The Zuma economic nightmare

February 21, 2011

I have often written, going back a few years, that major global resource companies – scared of the usual suspects, the ANC created regulatory environment, labour blackmail, rhetoric, the total absence of security of tenure, blatant theft of mineral rights and the consequent unacceptably low margins and returns and general insecurity – slowly divesting from South Africa. With few major long term projects able to deliver suitable and sustainable returns to justify the risks to these extremely long term investments it would be rather stupid to expect investments and sooner or later South Africa will, for the sake of jobs and development, will have to beg these people to return un terms worse than ever before, conversely they can invite a different entity, China or India, who will most certainly not invest on terms more attractive than that acceptable to current investors.  

For my views I was often ridiculed and laughed at but these days, more and more “reputable” and “valued” analysts and commentators advocate the same views in conferences and publications that I have espoused for a while now. Despite this there are still many who refuse to believe.

It is interesting to note that BHP Billiton, the second biggest company by market capitalisation in the world, lagging behind only Exxon Mobile, are sitting on a pile of cash they do not know what to do with. The South African CEO of BHP Billiton, Marius Klopper, a “boertjie” not intimidated by the “Kill the Boer” song, announced that this gigantic company who dictates terms even to the likes of the mighty China, will embark on a five year, USD 80 billion plan, to expand the resource behemoth. To put this into perspective; $ 80 billion are more than the market capitalisation of Anglo American, the fourth biggest resource company in the world. The sad but not unexpected part of the story is that not a penny of the $80 billion, are destined for South Africa where the ANC government promised 140 000 new jobs in the mining sector (an equivalent of ten mines a year at a cost of $ 1 billion each) over the next eight years.

Unfortunately BHP Billiton is not the only resource company taking a dim view on investments in South Africa. World no 2, Rio Tinto, and numberone gold miner, Barrick are avoiding the country like the plague. And whereas Goldfields previously stated that they were reviewing their exposure to their South African assets, their CEO, Nick Holland has now made it very clear that Goldfields will focus on stabilising (accountant speak for sweating the assets or running the asset into the grouns) their gold output from South Africa by milking their main asset, South Deep, a mechanised operation which will not absorb the jobs lost as a result of winding down their other operations, Kloof, Driefontein and Beatrix. Holland also announced that the envisaged Uranium mine, based on the retreatment of uranium bearing gold mine tailings, will not go ahead. Instead Goldfields, having slipped from being the world’s second or third biggest gold producer less than two decades ago, to number six or seven currently, will develop prospects in Mali, Peru, Philippines and of all places, Finland. Astonishingly Goldfields have found it is cheaper to mine gold in a very developed and expensive, over exploited, Scandinavian country than in South Africa with its vast amounts of known resources.

The strategy of Goldfields to stabilise sweat their existing assets to the maximum extends further. It is an open secret for those with the necessary insight that Anglo American is following a similar strategy. They have in past years, flogged their most valuable assets, locked up in Anglo Platinum, to partners in joint ventures and, in doing so, substantially reduced their risk and exposure to the pernickety politicians belonging to the broad church. In their established operations they have minimised their capital expenditure to the barest minimum. They, Anglo, avoided the capital expenditure that would’ve been required to establish the Stylsdrift Mine and when they could no longer avoid or delay spending and in so doing they reduced their risk by passing the property on to Royal Bafokeng Holdings. The existing operations of Anglo Platinum requires a major Vertical Shaft system in their Rustenburg operations – virtually a new mine at a cost upwards of a billion dollars US – to maintain output. Anglo Platinum instead deferred this capital expenditure, choosing to access the cheaper ore requiring very little capital outlay at their opencast mine near Potgieterust; this in a market that is currently undersupplied; a clear indication that any growth plans requiring large fixed investment will be avoided or deferred until such time as sufficient security returns and risk is reduced to acceptable levels.

