Downgrades to curtail prospects in mining industry
Warren Beech, the head of mining at law firm, Hogan Lovells, said on Friday that the mining industry would not be spared the effects of the recent downgrades in the sovereign ratings, which included higher borrowing costs.
“The cost of borrowing will go up The mining companies raise money, whether it is from shareholders or financial institutions. Investors get nervous because they look at the political and financial risks,” said Beech.
Ratings agencies S&P Global and Fitch's recent downgrades, are expected to increase the cost of capital, weaken the currency and raise inflation.
Beech said the downgrades came just as optimism in the mining industry was on the rise. "We had a good first quarter,” he said.
After putting on hold projects in the wake of the global financial crisis, mining companies last year decided to revive some of their shelved projects.
“It takes a while to get the projects going. It can take up to a year,” he said. “But the downgrades could prompt mining companies to rethink some of their projects.”
In recent data, Statistics SA said job losses slowed down last year, while mining production grew by 3.2percent in the first two months of this year.
Beech said when the industry stabilised employment figures would also settle from the steady fall that had been experienced since 2012.
“Each year, the employment has been going down,” he said.
Read also: Fitch follows S&P, downgrades SA
Chamber of Mines chief economist Henk Langenhoven said the rate of job losses had waned.
Langenhoven said between the end of 2015 and the end of last year, job losses amounted to 4162.
"During 2016, this slowed down even further to 2651 but, disappointingly, increased to 2902 between the last two quarters of last year, Langenhoven pointed out.
Despite the renewed optimism, Beech pointed to the rising costs of compliance among factors the industry grappled with.
He said the departments of mineral resources, water and sanitation, and environmental affairs had increased their focus on compliance. “There is a cost associated with compliance,” he said.
But he said the emphasis on compliance was justified, given the industry’s performance in health and safety. “I understand why the Department of Mineral Resources is enforcing compliance,” said Beech.
He also cited ongoing uncertainty in the mining sector as a result of delays in the finalisation of the reviewed Mining Charter.
Speaking at this year’s Mining Indaba in Cape Town, Mineral Resources Minister Mosebenzi Zwane said his department would gazette the revised charter before the end of March.
In a statement last month, the department said the charter, which is a regulatory tool to effect transformation in the mining sector, was being finalised, “following extensive consultations with stakeholders, as well as consultations with the cabinet.”
Beech said the delay in the finalisation of the charter created uncertainty.