South Africa Mining Report Q3 2013 - New Study Released

The past decade of stagnation and decline in South Africa's mining sector is set to end as several projects across South Africa's vast mineral wealth come online in the next five years. We expect South Africa's mining sector value to grow by an annual average rate of 0.6% over the forecast period, from US$32.1bn in 2012 to US$33.1bn in 2017.

South Africa's mining sector is amenable to investment in the sector, with few obstacles confronting foreign investment. The government is generally stable and its business environment is one of the best on the continent. While South Africa's mining output growth is set to pick up over the coming years, we expect the country's share of global output to continue to decline as other major mining countries see faster rates of growth, most notably China and Australia. In addition, we expect investment, particularly in gold, to be increasingly attracted to low-cost, high resource opportunities in the rest of the continent such as the Democratic Republic of the Congo and Ghana. This scenario is likely to be replicated in the diamond and iron ore sectors as growth elsewhere, mainly Zimbabwe and West Africa, respectively, makes South Africa less attractive for opportunities.

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Following the massacre at Marikana in August, we expect the government to impose greater regulation on the mining sector, which will increase costs for companies operating in the country. This will most likely take the form of more stringent safety regulations and working conditions. While we do not expect nationalisation to occur, it is likely that the government will seek to appease more radical elements within the party and electorate by adopting some form of resource nationalism such as higher taxes or a share of projects owned by the state. Finally, the precedent set by Lonmin offering a 22% pay rise for workers has given a benchmark for future pay negotiations. While we do not expect this 22% to be replicated, it is likely that workers will seek double-digit wage increases over the coming months. Given that mining sector margins in South Africa are among the lowest in the world already and wages account for around 50-60% of mining companies' costs, this will likely make South Africa an even less attractive investment destination.

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