THE REGULATORY ENVIRONMENT AND ITS EFFECT ON COAL MINE DEVELOPMENT
Roger Baxter Chief Executive 4 February 2016
PAGE
This is the Mining Industry
“Long Cold winters and Short beautiful summers” Chamber presentation to IHS Energy conference
PAGE
2
More than half of NDP priorities can be tackled by mining
Economy and employment Economy infrastructure – The foundation of social and economic development Environmental sustainability – An equitable transition to a low-carbon economy An integrated and inclusive rural economy Positioning South Africa in the world Transforming human settlement Improving education, training and innovation Promoting health
Chamber presentation to IHS Energy conference
PAGE
3
Mining matters for the growth, development and transformation of South Africa
Capital goods: • Equipment • Machinery
Direct Services: • Geological • Engineering • Health and safety • Education skills
MINING
Supplier Industries: • Manufacturing • Chemicals • Consumables (e.g. diesel, timber) • Rail • Port • Electricity
Exploration Infrastructure development Mine development and operating Treatment (Washing – e.g. coal, sizing e.g. iron ore, smelting e.g. precious metals)
Related Services: • Financial services • Banking • Stock market (JSE) • Auditing and consulting services • Business services
Refining (Pure Gold, PGM, Ferro Alloys)
Manufacturing
- Autocats - Chemicals/liquids/ferilisers
- Steel/alloys - Jewellery
- Electricity - Liquid fuels
Energy - Methane gas for FCs
End consumer markets
Chamber presentation to IHS Energy conference
PAGE
4
Mining matters to South Africa In 2014, the South African mining industry contributed: • 7.6% to GDP • Around 15% to FDI
Sector contributions to mining minerals exports in SA (2014)
• 20% of private investment
Gold; 17
• 1,4 million jobs
PGM; 26
• 25% of exports Other ; 8 Chrome; 2 Manganese; 6 Diamonds; 3
Iron ore; 20 Coal; 18 Source: Chamber of Mines estimates; StatsSA
Chamber presentation to IHS Energy conference
PAGE
5
SA Coal mining sector – burning issues Falling Coal export prices (-60% since 2012) Some areas of policy uncertainty – especially on strategic minerals and export restrictions (which the industry thought were resolved) Some policy and regulatory challenges (and various government departments wanting to add extra costs on to coal mining – e.g. Environmental legislation) Unexpected upward revision in coal royalties (change to the base calculation), resulting in large unplanned increased in royalty for industry Some infrastructure constraints (but not all players take up export entitlements) Water management and ability to feed back into water supply Falling productivity Rapidly escalating costs
Chamber presentation to IHS Energy conference
PAGE
6
South Africa’s share of the global total has fallen from 14% in 2004 to 8% in 2014
Coal production Million tonnes
Total SA coal production and global export thermal coal market share 300
16%
250
14%
200
12%
150
10%
100
8%
50
6%
0
4% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E Export
Eskom
Other local
Export global market share
Source: SA Chamber of mines, SAIMM, Industry research Chamber presentation to IHS Energy conference
PAGE
7
Competitiveness in mining is driven by multiple factors Competitiveness drivers Market context Factor market efficiency
Performance outcomes Value add Production volumes Investment
Production
Industry structure Inherent potential Natural resource endowment Human capital/ skills Geographical factors
Enabling factors
Product demand Infrastructure Accessibility of Ease of doing business markets ▪ Social licence Domestic ▪ Security of tenure demand ▪ Rule of law International ▪ Macroeconomic stability demand Regulatory environment Regulatory and legal requirements Institutional capacity
Costs
• Labour cost • Other costs
Sustainability outcomes ▪ Transformation Translevel formation ▪ Societal contributions Safety, health, & environment
▪ Occupational ▪
health and safety Environmental impact
SOURCE: McKinsey & Company
Chamber presentation to IHS Energy conference
PAGE
Mining has a set of characteristics that include: It is a high risk industry, with long lead times from exploration through to mine development and ultimately through to closure. It is very capital intensive and a large portion of the capital is spent in the development of the mine. It is exposed to cyclical commodity markets. It is generally a “price-taker” and cannot pass on cost increases to the final consumer. It is geographically captured. It requires access to cost competitive and efficient infrastructure. In order to encourage investment into mining, policies need to recognise the characteristics of mining and help reduce the risks of investment in long term projects.