Despite this, the ANC continues to promise thousands jobs in mining with the disingenuous Ibrahim Patel telling the ill-informed and the great unwashed, that the last year saw the creation of 17000 jobs in the mining industry, perhaps Patel and his friends in the broad church are thinking of jobs along the lines of those at the infamous Aurora Mines of the Zuma – Mandela family where workers haven’t been paid for more than a year. Patel conveniently omitted to mention that jobs in mining shrunk from 500 000 in 2007, to 346 000 in 2008, 296 000 in 2009 and to 303 000 in 2010; a net loss of 200 000 in three years. “The global economic crisis”, many will point out to which the answer; “Wake up, resource prices and demand are back at pre-crisis levels and the resource producing countries, except South Africa naturally, are coining it. We are too busy destroying a good thing.”


Rats and sinking ships

February 7, 2011

It is official; BHP Billiton’s announced what I’ve been saying forever. They are divesting their coal prospecting and mineral rights in South Africa, in other words they are getting rid of their future in this country. They did say they will be spending $1.5 billion in streamlining her current mines. That means, in effect they will speed up their mining; get us much of that ore, in which they have already invested billions of dollars, out of the ground as soon as possible whilst the global demand for coal is booming. This strategy is also known as sweating the assets and getting the last drop from the cow.

Those easily fooled by the $1.5 billion investment in the dying cow; rest assured $1.5billion is a drop in the BHP Billiton ocean, you will be interested to learn that even Susan Shabangu has seen through the plan and warned the likes of BHP Billiton not too rape resources in their hast to depart these shores.

In the interest of completeness it may serve us well to take note that 4 years ago BHP saw the writing on the wall and flogged the best, or ,at the worst, the second biggest Chrome and Ferrochrome company in the world, South Africa’s Samancor. They followed that with the sale of all their Diamond interests in South Africa and then during the global crisis they moved South African Aluminium capacity to Brazil.

Unfortunately BHP is not the only one who decided that running is the best thing to do, Rio Tinto has done the same and so has Anglo, they are just not saying it in so many words.


The Great South African Mining Disaster

February 24, 2010

Nic Holland, upon taking over at the helm at Goldfields, vowed to close down working places considered a safety risk. Being a man of his word and having the integrity of an old-style accountant he carefully assessed the risks and duly started shutting down workings considered to risky. Having not done the “Mining Math” properly in the first place, he found, perhaps too late, that he will eventually have risk free operations. That was however not the only reality that dawned upon him – he also found no risk means no gold and after all, that is what Goldfields is all about – mining gold. With every risky place they stopped the gold output fell inexplicably; A difficult concept? Not really. Most call it common sense. As the saying goes; you do not make scrambled eggs without breaking a few eggs.

Nic Holland was not the only one trying to get rid of the “risky” operations. Anglo American’s Cynthia Carroll went a bit further and sold all of AngloGold Ashanti, getting rid of a whole whack of dangerous operations in one foul swoop. She went further and then publicly claimed a massive reduction in mining related fatalities at Anglo – a novel variation on the concept of selling your problems to the uninformed – in this case selling your deaths, sweetened with a splattering of gold to the unsuspecting foreigners. Fortunately in this case the foreigners got a bit more than a smattering of gold with the Africa operations that came with the South African assets. My reckoning; if Julius and friends succeed in nationalising the South African mines with compensation the foreigners can get rid of the South African poison pill – the deal of a lifetime.

As this drama continues to unfold, South African mining production continues to fall sharply. At a time when the gold price is at its most favourable in decades, South African gold production has reached an all time low of 232 tonnes, less than half the 490 tonnes produced in 1985 and falling ever faster. Ironically, as the gold production from South Africa was dragged down by labour issues, government regulation and risk aversion, output from the rest of the world, particularly the rest of Africa and China rose sharply.

Looking at the latest round of reporting by mining companies, it is particularly noticeable how many companies reported a great number of production days lost due to safety issues a new inclusion in their reports. As in the case of Goldfields, the South African mining industry will come to the realisation that the easiest way to ensure no risk is to shut the mines down.

With the loss of 15 000 jobs in the mining industry in 2009, a year when resource prices were showing a recovery  from the global recession with the gold price reaching an all time high, South African mineral production continued to fall.   

