Another bad year for miners
IF you are nervously watching the commodities market, hold your breath; there is still a terrible prospect particularly if you’re a miner in Zimbabwe.
The sector has to contend with a painful new reality of falling commodity prices, squeezed margins, soaring costs, cash conservation and power shortages.
Just a few weeks into 2016, and it is clear the year simply started where 2015 ended: There are growing signs that this year does not look like it will be much better, as prices are expected to continue falling, leaving miners on the edge.
Mines and Mining Development deputy minister, Fred Moyo, a veteran mining administrator and former Hwange Colliery Company Limited chief executive officer, spoke exclusively to the Financial Gazette about threats facing the mining sector, saying the slump in global minerals prices would continue until the fundamentals of supply have stabilised.
Moyo said: “It’s like in the jungle where there is no food, the weaker species are going to die and we just need to make sure that we are not the weaker ones.”
“Our mines must survive; they must usher in efficiencies in internal design of systems, the sector infrastructure, those who service the mines must be efficient, the quality of our labour, our laws on taxation and the cost of money.
“All of us, we have a responsibility. The mining companies must design modern businesses, they must be able to capitalise.
Local miners are falling over themselves to cut costs and are re-evaluating expansion projects more carefully.
Zimbabwe’s major mining companies have already outlined their intentions to reduce their head count and warned shareholders to expect a dramatic fall in basic and headline earnings.
The crisis confronting mines has been compounded by a slowdown in Chinese consumption, which has wreaked havoc in the sector.
China is the world’s biggest consumer of most of minerals and metals.
The Asian giant’s slowdown, coupled by weak economic recovery in Europe and sluggish growth in the United States, has severely undermined demand for commodities and affected prices.
A decade ago, when China’s economy was growing at more than 10 percent annually, it was a very hungry consumer of raw material. Miners around the globe jostled to meet this demand.
This created a “super-cycle” in commodity prices, but now its growth has moderated to around 6,5 percent and its commodities demand is set to remain weak this year.
Godknows Njowa, a mining expert with Venmyn Deloitte & Touche in South Africa who advices mines across the world, does not expect commodity prices to improve any time soon.
“You have just called when I am going to Europe where I am going to advise some mines on how to stay afloat in this environment,” said Njowa.
“In my opinion, this is not going to go away in the next 12 months; prices will remain relatively weak. Maybe in the first quarter of 2017 things will start to improve.
But it’s not just in Africa, that’s how deep this thing is.
“But I can tell you that I have never seen anything like this in the last 15 or so years that I have been in the mining industry. Who would have expected platinum to go below US$870 per ounce?” he asked, rhetorically.
“If you look at the cost curves for that, more than half of production would be closed up. But the biggest danger would be to shut down the mines. It would be very expensive to restart operations because there will be issues about rising water levels in mines and gases in the shafts.
“Instead, it’s advisable to restructure operations and keep them running. Run them low and start rebuilding them up from a lower level as the situation improves.
Njowa said government should not continue to watch while the industry drifted towards the edge.
He said while Treasury may fail to bail out struggling miners, like what is happening in South Africa, it must stop exerting unrealistic demands, through taxes, on miners.
Njowa suggested that the tax regime be looked at once again to make it more competitive and in line with other countries.
“For mines to stay afloat there is need for interventions from government and mine owners to make it work. They need to make calculated moves on how to improve the situation,” advised Njowa.
“If government is willing to listen to the market, there is need to give out a little token not something big. Look at royalties; government wants a flat rate which is different from what the South African government is asking for. They ask for a floating rate,” he said about Zimbabwe’s tax regime.
“Maybe Zimbabwe’s fiscus is a bit small, but it should be able to give concessions on royalties so that mines can remain afloat.
“These are quick incentives not tax breaks, but allowances. This will encourage investors to put more money into mines.
“We cannot afford to close down the mines, if the worst comes to the worst government should subsidise a certain proportion because they have the money.”
The South African government is adopting strategies to save jobs in the mining sector following tumbling commodity prices on the international markets.
President Jacob Zuma’s government has come up with a series of interventions that include boosting the platinum sector by promoting the metal as a central bank reserve asset.
Pretoria has even gone to the extent of intervening in power tariffs and supply disputes between some of the miners and power utility, Eskom.
The Zimbabwe mining industry’s outlook remains highly uncertain for a sector, which has remained the anchor of the economy since 2009, and no one knows when it will get better.
Toendepi Muganyi, president of the Chamber of Mines of Zimbabwe (CoMZ), said as a matter of fact, all commodities were currently experiencing viability challenges on the back of declining commodity prices and high operating costs.