Chamber presentation to IHS Energy conference
PAGE
9
Given long life cycle, mining needs predictable, stable and competitive policy and regulatory environment
Mining Asset Lifecycle
Explore
Evaluate (proofing)
Cash flow over life cycle
Develop
Mine
Closure
+ -
Price cycle Chamber presentation to IHS Energy conference
PAGE
10
Creating a successful coal mining sector
More effective problem solving partnership between government, business and organised labour
Regulatory and legislative environment that is stable, predictable and competitive
Stable and constructive labour relations environment and better social license to operate
Access to available, efficient and cost effective infrastructure (electricity, rail)
Solutions to improve productivity (next generation mining) and reduce cost pressures
Chamber presentation to IHS Energy conference
PAGE
11
South Africa ranked 64/122 most attractive mining investment jurisdictions in the 2014 Fraser Institute Survey (we should be in top 20) 83,8 83,6 83,3 82,9 82 81,5 81,4 80,7 80,1 79,7 78,3 78,1 77,2 76,4 76 75,7 75,5 75,5 75,1 74,9 74,9 74,8 74,5 72,8 72,4 71,5 71,5 70,5 70 69,6 68,5 67,8 67,6 67,3 66,6 66,3 66,2 66,1 65,3 64 62,9 62,6 62,3 61,6 61,5 61,1 60,4 60,3 60,2 59,1 58,9 58,5 58,4 58,1 57,8 57,6 55,3 55,2 55,1 53,2 53 52,8
Finland Saskatchewan Nevada Manitoba Western Australia Quebec Wyoming Newfoundland & Labrador Yukon Alaska Ireland Sweden Chile Utah Northwest Territories Minnesota Salta Arizona South Australia Idaho New Brunswick Alberta Ontario San Juan Namibia Botswana Queensland British Columbia Nunavut Peru Northern Territory Colorado Mexico Montana Catamarca Michigan Zambia New Mexico Tasmania Morocco Greenland Nova Scotia Norway New Zealand Jujuy Myanmar Ghana California Portugal Burkina Faso New South Wales Brazil Fiji Guyana Madagascar Tanzania Ivory Coast Colombia France India Russia Nicaragua
Fraser Institute Survey 2014
0
20
40
Chamber presentation to IHS Energy conference
60
80
52,8 52,6 52 51,2 51,1 51 50 49,4 48,7 48,5 48,5 48,4 48 47,4 46,7 46,2 46,1 45,9 45,9 45,4 44,6 44,4 44,3 44,3 43,7 43,4 43,4 43,4 42,6 42,6 42,4 42 41,1 40 39,8 39,1 37,6 37,4 37,2 36,9 36,6 36,5 36,5 35,7 35,6 35 34 33,4 32,2 32 31 30,4 30,2 29,7 28,6 27,3 26 21,8 20,5 14,1
Democratic Republic of Congo (DRC) South Africa Panama Victoria Liberia Santa Cruz Laos Kazakhstan Neuquen Guinea (Conakry) Papua New Guinea Chubut Washington Indonesia Eritrea Turkey Mozambique Cambodia Ecuador Mali Uruguay Poland Vietnam Mongolia Mauritania Thailand French Guiana Rio Negro Suriname Uganda Angola La Rioja Bolivia Spain China Kyrgyzstan Venezuela Zimbabwe Philippines Serbia Dominican Republic Sierra Leone Niger Mendoza Lesotho Ethiopia Central African Republic South Sudan Greece Romania Sudan Nigeria Bulgaria Guatemala Egypt Solomon Islands Honduras Kenya Hungary Malaysia
100
0
20
40
60
80
100
PAGE
12
Underlying reasons for South Africa not faring well in the Fraser Institute mining rankings (great potential) Frazer Institute Survey 2014 factors encouraging investment in exploration versus deterrents to investment for South Africa Policy potential assuming industry best practice Quality of the geological database Availability of Labor and Skills Uncertainty over which areas will be protected as parks Environmental regulations Quality of infrastructure Tade barriers (tariff & non-tariff + forex restrictions) Mineral potential assuming existing regulations Security situation Regulatory Duplication and Inconsistency Efficacy of the mineral legal system Taxation regime Socioeconomic agreements Uncertainty on administration & interpretation of regs Labour regulations/labour militancy/work disruptions Political stability Uncertainty concerning disputed land claims
-100 -80 -60 -40 -20
Deterrent Score Encouragement score
0
20
40
60
80 100
Fraser Institute Survey 2014 Chamber presentation to IHS Energy conference
PAGE
13
Capital investment outlook looks weak (lower prices, rising costs, plus uncertainty on some aspects of policy)
Capital expenditure by SA mining companies by commodity* (R million) 90 000
Capital spend on SA growth projects ^ Gold PGM Coal Diamonds Total
80 000 70 000 60 000 50 000
R million (>5yrs) 9 507 7 676 28 580 24 300 70 063
Split 14% 11% 41% 35% 100%
40 000 30 000
Top projects in each sector
20 000 10 000 2006
2007
2008
2009 Gold
2010 PGM
Coal
2011 Iron Ore
2012
2013
2014
2015E
Commodity Diamonds Thermal coal Gold (Maintenance) 2016E PGM (Maintenance)
Cost (Rm) 20000 7700 3235 3301
Manganese
Source: SBG Securities, Company reports, Chamber of mines estimates, based on top 3-5 largest producers per sector; estimated 2014/2015
Chamber presentation to IHS Energy conference
PAGE
14