Having said that, it is particularly noticeable how the cause of accidents and the reasons for Section 54’s, Mine closure orders, are glibly attributed to the owners and management. When an incompetent and reckless miner, holding a certificate issued under the auspices of the relative government department, blows himself and his colleagues up by smoking in an area which he has tested as being laden with methane, management is blamed, the mine is closed down and the bad and twisted – by the Union and the Department of mineral Resources – publicity, loss in production and subsequent revenue loss accrues to shareholder.

No wonder Patrice Motsepe is so keen to give his mines to Julius Inc., compliments the South African taxpayer. He learned from Cynthia Carroll.


Little Lies

February 10, 2010

It is disconcerting the manner in which everybody, from the President, including ministers and Chief executives, twist and distort facts to suit their little agendas. Even worse, is the manner in which they proudly tell their convoluted truths, not in the slightest concerned that their reputations may be harmed should they be exposed?

The same people who claim they are adhering to all principles of good governance unleashes their half truths on a public, punch-drunk from being bombarded by nonsense espoused by the pillars of society.

I am not talking here about politicians from the governing party or even politicians in general. We have come to expect lies and deceit from our politicians. Truth be said, we are disappointed and feel robbed if they fail us in this regard. No. I’m speaking of Cynthia Carroll, upstanding leader of the once mighty Anglo American.

Desperately fighting for survival, the once hailed saviour of a faltering organisation – like the legendary Phoenix or using an example closer to home, Shabir Shaik – rose from the ashes and flattened delegates at the annual Mining Indaba, when she proudly announced a staggering safety performance at Anglo American.

According to Carroll, Anglo reduced the fatalities resulting from mine accidents from 44 in 2006 to 19 in 2009, an improvement of 42% over three years.  A remarkable achievement, unless you dig a bit deeper to find that Anglogold Ashanti, responsible for 32 of the fatalities in 2006 are excluded from the 2009 figures by reason of Anglo American’s disposal of that asset in 2007.

Looking at current Anglo operations it should be noted that fatalities at Anglo Platinum remained flat at 17 – 18 fatalities through 2006 to 2008. In 2009, with fewer people employed and more of their production and revenue coming from joint ventures, resulting in lower risk, fatalities decreased to 13. A reasonable performance? Yes. Spectacular? Not in my book.

What it does teach us is to tell a convoluted story, peppered with twisted facts omissions and half truths. You may get away with it for a while, fooling even the so-called experts and informed. However at some stage you will be caught out and people will snigger when you make your profound statements; some may even tell you to your face that they feel insulted by you underestimation of their intelligence.


The Death of a Minister

February 8, 2010

With eminent miners, Nic Holland’s and Nicky Oppenheimer’s, expression of faith and confidence in mining life in South Africa, according to Susan Shabangu, potential investors and mine owners alike can be forgiven for thinking everything was hunky-dory.

Their belief, that the nonsensical and poorly written discussion document released by the ANC Kindergarten is nothing but a hallucination and a bag of typical Malema hot air, is totally understandable considering the utterances by Jeremy Cronin and Gwede Mantashe on Nationalisation. But then, what do Holland and Oppenheimer know, spending the bulk of their time plotting their divestment from South Africa they are bound to be slightly out of touch with reality.  

Shabangu, in the mean time, having assured investors that mines will only be nationalised over her dead body, must have seen her life flashing by for a moment on Sunday when Chairperson and stop-gap Ex-Deputy President, Baleke Mbete, informed ANC heavyweights that ministers and cadres should familiarise themselves with the content of the much-vaunted aforementioned position paper. As for the hapless white-Messiah, Jeremy Cronin, one can only wonder what the future holds.

It seems Shabangu’s past contributions – notably the shoot-to-kill policy, subsequently hi-jacked in spectacular style by Fikile Mbalula; mentor and friend of Malema – counts for nothing as she fights for her life, so to speak. Jeremy Cronin, unlike Kortbroek van Schalkwyk and Barbara Hogan, despite his many years of experience in struggle politics, still do not know his place in the pecking order.

From Mbete’s stance it is patently clear that the views of Malema prevails with the ANC heavies and the Long Schlong himself, who briefly popped out of bed to put to make it clear which hole he is drilling in a manner of speaking. It seems Malema, the Long Schlong’s love child and favourite son – according to that much respected genealogist, Mr. Ben Trovato, wields a bit more power with the elders than the inconsistent Shabangu and the dapper but naïve Cronin.

