South Africa losing favour among mining investors

2012-JAN-25

Considering all the developments that have taken place in South Africa in recent years, it is unsurprising to find the country's mining industry in decline. Miners are being forced to search for minerals at ever greater depths owing to the depletion of more easily extracted deposits, while growing labour unrest and decaying infrastructure adds to the difficulties facing mining companies in the country. According to the latest South Africa Survey published yesterday, South Africa’s appeal to mining investors has “declined dramatically since 2006”.

This study, published by the South African Institute of Race Relations, confirms what has long been predicted by informed observers, and should not come as a surprise to investors. According to this survey, which comprises 79 countries, in 2010 South Africa was in 67th position in the list of investors’ favourite countries – a significant drop from the 37th position it held in 2006. The majority of investors surveyed were especially concerned about legal and regulatory uncertainty. Recent years have seen many lawsuits concerning land ownership, and the populist verdicts delivered by the judiciary have scared away many foreign investors.

Costs have also been increasing across the whole South African mining sector. For many companies there, production is only profitable at a gold price of $1,600 per troy ounce, as increases in exploration costs pile pressure onto companies. While in recent years gold and diamonds were still mined at lesser depths or at open pit mines, today the search for minerals is often performed at a depth of thousands of metres. This requires highly-expensive equipment, which also contributes to increasing production costs. South African gold production will remain profitable as long as the gold price stays at or above its current price level of $1,665 per troy ounce. Nevertheless, the profit margin will be smaller than in previous years.

Extended strike activities among miners and continuous power outages have also been weighing on inverstors' mood. Nationwide strike activities reached their peak last summer, with miners demanding increases in wages, improved health care and improvements in working conditions. Furthermore, mining companies were greatly damaged by continuous power outages, as production had to halt for extended periods and some workers were trapped at great depths.

According to experts, this situation – which has been deteriorating over recent months – could affect the supply situation at the global commodity markets. South Africa produces gold, diamonds, palladium, and 75% of the world’s platinum. If these legal and infrastructure problems persist, the prices of these metals could be forced higher.