South Africa’s mining companies return to profitability, but sustainability remains a concern

Opinions

Date: 22.02.2018

JOHANNESBURG (miningweekly.com) – Despite wading through what is being dubbed the year of regulatory conflict, South Africa’s mining industry in 2017 has seen a turnaround in financial performance and the first substantial increase in revenue in five years, the latest PwC 'SA Mine' report has shown.

Spot price increases for bulk commodities ultimately led to a 13% increase in revenue to R371-billion and a return to net profit, which reached R17-billion in the year ended June 2017, from a R46-billion loss in the prior year.

“After the price lows of December 2015 and January 2016, the current year saw the dollar prices recover for most commodities, with the exception of platinum. Although some dollar price gains were offset by a stronger rand, the improved prices did bring the industry as a whole back into profitability,” PwC Africa energy utilities and resources leader Michal Kotzé said on Friday.

Lower impairments, which contracted 62% to R22-billion in 2017, also helped lift the industry into a more positive net position, with the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin of 26% equating to 6% growth on the prior year.

“It is encouraging that all commodities improved their Ebitda margins. However, the low platinum Ebitda margin of 12% is still a significant concern and threatens the sustainability of a number of operations,” added PwC assurance partner Andries Rossouw.

During the year under review, coal maintained its position as the strongest revenue generator, increasing its total revenue to R119-billion in 2017, up from R105-billion in 2016, despite its percentage of revenue generated remaining unchanged at 27%.

Iron-ore increased its share of revenue generated, adding R10-billion to revenue.

The improvement in the dollar gold prices and a weaker rand enabled gold revenue to increase 17% to R23-billion, while platinum-group metals, which contributed 22% to total revenue, recorded a R2-billion decline in revenue to R94-billion.

The platinum sector, however, remained plagued by low prices, with no real signs of immediate improvement. The significant restructure of the sectors’ balance sheets is expected to enable the companies to survive a six-month period of low prices.

“No platinum companies are making money right now,” said PwC energy, utilities and mining partner Sizwe Msondo.

The ninth edition of the report also revealed a year marked by a decrease in dividends and market capitalisation, retrenchments across the industry and marginal increases in taxes paid.

“The 2017 year can be described as a year of policy uncertainty and real questions over the long-term sustainability of the industry,” Kotzé said, highlighting the significant drop in market capitalisation during the year to June 2015 levels.

The market capitalisation of the 29 companies reviewed declined 25% to R420-billion.

Gold mining companies suffered a R114-billion, or 52%, decrease in market capitalisation, losing almost all the gains made in the prior year, the report revealed.

However, as at August 31, market capitalisation overall had recovered somewhat to R506-billion.

Capital expenditure remains at ten-year lows of R48-billion, which has negative implications for the long-term future of the industry, said Msondo, who believed that the industry had really been in survival mode over the last five years.

“The long-term nature of mining investments translates into a significant lag in the supply response to price changes. This lag contributes to the cyclical nature of the mining industry,” he concluded.

http://www.miningweekly.com/article/south-african-miners-swing-to-r17bn-profit-2017-09-29/rep_id:3650

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