My advise to Oppenheimer and Holland; “Hedge your bets and, like Cynthia Carroll and so many others, go to Luthuli House and join the queue at Malema’s door. Perhaps the rotund little boy can find it in his heart to arrange a deal with the new movers and shakers in the Mining Industry, Mandela and Zuma Inc.


Nationalisation – A Matter of Life and Death

February 4, 2010

The nationalisation debate or non-debate, depending on your perspective, could become a matter of life and death it seems. Given the quarters in which the discussion rages at it fiercest, where stabbings and burnings are at the order of the day, some statements by major protagonists could  turn out rather prophetic.

I am referring of course to the spat between the Minister of Mines and the ANC kindergarten. Malema started this dice to death when he stated that nationalization of mines will happen in his lifetime, which means – given the average life expectancy of the South African male being down to 47 – the window for this envisaged nationalization of mines, particularly gold and platinum mines – Malema’s stated target – cannot be too far away. Those having false hopes that the window may be enlarged by Malema’s longevity, think again – the tsotsi’s obesity problem is likely to make the window even smaller and he,  realizing the risk,  are upping the ante on this matter.

Susan Shabangu, in reply to the Tsotsi, and in a desperate attempt to calm the nerves, told mining investors – already suffering jitters when they hear the words South Africa  mining and investment spoken in the same sentence – that nationalization will only happen over her dead body.

Shabangu’s statement are contrary to her position only a few months ago when she made her “State of the Industry” address, stating emphatically that mine owners will wish her dead for various reasons. Ironically, that same mine owners are now praying that she outlasts Julius.

However, those naively pinning their hopes on Shabangu, dare I remind you that the same Shabangu has made a number of U-turns on this subject? The statement by the DMR that state ownership of strategic mineral mines is just another form of nationalisation – nationalisation by stealth so to speak.

Anyone trying to get clarity from Gwede will be left justifiably confused, as Chris Barron found when he interviewed the “Jumping Jack” last week.

As for the leading fornicator, he is too busy building a nation to care about insignificant and boring little debates amongst the minnows. That is the stuff that his “Loottenants” deal with.

Anglo America, hedging their bets will not be derailed by the confusion and Cynthia Caroll, whilst promising a bail out for ESKOM and a great partnership in “strategic” coalmines, are reportedly consuming copious amounts of Chivas with the Tsotsi, discussing compensation for nationalised mines – anything rather than getting into bed with Mick Davis.


Mining Mechanisation – Ten Years On

July 13, 2009

Ten years ago saw the successful introduction of a low profile electro-hydraulic mechanised drill rig, Sandvik’s Axera LP Drill, specifically designed for application in South African narrow reef hard rock mining. This completed the process of mechanising chrome mining in South Africa’s Bushveld complex, a programme that started in 1985 with the introduction of the first Load Haul Dumpers on chrome mines in Rustenburg. The Axera LP Drill became one of the most commercially successful machines introduced in the South African mining industry.

By 2005, South Africans chrome mines were producing 70% of total ore output of 700k tons per month, utilising machines. Technically this revolution, after previous unsuccessful attempts at mechanisation was spectacular and had a major impact on the successful implementation of mechanised mining in the platinum industry, so much so, that the total tonnage derived from mechanised mining in platinum mines has grown from zero in 1990 to 1.5 million tons per month by 2008. Production costs of mechanised chrome ore have become very competitive and it is now the preferred production method, it is no coincidence that the some of the cheapest platinum producers, Aquarius and Mototolo, are also mechanised. Add to the benefits mentioned the favourable safety impact of mechanised mining and the choice seems very obvious and straightforward and the visionaries who single-mindedly promoted and implemented mechanisation may be forgiven for feeling smug when looking at their achievements.

