The mining sector was confronted with an extremely volatile 2022, with three core challenges: Russia invading Ukraine, Eskom's load shedding and Transnet woes, both port and rail.
Business Report spoke to economists and mining industry players to find out how they fared this year and what 2023 might hold.
According to Anchor Capital investment analyst Seleho Tsatsi, when Russia invaded Ukraine, commodity prices soared as the market feared supply shortages, given Russia's importance as a supplier for many of these metals.
He said those fears subsequently eased, and some prices started to revert to pre-invasion levels.
"The anticipated easing of zero-Covid policy in China in the fourth quarter has since led to another run in commodity prices," Tsatsi said.
In the first half of 2022, commodities, such as gold and oil, were trending higher due to the escalation of the dispute between Ukraine and Russia.
Coal prices
Tsatsi said coal prices were expected to remain higher for longer as demand stayed strong while supply challenges remained.
"If you look at the multiples of coal companies, they generally trade at low single-digit P/Es (price to earnings). Part of this is likely due to ESG (environmental, social and governance) considerations, but another contributor to the low multiples is the market's uncertainty over how long coal prices stay high."
Earlier this year, coal mining firm Thungela Resources said coal prices had been driven by demand, especially from Europe, whose energy supplies have been disrupted following Russia’s invasion of Ukraine.
Benchmark coal prices averaged $276.57 (R4 841) per tonne for the year to date, compared to $124.11 per tonne last year.
Platinum group metals
Platinum group metals (PGM) miners' shares had had a strong fourth quarter, but generally, it has been a challenging year for the sector.
"The so-called 'love triangle' between Northam, Implats, and RBPlats has added a layer of uncertainty for investors in the sector," Tsatsi said.
Northam Platinum and Impala Platinum (Implats) are involved in a bidding war over acquiring Royal Bafokeng Platinum (RBPlats).
Meanwhile, Anglo American Platinum said it lost 105000 ounces in PGM production this year, or nearly 3% of its total refined output, due to power cuts in South Africa meted out by power utility Eskom.
"In addition to Eskom, the sector has operationally had issues of high-cost inflation, load shedding and volume challenges. Next year may be challenging depending on how deep the economic downturn turns out to be global," Tsatsi said.
Gold
Harmony Gold in August said it had very difficult mining conditions but had to prioritise its capital. The company paid a dividend when it spent a lot of money on capital, and because of that, it decided to put some projects on hold.
During an interview with Business Report earlier this month, Harmony Gold CEO Peter Steenkamp said: “We think we can do both, spend the money on capital and then also be able to pay a dividend. We are happy with the dividends. Paying it, we believe, shows our confidence in our future.”
Umthombo Wealth Equity and ESG analyst Sandile Magagula said gold mining firms, in particular, had reduced net debt /Ebitda to almost nothing.
“For most mining operators, the post-Covid-19 era has opened an opportunity to invest back into operations and new production. This should see capital structures quickly reverting to pre-Covid level depending on life of mine and pace of moderation in the commodity market,” he said.
According to Magagula, the challenge for the mining sector is investing on top of the cycle with earnings seemingly having peaked if not plateauing for some.
“The biggest differentiator in the 2023 financial year would be those operators who can allocate capital sparingly, ability to preserve balance sheet while maintaining robust dividend flows to shareholders,” he said.
Magagula said miners focusing on aggressive balance sheet growth would not be able to pay good dividends, and investors would have to wait longer to realise returns on invested capital, which could be realised elsewhere in a short space of time.
The question remained whether the commodity cycle had peaked or is yet to peak, given what is going on in the Chinese economy, he said.
“For instance, in the gold sector, we see companies like Pan African Resources and Harmony investing more than 89% of Ebitda and 60% of market capitalisation, respectively, in the next 12 months to 36 months, while companies like Glencore and Thungela are looking to distribute 40% to 50% of their current market cap in dividends and buybacks over the same time frame.
“These are the key contrasting differences that make a good case for short- and long-term investment decisions. So, the focus would be on total returns and low-risk organic growth projects type of capex initiatives,” he said.
Looking ahead, some major commodity firms do not expect a bountiful 2023.
Tsatsi said: “Given the mining cost inflation, load shedding, and Transnet challenges, we may see volumes come under pressure next year. Those supply challenges may be significant in certain parts of the mining industry.”
In line with this, in its recent results, diversified mining firm Anglo American said production across its operations would be lower than expected in the next couple of years.
Anglo’s operations have been negatively affected by everything from logistical issues and extreme weather to fallout from the pandemic.
Meanwhile, mining and commodity trading group Glencore also decreased its forecasts for 2023 on most of its commodities. Copper production at Glencore's Katanga mine in the Democratic Republic of Congo was affected by issues including grid power instability, higher volumes of acid-consuming ore, and incursions by artisanal miners
Minerals Council South Africa’s head of communications, Allan Seccombe, said the difficulties in Eskom and Transnet Freight Rail imposed constraints on the South African mining industry during 2022.
“Nothing we have seen to date inspires confidence that these challenges will be quickly or easily resolved in 2023,” he said.
He said the Minerals Council applauded President Cyril Ramaphosa’s reform of the energy market in July 2022 by encouraging private sector construction of renewable energy projects.
“However, the capacity constraints on the grid do indicate that many of these projects will, by necessity, be for their consumption,” he said.
According to Seecombe, the mining industry has a project pipeline of about 6.5 gigawatts of solar, wind, battery storage, and hydrogen projects worth more than R100 billion.
“These projects could reduce demand on Eskom’s generation units and give the utility the space it needs to conduct urgent maintenance.
“The Minerals Council is a proponent of private sector participation in resolving the rail constraints that we estimate will cost the coal, chrome, ferrochrome, iron ore, and manganese producers R50 billion in lost revenue this year compared to R35bn last year when deliveries are measured against contractual targets," he said.
He said failing municipalities and high levels of unemployment show no signs of abating which poses a risk to not just the mining industry but the broader country.
“One of the most pressing issues for the government to tackle is the high level of crime, which is affecting all sectors of society,” he said.
BUSINESS REPORT