Mining in SA needs structural change to maintain newfound momentum

The mining sector in South Africa appears to have completed a significant recovery in monetary terms, although signs are emerging that the respite will only be temporary if major structural changes are not implemented. This is according to the latest South African mining analysis by PwC.

PwC’s annual review of South African mining has reported a damp sentiment across South Africa in recent years. Mining is a crucial sector in the South African economy, contributing approximately 10% to the GDP. PwC annually collects data from 26 of the country’s top mining companies to gauge the economic situation in the sector

Since the global dip in commodity prices in 2014, mining revenues in the country have taken a substantial hit. Each year’s review of the sector has indicated falling revenues and dipping market capitalisation, particularly of precious commodities such as gold and platinum. Day-to-day commodities such as coal have managed to stay afloat in these turbulent times.

The latest review is among the first to spell good news for the sector. Commodity prices have risen on the back of a weak Rand, while cash flows in the sector have nearly doubled. Dividends in the mining sector are at their highest point in half a decade, spelling promise for investors in the sector.

More good news for investors in mining comes in the form of the sector’s strong performance on the Johannesburg Stock Exchange (JSE), with the sector outperforming the the JSE All Share Index for two years running. However, PwC reports that the current momentum in the sector is not sustainable.

The current fortunes of the mining sector continue to rely on commodity prices and the value of the Rand, subjecting them to similar fluctuations further down the line. In fact, a similar scenario down the line is only likely to hit the sector even harder, given that operational costs are higher than ever, while reserves are depleting.

Despite increased revenues and market capitalisation, production in the mining sector has continued to register a decline, primarily due to falling reserves. Some experts have suggested that further investment in exploration is key to solving this problem, asserting that there are undiscovered deposits to be found. 

The most sustainable solution, meanwhile, is that of digitalisation. In its current structure, the mining sector is inefficient when it comes to costs, processes and environmental sustainability. High-emission activity is now set to cause significant damage to mining companies, in light of the newly instated carbon tax in South Africa, which levies a charge proportional to emissions.

Many have suggested that these operations must be tightened to reduce operational costs.The best way to do this, as emphasised by experts, is the digitalisation of various mining processes. ‘There are substantial opportunities for companies that embrace new technologies within their existing business models,’ states PwC in its report.

‘Although investment in new technologies requires capital expenditure, renewable energy to power mining operations is increasingly being recognised as viable technology. This reduces emissions and could lead to financial benefit as the cost of renewables is rapidly decreasing,’ it adds. 

Several models have emerged to help the mining sector digitally transform. Last year, Big Four accounting and advisory firm Deloitte launched an integrated solution for South Africa’s mining sector, designed to improve aspects of the production process through artificial intelligence and real-time data analysis, among other applications.