“In order for the mining industry to survive this downturn a multi prong approach by all stakeholders has to be adopted targeting competitiveness, ease of doing business and industry attractiveness in various areas,” Muganyi said.
He said government’s intervention to reduce the cost burden on a multiplicity of taxes and tariffs levied on mines would support the survival of the mining industry during the current downturn
CoMZ chief executive officer, Isaac Kwesu, described the situation as dire and thinks the problems are here for the long haul.
He said prices had gone down to levels below the cost of production and mining firms were therefore failing to break even.
“Our industry is going through difficult times especially with depressed international prices,” said Kwesu.
“The majority of our mining houses are struggling to break even, meaning that viability has been compromised.
“The cost of production has gone up. For the second year running, the sector has recorded negative growth after another in 2014.
“We hope this year will be the turning point as long as fiscal issues that affect performance are addressed.
“Price remains the most hindrance and… prices will remain depressed this year and probably into 2017. And again, this is a big dent to our mines who are struggling to break even.
“It is an all-stakeholders issue; it’s not that one stakeholder has to drive the economy,” Kwesu argued.
The mining sector has emerged as a critical factor in efforts to spur economic growth since Zimbabwe dollarised its economy in 2009. Before that, during a hyperinflationary era, a number of mines had closed owing to a skewed pricing regime and failure by mining companies to retain US dollar earnings.
It took significant cash injections to get these mines back into operation again.
Kwesu said there were “critical areas for key success factors that drive growth and our members have been on record appealing for a number of policy interventions. We hope this will be addressed”.
“Some mining houses for some reasons are to blame for not playing their part but government is equally to blame for not coming up with optimal policies that will make our mining sector drive the economy as anticipated,” he said.
Kwesu warned that Zimbabwe could lose US$1,3 billion in potential export revenue due to a decline in commodity prices on international markets, a situation likely to exacerbate the mining industry’s woes.
He noted that the situation was so desperate that mining operations could be forced to close, particularly in an environment of high production costs.
Two thirds of the industry is under water, with those producing the platinum group metals (PGMs) being the most affected.
Zimbabwe has the world’s second largest platinum resource estimated at 2,8 billion tonnes of PGMs ore.
The price of the commodity has tumbled by its biggest margin in years to about US$869 per ounce, casting a dark cloud in the platinum sector. At its peak, platinum price reached a price of US$1 450 per ounce in 2012.
Costs have gone up by over 85 percent in recent years to about US$1 500 per ounce, meaning miners are losing about US$639 per ounce produced.
Zimplats chief operating officer, Stanley Segula, said there was need to rationalise capital spend, push hard for volumes in order to remain afloat and cut costs.
“The stage where we are, it’s no longer business as usual,” said Segula.
“I tell you, if this massive crash (in commodity prices) is sustained, a massive re-engineering is required because operators are under water in terms of costs, which means the price has gone below the cost of production and we can’t even break even. Prices are quite soft and threatening,” he said.
To produce an ounce of gold, miners require about US$1 200, a figure that outstrips the prevailing gold price of US$1 115 per ounce.
The yellow metal’s prices tumbled by about 32 percent from a peak of around US$1 660 per ounce in September 2012 to a low of under US$1 115 per ounce obtaining in the market at the moment, meaning miners suffer a loss of about US$85 for every ounce mined.
The price of the commodity is expected to continue falling this year on the back of a strengthening greenback.
The narrative of gold is that when there is a weak US dollar, gold is stronger, when there is a stronger dollar, you have weaker gold prices.
However, it’s not only miners that are feeling the pinch from a commodity price rout that is wreaking havoc in terms of hitting profits, curbing investment and pushing producers to scale back on output and postpone plans for expansion.
The dire situation has seen Treasury also taking a hit as minerals are quite influential as far as State budgets are concerned.
Zimbabwe’s economy has been driven by mining growth but price volatilities on the international market — due to fluctuations in global demand for mineral products — have exposed the country.
It’s too bad because government, through its economic blue print, the Zimbabwe Agenda for Sustained Socio-Economic Transformation, has identified the mining sector as a pillar for economic revival.
The mining sector remains the highest foreign currency earner, accounting for about 45 percent of the country’s export earnings but the weakening prices are a cause for concern for the country as it also affects the overall growth of the economy.
It contributes more than US$3 billion to the gross domestic product.
Export earnings for Zimbabwe’s mining sector plummeted by about 17 percent in 2015 due to falling prices on international markets.
Follow us on Twitter on @FingazLive and on Facebook – The Financial Gazette