Country-risk strategy and economics advisory firm Eunomix will release its latest study, completed on August 31, at this year’s Joburg Indaba, in which it demonstrates the causal relationship between the decline of the South African mining sector and the local policy environment.
Eunomix CEO Claude Baissac tells Mining Weekly that the study, submitted to the Department of Mineral Resources (DMR) as part of the Mining Charter’s public input, will be presented, distributed and published during the event which will take place from October 3 to 4 at the Inanda Club, in Johannesburg.
The study compares the economic performance of South Africa’s mining sector over the past 20 years with that of Australia, Canada, Chile and Russia: “The study shows that the impact of commodity price fluctuation has been more severe in South Africa than in peer countries,” explains Baissac.
Eunomix submitted the study to the DMR and Mineral Resources Minister Gwede Mantashe last month as part of the public submissions process on the draft Mining Charter.
Baissac acknowledges that the aim of the study is not to make recommendations on how to rectify policy issues, but simply to highlight their effects. Consequently, the company is conducting further research into what a successful policy regime might look like.
Using in-depth empirical analysis, the study has found a clear causal link between South Africa’s policy environment and the decline in the mining sector. Inefficient policy and continual fluctuations in legislation constrained the sector’s economic potential before 2008 and have exacerbated its decline since 2011.
“The term that has been used to describe the sector for the past five years has been ‘uninvestable’ and the data supports this conclusion: investment has been limited to optimising existing operations.”
Baissac further elaborates that “even during the commodities supercycle, South Africa’s attractiveness to new projects was underwhelming in comparison to other mining jurisdictions”, predominantly because the local mining sector was less appealing to investors.
The analysis invalidates the often-repeated assertion that the cause of decline in the country’s mining industry is caused by depleting gold resources.
“While gold reserves depletion has been occurring, our analysis shows that this does not directly correlate with the sector’s decline.” He adds that the trajectory of the platinum group metals industry is a case in point. “South Africa has had a clear advantage in terms of its sheer endowment, but the industry has been in a crisis that cannot be explained solely by commodity prices. Its troubles started well before the platinum bear market.”
Performance has strongly correlated with policy regime shifts since the inception of the Mineral and Petroleum Resources Development Act (MPRDA) of 2002. The MPRDA Amendment Bill has been in and out of Parliament in recent years. The Mining Charter is continuously revised. Ministerial continuity has been low.
“The South African sector has experienced a continual and accelerating regime of policy and implementation missteps. The sector remains the seat of major contestation. Add to this continuous pressure on the cost side and the overall business climate, and it cannot remain a surprise to decision-makers that these have taken a heavy toll.”
Commenting on the study, Baissac states that mining houses’ strategies clearly played a role in the performance curve of the industry. This is implicitly measured in the study. Specific to South Africa, mining investment and mining houses adapted in different ways. “Firstly, the regulatory environment disincentivised investment, and South Africa received progressively less investment. “This is particularly evident in the slow, continuous death of the exploration and junior mining segment. “Secondly, the increasing burden of regulation through continuous revision and instability forced existing miners to progressively downplan their ambitions, and turn toward assets maximisation and geographic diversification.”
Investment sentiment, as measured, for instance, by the Fraser Institute’s global ranking, is not an abstraction. “Investment is sentiment. Sentiment is influenced by policy and the investment climate. Investment turns into economic benefits. “Undermine the first and your entire chain of socioeconomic benefits is undermined.”
A key finding of the study is that declines in key indicators of the economic contribution of mining are matched by, and appear related to, lower investment. The previous government often rejected this critical fact, and many continue to call for policies that would increase broad-based economic distress.
As a result, Baissac explains, the country’s economic potential that is inherent to its geological endowment has gone underdeveloped. This by implication has had a depressing effect on mining’s economic contribution, with deleterious consequences on government revenues, foreign currency reserves, local socioeconomic wellbeing, and so forth.
The study’s implication is that there is an urgent need for a new policy dispensation that focuses not only on providing certainty but also creating a competitive investment environment, Baissac emphasises. He suggests that the current debate around policy in South Africa has been overly focused on policy stability and has made little reference to policy quality.
“The sector needs to be careful of what it asks of government. If it demands certainty, it may find itself in a situation where investors are certain that they do not want to invest in South Africa’s mining industry, and that existing mining companies are certain that they must rationalise operations,” emphasises Baissac.
A key factor at play is the issue of legacy and transformation. It has been a determining consideration and influenced policy. The current state of the Mining Charter process once again highlights how far apart the parties are. And this is extremely dangerous for the causal chain of economic value creation.
Baissac concludes that “the policymaking machine is not working. It is urgent that a new policy formulation model be found to regenerate a crucial sector for an economy which has ran out of steam and has ever fewer options for growth. Mining is the proverbial low hanging fruit. It is high time all parties focus on protecting its potential rather than fight over its spoils. In the first case, the future is bright. In the second, everybody loses”.Creamer Media Deputy Editor: Features