venture Capital

Availability

SA Financial market ranking good, but some challenges for emerging mining companies to raise capital…..

Product demand:

•Commodities markets are back to the “Boom” as urbanisation

and industrialisation in certain emerging economies drives growth

in demand for most minerals.

—

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

7 000 000

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

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Regulatory environment:

• General agreement that objectives of MPRDA of promoting a sustainable, safe, environmentally responsible, growing & transformed industry are NB and globally aligned.

• However, certain gaps in the mining laws, inconsistent application of the laws and long processing times have created uncertainty.

• Other regulatory areas have presented challenges (e.g. environmental permitting).

• The lack of a functioning mining cadastre system has compounded the negative perceptions about the regulatory framework.

• Recent court cases and the nationalisation issue are causing uncertainty.

• Despite the country’s significant policy potential, it has slipped down the global rankings to position 67 out of 79 countries in the Fraser Institute Survey for 2011 for prospecting potential.

Enabling factors:

•SA ranked reasonably well in ease of doing business.

•Transformation - All the stakeholders agree that transformation is a

key component of promoting stability & a long term license to operate.

•Infrastructure – at a general level SA’s infrastructure is ranked as

reasonable, but specific constraints have emerged (rail & electricity)

•Social license to operate (safety, health, environment, etc.,) -

important component of the industry’s long term license to operate.

•Macroeconomic stability – the country has adopted prudent

macroeconomic policies, but volatility in the exchange rate is an issue

affecting long term planning.

•Political stability – SA is a stable constitutional democracy.

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South Africa is ranked 34th easiest place to do business (out of 183 economies)

0 20 40 60 80 100 120 140 160

Protecting investors

Getting credit

Doing Business

Dealing with construction …

Starting a business

Paying taxes

Closing a business

Registering property

Enforcing contracts

Employing workers

Trading across borders

World Bank Ease of doing business, South Africa's country ranking per category (doing business 2011)

2011

2010

2009

2008

2007

BadGood

Infrastructure challenges/opportunities:

Example of Rail

•Only 13% of SA’s freight is carried by rail, but more than half of

Transnet’s business is bulk commodities.

•High rate of derailments and collisions unacceptably high.

•Coal exports have fallen in the last five years as efficiencies on

RBCT line & some supply challenges from mines affected exports.

•Cost effective rail capacity critically important for growth of the

coal, manganese and ferro-chrome sectors.

•Getting rail right presents significant opportunities for unlocking

growth in bulk commodities.

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•Only 62.8 MT coal sent down Coallink line in 2010 vs capacity of

75 MT on rail line and >90 MT capacity at RBCT.

•2011 TFR target is 70 MT, but this is unlikely.

•Accessibility of Northern Coal fields to export rail infrastructure

critical to future development of Waterberg?

Coal exports negatively affected:

constraints constraintsconstraints

The competitiveness analysis showed that South Africa was unable to take advantage during the commodity boom

mostly due to domestic issues

• Mining production declined in period 2006 to 2009,

– Binding infrastructure constraints (electricity, rail,)

– Regulatory framework challenges

– Policy uncertainty (uncertainty regarding possible changes to the rules of the game)

– Challenges around the industry’s social license to operate

– Human capital constraints

– Stagnant productivity and rapidly escalating costs

– Lack of Greenfields exploration & R&D

– Volatility in rand-dollar exchange rate

– The GFC

local

global

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MIGDETT Stakeholders have recognised challenges & are working on the appropriate solutions

• The MIGDETT stakeholders recognise the challenges.

• Realistic assessment of the constraints has been completed.

• Work is underway to resolve the constraints.

• By 2012 South Africa should start doing better on the global rankings (such as the Fraser Institute Survey).

• By 2014, MIGDETT focus is on getting South Africa back into top half of the rankings.

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MIGDETT Milestones, so far..

• Substantive documents on Competitiveness and Transformation

completed.

• These document were debated at a comprehensive Mining Summit

held in late March 2010.

• Final declaration signed 30 June 2010.

• Revised Mining Charter finalised in September 2010.

• Sectoral growth strategy completed and submitted to Cabinet in Dec

2010.

MINING BACK ON TOP 5 SECTOR PRIORITY LIST OF GOVERNMENT

• Substantive tripartite declaration on 13 topics:1. Promoting sustainable growth and meaningful transformation

2. Resolving infrastructure constraints

3. Promoting innovation, productivity and cost competitiveness

4. Promoting sustainable development in mining

5. Encouraging beneficiation

6. Enhancing the regulatory framework

7. Developing skills

8. Enhancing employment equity

9. Enhancing mine community development

10. Upgrading housing and living conditions for workers

11. Broadening procurement

12. Broadening ownership for meaningful transformation

13. Monitoring and evaluating the progress annually

Proposals to move RSA mining on to Growth Path:

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Substantial work is being done to get the “rubber” to “hit the tarmac”

• The regulatory task team is working on 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.

• There is an investigation into issues holding back exploration and

R&D.

• A state owned mining company has been launched to compete on a

level playing field with the private sector.

• The stakeholders are cooperating on wide range of areas to

promote competitiveness and growth.

• The future is in our hands………..

Vibrant, growing, transforming mining sector that helps contribute substantively to growing

the economy, reducing unemployment and making South Africa a better place for all

We have a Vision of a

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Mining and minerals matter for the growth, development and transformation of South

Africa

Conclusion

“repositioning the south african mining industry for...

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