Summary of regulatory framework areas creating challenges The MPRDA amendment bill: the industry requires regulatory certainty (issued include s11 approvals, s26 export restrictions, strategic minerals, pricing, regulation of dumps, etc.). Transformation Regime (B-BBEE Act & Mining Charter): need for certainty on interpretation (continuing consequences of previous BEE deals). Eskom 51% versus Mining Charter 26%. Taxation of the mining sector: Resource rent taxes, changes to royalty base, environmental taxes, carbon tax. Section 54 stoppages: in some cases inconsistent implementation of regulations. Labour instability and cost: union rivalry increases risk of protracted and violent strikes: The need to introduce secret strike balloting and flexibility to s18 agreements. The social wage issues. Environmental requirements: Previously fragmented system with duplication. Challenges regarding funding requirements for environmental trust funds. Chamber presentation to IHS Energy conference
PAGE
15
Environmental issues affecting the coal mining industry 1. Water Resources Management • Security of Water Supply, competition of water with other users •
Water Quality Management i.e AMD from abandoned mines.
2. Interface of Coal Mining with Protected Areas • COM members commits not to mine in legally protected areas • There is no framework guiding policy to govern the interface/Coexistence of mining and biodiversity conservation in the cases wherein the protection and declaration of water sensitive areas came after the mining activities.
3. Regulatory Matters • The mining industry commit to implement the One Environmental System however, certain challenges hinders effective implementation of the OES. •
Fragmentation - in that the OES only deal with synchronisation of timeframes (300days)
• Unrealistic regulations i.e NEMA Financial Provision Regulation (Double provisioning) • Regulation of Mine Residue Deposits and Stockpiles as hazardous Waste in terms of Waste Legislation.
Chamber presentation to IHS Energy conference
PAGE
16
Creating a regulatory and legislative environment that is stable, predictable and competitive (Policy and Regulatory Certainty) MPRDA amendment bill •
Government is aware of the critical importance of finalizing the Bill.
•
Various challenges in first draft addressed through significant engagement between business, government and parliament.
Transformation •
Dti provided a year’s period to allow for alignment between Charter and DTI codes.
•
Dual process on interpretation (bilateral discussion and court process).
•
Government needs to create coherence of policy between Eskom requirements and the Charter.
Certainty on Taxation •
DTC interim report supports existing royalty system which obviates need for RRT.
•
DTC proposes phasing out capital ring fencing.
•
However, DTC also recommends equalization of mining tax with manufacturing (i.e. reducing immediate capital expensing). Carbon tax • The Chamber calls for a 5 year delay to implementation due to crisis facing the sector and fact that RSA is below “Peak-Plateau-Decline line” committed to in Copenhagen in 2009.
Chamber presentation to IHS Energy conference
PAGE
17
Progress on the policy challenges Section 54 safety stoppages • Agreement by DMR to speed up the development of the Enforcement Policy pertaining to Section 54’s. Deputy President’s NEDLAC task team – minimum wage and strike action committee • NEDLAC process underway, results expected by mid-2016. • Looking at measures to prevent/resolve L/T strikes and create greater labour stability. Environmental licensing • New “One Environmental system” in place. Real progress made with commitment by government that environmental licenses will be issued within 300 days. • Challenge of environmental trust funds being addressed (hopefully DEA will take on board proposed changes).
Chamber presentation to IHS Energy conference
PAGE
18
Vision for the South African coal mining industry Government and trade unions: proud of and fully supportive of the mining industry and acknowledge industry as important for the country
Workforce, transformed, productive, fair wages and nondiscriminatory, safe and healthy workplaces
Chamber presentation to IHS Energy conference
CONSTRUCTIVE PARTNERSHIPS BUILT ON TRUST
Key exporter Key earner of foreign exchange Key taxpayer Creator of decent jobs Developer of skills Key contributor to economy
Investors regard industry as a good investment destination
Management not only focus on profits, but provide decent jobs, play positive role in mining communities and sensitive to environment
PAGE
19
THE REGULATORY ENVIRONMENT AND ITS EFFECT ON COAL MINE DEVELOPMENT
Roger Baxter Chief Executive 4 February 2016
PAGE