Taking a more holistic and detached view of the unfolding process, it is easy to question the astuteness with which our heroes set about the task of replacing men with machines in South African mines. With the current, unacceptably high levels of unemployment in the country, the wisdom of mechanisation in mines must be considered along other socio-economic factors that drive employment, wealth creation and other factors creating value to society. Mining, along with agriculture and manufacturing remains one of the biggest employers in South Africa and anything that has a negative effect on employment opportunities will, quite rightly, be questioned. Fortunately, the visionaries responsible for mechanisation do not have to feel alone in their guilt, government policy and trade unions did more than their fair share of job destruction and contributed more to the destruction of jobs. Unfortunately they wrap their contribution in righteous packages, wrapped up as “Rights of the oppressed and exploited worker” and “Transformation of an unfair society”, giving them the moral right to destroy jobs.

In most normal market driven economies, the move from man to machine follows a set route. The typical road map starts with an oversupply of labour, manually producing products of value. As production increases, unemployment drops, wages goes up resulting in thinner margins and the search for more efficient production methods, inevitably machines. Skills improve to suit the machines and the cycle repeats. In the case of socially engineered economies, especially the less sophisticated ones like South Africa, machines can enter the production process for very different, and often wrong, reasons.

The politically correct motivation for machanisation of South African mines has been improved safety, decent jobs, up-skilling of employees improved salaries the loss of traditional skills because of HIV/Aids and the low-esteem in which the mining industry is held, globally and especially in South Africa, as an employer. I often think people consider mining as a small step ahead of the noble pursuit of sewer engineering. Truth however is, despite the negative perceptions of mining, perpetuated by the ANC Alliance, and their obsession with so called “decent and meaningful” jobs, millions are still prepared to work in mines for market driven wages, a view reinforced by the recent exposure of the extent of illegal mining activities in defunct mines.

It is however not a coincidence that the mechanisation  initiatives in the South African mining industry coincided with the liberalisation of labour law and the rise of black trade unionism on the mines. That chrome mines, despite their relatively low profitability, became leaders in mechanisation is also no coincidence. Chrome mines were always beset by highly volatile markets and wildly oscillating price curves, with the commensurate fluctuation of labour requirements. They recognised the potential opportunity proffered by mechanisation to effectively counter the potential crippling cost of retrenchments and disruption associated with it. Power of machines meant less power to radical unions. Higher skilled people not only meant higher pay, but also higher productivity and less hidden cost associated with a large lowly skilled but powerful workforce. The combination of out-of-control input cost, driven largely by the labour component, unreliable output levels and the physical threat to life and property, posed by militant and highly politicised trade unions, made for a compelling argument in favour of mechanised operations.

Government policy and trade unions must accept a large proportion of causal blame for this economic anomaly. By turning an industry, which should be the backbone of our economy, into a pariah industry, stigmatising it as an “enemy of the people” on par with the apartheid regime and the National party, was irresponsible and devoid of truth and reason, but possibly understandable. It is unforgivable for union leaders and people in government to persist with the perpetuation of that myth at this point of our history, thus continuing the fostering of distrust. To suggest that mining companies are singularly obsessed with the exploitation of workers borders on economic “hate-speech”. The single-minded objective to create a protected competition-free workplace at any cost cannot be tolerated any longer. As long as these “heroes of the poor”, with the active support of government, persists with this madness, jobs will be destroyed and poverty will increase.

It is estimated that the mechanisation of chrome and platinum mines resulted in the loss of at least five thousand conventional jobs in the last eight years. This loss in jobs could have been bigger, had it not been for the slow rate of skills development. The lack of adequate skills has been the single-most critical constraint in the rapid advance of low-profile mechanised mining.

In the mean time, initiatives to turn resources into profit will drive the innovators to find solutions. As things stand, the mechanisation of ultra low, flat dipping, ore-bodies are well advanced and requires skill development and fine tuning before it will inevitably, become the stoping method of choice in platinum mines. Continues Rock Cutting is far advanced and current unrealistic wage demands puts a smile on the faces of the pioneers of this groundbreaking, pardon the pun, technology.

To correct the situation whilst creating a competitive business environment a change in attitude by stakeholders are required. I am not advocating a free-for-all attitude bur rather a joint strategic approach focused on realistic market related wages and the best mining techniques, taking in consideration technical aspects, sound business principles and socioeconomic requirements.  To survive in a competitive world we need to be competitive and smart, face up and understand mistakes, and as stakeholders commit to elevating the South African mining industry to global leadership.