SA’s mining industry sees steep decline in financial performance

SA’s mining industry sees steep decline in financial performance

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The 2015 financial year has proved to be extremely challenging for South Africa’s mining industry. Local cost pressures, labour action, and a continuing downswing in commodity prices have resulted in shrinking margins and impairment provisions.
Mining companies are grappling to improve productivity in order to address the demanding global and local mining environment.
These are some of the findings from PwC’s seventh edition of ‘SA Mine’, a series of publications that highlights trends in the South African mining industry, released by global consultancy, PwC.
The mining industry continues to be marred by labour unrest with four gold mining companies continued to be locked in a three-month wage ‘stalemate’ with unions and the pressures of a recent coal strike mounting.
Michal Kotze, PwC African mining industry leader, says, ‘The message to miners is clear: “Continue to focus on costs, refocus on your core business and carefully evaluate growth opportunities.” It certainly will make for some interesting planning and forecasting discussions in the coming year.’
The 2015 financial year saw the declining trend in market capitalisation continue with few, if any, companies left unscathed. Market capitalisation for the top 35 companies declined to R414bn ($31.6bn) as at June 30 2015 (compared to R675bn as at June 30 2014). The decline continued when compared to market capitalisation as at September 30 2015 of R304bn, resulting in an aggregate decline of R371bn when compared to June 30 2014.
Although iron ore and coal prices were the most severely impacted, platinum and gold mining companies have not escaped the continuing downward slide in commodity prices. South Africa’s main revenue generating commodities haven’t experienced real prices as low as those experienced in 2015 in ten years, and it is not certain yet if or when the prices will start to recover.
Despite a continued reduction in prices, coal remains the highest earning commodity in South Africa. Coal had a solid performance over the last decade, with marginal increases in production in the last few years. The long-term decline in gold production was temporarily halted in the last two years. This decline is indicative of the ever-increasing depths of existing mines, technical difficulties experienced by start-up operations and a continually growing base. Platinum group metal (PGMs) production has been severely impacted by industrial action since 2012 and by mine enclosures in the low-price environment. In the absence of a meaningful price increase, it is unlikely that platinum production levels will increase from the current lower base.
The message to miners is clear: ‘Continue to focus on costs, refocus on your core business and carefully evaluate growth opportunities. Financial performance for the South African mining industry in 2015 was extremely challenging and downcast,’ says Andries Rossouw, PwC Assurance Partner. This year’s cash flow is the worst since the financial crisis in 2008 and reflects the margin pressure and liquidity concerns experienced by the industry. The free cash flows generated were insufficient to make existing borrowing repayments, let alone distributions to shareholders.
Revenue only increased by a mere 4 percent or R12 billion on last year.
Operating expenses increased by 14 percent, which is higher than the 13 percent of the previous financial year. However, when companies affected by the platinum strike are excluded, the increase climbs to 15 percent. Labour costs still remain the biggest cost component in the local mining industry. The share of labour costs decreased marginally from 47 percent to 45 percent in the current year.
The 2014 period saw record levels of impairment charges being recorded within the mining industry. In 2015, the industry saw impairment charges as a percentage of capital expenditure reduced to 40 percent, which is still above the 35 percent four-year average. Net profit reduced by 75 percent to a mere R2bn despite a R26bn reduction in impairment provisions. The EBITDA margin is 22 percent in the current year, down 7 percent on last year.
The mining industry is faced with numerous challenges and risks which need to be effectively addressed. When one compares the risks facing the mining industry from the prior year to the current year, overall they have not changed. What has changed is the priority of rankings allocated to the different risk exposures. In the current year, most companies increased their focus on environmental compliance and liquidity risk.
Rossouw adds, ‘Many mining companies are in the process of renegotiating the terms of their debt facilities with financial institutions, or will be doing so in the near future. Given the current environment of low commodity prices and high production costs, it seems inevitable that some companies may not be able to make large terminal repayments from profits and may have to enter into negotiations with loan providers in order to agree on more workable arrangements.’

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