Nigeria is reckoned to be the world capital of oil theft, losing at least 400,000 barrels a day. It has maintained this title thanks to a network ... of criminals among local politicians and security officers who collude with crooked international oil traders and refineries.
It will reinforce existing sector worries around political risk that have tarnished South Africa’s reputation as a top tier mining nation, with an unpredictable regulatory landscape, fears of resource nationalism and difficult community relations driving declining investment.
On 12 August, Exxaro Resources CEO Mxolisi Mgojo, although announcing positive results, singled out recent unrest and poor performance of state-run infrastructure as ‘clearly negative’ to immediate operational stability and long-term investment efficiency and attractiveness.
The overall effect is to significantly tarnish South Africa’s reputation as a top tier mining nation and leave President Cyril Ramaphosa’s investment ambitions facing a considerable battle to succeed when the industrial centrepiece of his country’s economy is now under threat and the worrying figures show rejuvenation is badly needed.
Decline without international investment
The mining industry remains one of South Africa’s most important economic sectors, contributing 8% to 10% of national GDP. Each of its almost half a million strong labour force provides income for nine dependents. But it is vulnerable to global competition for finance and skills, restricting foreign direct investment into greenfield projects and marginal deposits.
In 2020, South Africa’s share of global mining exploration expenditure was $77.4m, down 20.5% from 2019, making it sixth in Africa and only 0.95% of global exploration spend – its lowest place in decades and a devastating statistic for a country whose geological attractiveness should by rights make it a top global player.
Reduced exploration has knock-on effects on the pipeline of investments in brownfield, midstream and downstream mineral value chain projects and the supply chain, and will shrink the industry for the foreseeable future.
AngloGold Ashanti’s sale of the Mponeng gold mine in 2020 was just the latest example of companies divesting to focus on more profitable geographies. Anglo American’s move away from thermal coal operations exemplifies the global pressure the industry faces to reduce carbon emissions. In this area too, South Africa has significant room for improvement.
Anxieties around policy and regulatory uncertainty are compounded by longstanding concerns about the ANC leadership’s handling of its factional divisions. The failure of the national political leadership to prevent political party infighting from escalating into large-scale civil unrest has shocked international investors, reinforced by widespread coverage of looting, vandalism and the failure of law enforcement to intervene.
Years of worsening socio-economic conditions and a culture of impunity emanating from the political class have created a very fragile environment. The apparent absence of police and security forces, the slowness by the national leadership to respond, and reliance on vigilantes in communities was a worrying sign of just how ill-prepared public institutions are for civil strife.
And President Ramaphosa may no longer be able to hide behind blaming ‘bad apples’ within the ANC – the narrative of virtuous reformers struggling against corrupt factions has worn thin. Corruption allegations against Ramaphosa’s ally and minister of mineral resources and energy, Gwede Mantashe, demonstrate how far the rot has spread and cast doubt on the prospect of mining sector reform being conducted with openness and integrity.
State failures and policy uncertainty
The industry also anticipates pressure from the government to increase rents and revenues from mining. While there is wide agreement that the government must do more to tackle the socio-economic grievances that underpinned aspects of the recent unrest, South Africa already has a comparatively high marginal corporate tax rate, and three iterations of the Black Economic Empowerment regulations have left firms frustrated by moving goalposts and fearful of future changes.
The long-awaited new Mining Charter III released in 2019 retained some controversial provisions, including the open-ended power of the minister to make discretionary amendments.
In 2020, South Africa came 60th out of 77 jurisdictions in the Fraser Institute’s Annual Survey of Mining and Exploration Companies report, 4th from the bottom of 13 the African countries in the study. By contrast, Botswana came 11th out of 77 globally and 1st in Africa. There is a risk of policy that further erodes profits, alienates investors and falls short of global best practices in mining regulation.
There is also widespread suspicion that increased revenue would not be sufficient to heal South Africa’s deeper social wounds. Successive ANC administrations talked of the ‘social compact’ between government, business, and labour. But this has become dominated by organised labour, leaving many marginalised, and cyclical labour unrest, corporate anxiety and the violence witnessed in June underline how strained these relationships remain.
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Securing an elusive social licence
These dynamics create the context for what the mining industry calls its ‘social license to operate’ – acceptance by stakeholders, especially at the community level, based on the perception of mutual benefit. Although the recent unrest had little direct impact on mining operations, with MC Mining’s Uitkomst mine being the only one to shut its gates, social challenges are a continual headache for the industry. Rio-Tinto’s RMB closed in June, before the unrest, as the operation has faced repeated bouts of local violence and tension over past years, despite significant efforts to improve community relations.
Community support is difficult to gauge, particularly when large operations border multiple communities. It is also increasingly hard to identify key stakeholders or develop strategies to engage them.
National and local power structures are in flux, and stakeholder engagement requires maintaining relationships with multiple ministries, local administrative bodies and traditional authorities, civil society groups, unions, faith leaders, community leaders and many others.
Echoing throughout these structures are the ANC party and factional allegiances that brought two provinces close to the brink of chaos. Companies are fearful of being caught between the state and its citizens or being cast as the scapegoat for government inability to provide for its people. Securing a social licence to operate in South Africa is becoming increasingly difficult, regardless of community well-being investment.
In the wake of recent events, the pressure is on for President Ramaphosa and his administration to reassert the global competitiveness of the nation’s mining sector.
Rebuilding trust between government and citizens and taking forward the promise of a new more inclusive social compact are vitally important. So too is policy clarity and certainty.
All these challenges remain in the gift of the government if they can move beyond political infighting and rebuild the national brand as a mining destination. South Africa’s geological potential, skills, and capacity for technological innovation remain substantial – they must now be matched by its leadership.
This was originally published at Chatham House.
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